Lies, Damned Lies, and Definitions, III: What is Money?

It's beginning to look as if "What is Money?" may be the most common title for postings on this blog. This is understandable, for misunderstandings of money are widespread, with confusion mounting day by day. This is especially troubling in light of the continuing belief that we can solve the world debt crisis by creating and spending more money backed by government debt to finance consumption, rather than creating and investing money backed by private sector assets to finance production.

Let's begin at the beginning. Money is anything that can be used in settlement of a debt. In accordance with Say's Law of Markets, we neither sell what we produce, nor purchase what others produce with "money." Money is the medium through which we exchange what we produce for what others produce — the "medium of exchange."

Money is simply a symbol of the wealth that someone promises to deliver when presented with the money in accordance with the terms of the agreement under which the money was issued. All money is thus a contract, a promise, just as (in a sense) all contracts are money.

That being the case (and everything else being equal), we cannot consume more than we have produced with our labor or capital, purchase what others have produced with their labor or capital in excess of what we have produced, nor sell to others more than they have produced with their labor or capital. "Supply" and "demand" are necessarily in balance. If some goods remain unsold, it is because other goods for which they can be exchanged are not produced.

Keynes rejected Say's Law on the grounds that supply and demand are clearly not in balance. This has become a sort of economic orthodoxy, and justifies government manipulation of the currency to try and equalize supply and demand.

The problem is that Keynes was dishonest in his analysis. He restated Say's Law, declaring, "Thus Say's law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment." (General Theory, I.3.i.)


In other words, Keynes did not keep everything else equal, meaning equal access to ownership of capital as well as labor that Say assumed.  Keynes changed the parameters of the question by ignoring equal access to ownership of capital as critical to the functioning of Say's Law, and asserted without proof that equal access to ownership of labor was the only factor worth considering.

Keynes seized on "chartalism" (now called "Modern Monetary Theory") as the cure-all for this disequilibrium. If the State would redistribute effective demand by artificially inflating or deflating the currency by emitting bills of credit or taxing away any excess, respectively, the economy would always be on an even keel — the Keynesian "counter-cyclical" approach to monetary and fiscal policy.

Keynes's "re-editing" of Say's Law is painfully obvious, and accounts in large measure for the current global debt crisis. Where Say was very careful to specify that production is the result of employing both labor and capital (we include land under "capital"), Keynes implied that production is due to labor alone.

This amounts to a pertinacious rejection of reality. As people have known for millennia, as technology advances, human labor is displaced from the production process and becomes less valuable relative to capital as an input to production. Wages, the return to owners of labor — and thus (in a predominantly proletarian economy) mass purchasing power — decline.

Profits, the return to owners of capital, increase proportionately as capital takes over more and more direct production of marketable goods and services. People who depend solely on selling their labor to gain income and generate mass purchasing power to sustain the economy are shut out of participating in production as they own none of the capital that is carrying out that production. They are forced to rely increasingly on State-supported or subsidized wages and welfare.

The failure of Say's Law to function is not due to any obstacles to full employment of labor, but to obstacles to full ownership of capital. Keynes's assumption that wealth must be concentrated if society is to advance ends up being the very thing that prevents society from advancing!

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