Monday, April 15, 2013

Defining Money, I: The Question

A week or two ago we got a question in the (e) mail.  Because we spent an entire morning answering it, we thought we’d break it up and turn it into a series of blog postings.  Since at that time we still hadn’t done our taxes, it seemed like a really good idea.

Therefore, here (with a few minor changes to protect the innocent) is the question as it was sent to us:

“A few months ago, we had a brief exchange on the nature of binary economics. At the time, I was so busy with work that I did not have time to respond again.

“I just came across the exchange today while looking for another e-mail.

“Re-reading the exchange, it struck me that the central idea in binary economics seems to be a re-definition of money that permits investment without a reduction in current consumption.

“I think you said that investment comes from future savings, not current savings.

“What occurred to me as I read that today is its similarity to the idea of a friend of mine named GB.

“GB did not talk in terms of redefining money, but rather in terms of restrictive vs. non-restrictive policy.

“It all hinged on an empirical fact that had been misunderstood or misrepresented or obfuscated by mainstream economists: the short-run marginal propensity to consume exceeds 1 (SR - MPC > 1).

“In a healthy economy C > Y not just occasionally, but quarter after quarter.

“This does not lead to system explosion and collapse, as Samuelson predicted; it leads to prosperity.

“That is because of growth.

“Even though a static model would suggest that savings must be negative if C > Y, in a growing economy savings can also be growing in absolute terms.

“That is the sort of relationship that GB examined during the years in the 1950s and 1960s when there were brief periods of non-restrictive policy.

“There are a long series of other odd and paradoxical outcomes that result from that single turn, which sound like gibberish if you are convinced that consumption must come out of current income.

“Another example is that the best way to balance the budget is by allowing the budget to be currently out of balance.

“The growth resulting from nonrestrictive policy will create a new balance at a higher level of national income.

“Thus, once you see the possibility of a dynamic form of balance that is quite different from a stationary form of balance, the economy takes on an entirely novel character that is far more generous than the Puritan model of economics that insists that suffering is essential for sustenance.

“I thought about this when I began to ask myself how you might empirically demonstrate the validity of the binary economics model relative to models that disallow investment without current saving. Perhaps you have another answer besides the one GB came up with. If so, I would be interested to know what evidence you point to in support of your position.

“Even if you have a different set of evidence for your position, the two seem so tantalizingly close to each other (or at least I imagine them to be), I wonder if you might be talking about two aspects of the same phenomenon.”


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