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Nick Rowe does an immense public good whenever he writes about esoteric monetary concepts in a way that is both accessible, and causes a high level of debate in the comments. At least he does me an immense service that I should probably be paying him for. Thanks for the consumer surplus, Nick!
In a recent post, he lays out an analogy between Daylight Savings Time and the non-neutrality of money (in the short run).
A purely nominal change (whether we say than solar noon is called “12.00″ or “13.00″) will have a big real effect. Even though we all know that it’s just a nominal change. Nobody is fooled by the government changing our watches without us seeing them do it. Nobody suffers from “time illusion”. We know it’s not really earlier. In fact, it’s the people who don’t hear that the time has changed who are likely to still get up at the same real time, by the sun.
And the real effects of this nominal change will last, at least until the Spring, when the government will tell us to change our watches forward again.
Read the whole thing, because it is a very good discussion about how monetary policy can have real effects in the short run. Nick, of course, subscribes to money neutrality in the long run. It is informative to discuss the nature of the short- and long run with regard to economics. When normal people talk about the “long run”, they implicitly mean a time in the future (which is sometimes delineated). This is buttressed by the use of the famous Keynes quote. Of course, this is not really what is meant by “the long run” in economics. The long run in economics is reached when the economy reaches a stable equilibrium after some change. As a very simple thought experiment; assume that all goods and services in the economy are priced in the same manner gasoline is — globally and (mostly) electronically — and thus prices adjust relatively quickly, and assume that markets are perfectly efficient. When the Fed makes a change to the supply of money, all prices adjust within a day or two. That is the long run. The time span doesn’t really matter. Obviously the real world is nothing like that, and there is a time lag between the change and the new equilibrium, but it need not mean “a long time”, although it often does.
Many economic models assume long-run money neutrality (or superneutrality!). That changes in the money supply only affect prices in the long run, and the economy has a long run growth rate that it converges upon given by its capital stock, and that the long-run composition of investment/saving/output is unaffected by the short-run fluctuations.
While I use these types of models for my study of economics, I’m going to make the (maybe controversial) claim that I don’t believe in the neutrality of money, even in the long run. I think that the features of the money system that we use do affect the type of transactions that take place, and the composition of investment/saving/output. Even in the long run.
For example, every advanced society in the world uses a money system that is characterized by money with positive interest rates. This one fact is the reason that people save in money (i.e. have a bank account…you could argue that the setup of our money system is the reason personal banking exists!). If positive interest rates didn’t exist, then people would save in other vehicles. A concrete example of this is negative interest on money — stamp scrip. You can’t hoard money that has negative interest. So how do you save? Well, you invest in real assets that appreciate at a higher rate of interest, compensating you for their illiquid nature. In Worgl, Austria, that was trees. To rid themselves of money, people planted trees. Trees appreciate in value, and so raise the capital stock…and people were doing this in the midst of the Great Contraction of 1929-33. That is a completely different dynamic that, if the system had not been shut down, would have large real effects on the long run path of the Worgl economy. Another popular place where complementary currencies have changed the long-run dynamic is elderly care, which is very expensive, and generally under-supplied by the market (which is why we have old-age insurance and medical care). Fureai Kippu no only allows elderly people to remain in their homes longer, but allows adolescents to partially pay for tuition — solving two social problems at once! More people are cared for and educated than otherwise would be under a single-currency dynamic.
Is the neutrality of money a useful concept? Yes. But I don’t think that it is literally true. Different types of money embody drastically different values, and thus affect what is produced and consumed. The money system we use is characterized by scarcity, and induces competition for money. That is a completely different dynamic than, say, a LETS money system (like Fureai Kippu), where money is issued by the users themselves. Bernard Lietaer, characterizes this distinction as Yin money and Yang money. As he is fond of saying (paraphrased from his book, The Future of Money):
“Currently, our biggest problem with money and currencies is unconsciousness. We are not aware of what we are doing around money. We haven’t really thought about what money does to us. We believe it’s neutral, so it doesn’t matter. But it’s not neutral: it deeply shapes us and our societies. The first thing that has to happen before complementary currency systems can effect real change on a larger scale is a shift in consciousness and awareness.”
I think that is correct, but I’d be interested in hearing what Nick and others have to say about the subject.
PS I suppose the above argument puts me in the “post Keynesian” camp. Although I don’t emphasize the role of debt deflation over that of monetary disequilibrium in producing real effects.
I’m delighted to see that Stephen Williamson mentioned Ithaca HOURS, a Local Exchange Trading System (LETS) alternative currency operating in Ithaca, NY. It is possibly the most robust complementary currency in the United States, which makes it an exciting experiment in alternative money systems. However, Williamson doesn’t seem to like it, and raises a some very valid points about the motivation to create an alternative currency:
It should be clear that the hours-issuing Ithacans did not attend classes in conventional modern economics. The theory underlying their currency system is in part related to social credit and Marx’s labor theory of value, with some wishful thinking thrown in for good measure. The wishful thinking relates to the ideas that exchange using hours can somehow enforce a minimum wage of $10.00 per real hour (i.e. there is Ithaca hour illusion), and eliminate cutthroat capitalism, thus making the economy somehow more friendly. However, for later use, note three key ideas in their story: (i) money is not neutral: more units of it in circulation increases local employment; (ii) there is a protectionist element: form a local club, which promotes trade among members of the group, the corollary being that there is less trade with the rest of the world.
He is referring to this graphic story about the founding, use, and purpose of the Ithaca HOURS system.
I’ve written about this problem before:
A very common fallacy that you will encounter when doing research about complementary currencies has to do with the nature of trade: a fallacy of composition. It is very common to view the economy as a zero sum game. Thus, if I win, by definition, someone else has to lose. This type of competition does occur within economies. For (a very simple) example; if you buy a Coke, Pepsi loses your business…and if everyone in the world buys Coke, Pepsi goes bankrupt. However, this type of competition doesn’t happen between economies. Economies as a whole do not compete. If everyone buys Toyota cars and GM goes bankrupt, the US economy does not lose — indeed, the economy has become more productive and thus wealthier.
It is common on the left to view complementary currencies as a way to “keep money within the community”. In this view, when we purchase things locally, the money stays within the community whereas if you purchase something from a different city, state, or country, the money leaves the community. There is absolutely no truth to this view, and the logical conclusion to this is that real self-sufficiency maximizes wealth…but then money is absolutely worthless! Never mind the fact that self-sufficiency makes everyone poor.
So if the above is not the purpose of complementary currencies, what is? If you view money from the perspective of traditional economics, then the only reason to have a complementary currency is to avoid the limitations of the zero-bound on positive interest rates. However, since the zero bound simply represents a lack of imagination, even within the current monetary paradigm, that the primacy is important, but it is not the only reason.
More philosophically, if you happen to view our money system as a value transmission mechanism, things are different. I believe not only that money makes transactions easier, but even that the types of money we use emphasize certain types of relationships between people. The way our money system works (and indeed, the way money systems work the world over) incentivizes competitive relationships. These types of relationships leave much demand for services unmet by supply — education is a prime example. I advocate complementary currencies because they can effectively bridge the gap between unused supply and unmet demand.
Complementary currency systems have also been shown to increase the velocity of legal tender within a local economy (Lietaer 1998), a goal which is exactly contrary to the claims made by leftists in the previous section.
The most common types of things that are paid for in complementary currencies are non-tradeable goods/services. Non-tradeable goods (and services) are items that can not be transported and sold in another location. For example, I can’t get a hair cut in Britain from where I live in Omaha, NE…I actually need to go to Britain. Real estate is another popular example…and unsurprisingly, people pay for both hair cuts and partial payment of their rent in Ithaca HOURS.
Complementary currencies are particularly popular in Japan, where two decades of mild deflation (or price stability) in the face of an aging population has taken quite a toll on society. Japan also has a department within the Ministry of Finance whose job it is to create new currency concepts and test them. The most advanced complementary currency in use in Japan is the Yamoto LoVE, which is completely electronic (no hand-to-hand bills).
I think there is an implicit assumption among “respectable” economists that the monopoly of money creation by the Federal government is the optimal state of affairs. It is certainly efficient, but at what cost? There is a strain of research in complexity economics that likens money to carbon in an ecosystem. The efficiency of an ecological system is measured by its ability to process biomass through the system; similarly, the efficiency (in the thermonuclear sense) of an economy is its ability to process money. However, as I have noted, there is a cost for this efficiency, and it is paid in resilience (just like in an ecosystem). Furthermore, complementary currencies such as the WIR Bank in Switzerland (the most “official” complementary currency in existence) actually work counter-cyclically to stabilize business cycle fluctuations.
Throughout history there have been numerous examples of complementary currencies in use which coincided with works of wonder, human enlightenment, and vastly increasing wealth an living standards…and there is good reason to believe that the mechanics of the currency these civilizations were using facilitated this growth. Perhaps it is time to learn from the wisdom of ancient civilization.