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Money As A Social Construct And Public Good

27/01/2014 by Ann Pettifor Leave a Comment

Ann Pettifor

In a new book, Ann Pettifor explores money and monetary systems, subjects which have been neglected for far too long by the academic profession. As long as we remain ignorant of how monetary systems operate, for so long will the public good that is money be captured to serve only the interests of the tiny, greedy minority in possession of private wealth.

Everyone, except an economist, knows what ‘money’ means, and even an economist can describe it in the course of a chapter or so… – A.H. Quiggin

Right now many of us are transfixed by a new kind of digital money that seems to escape the control of central bankers: Bitcoin and its new market challenger, Litecoin. There are two striking things about the ‘money’ that is Bitcoin. First, its creators (computer programmers) have apparently ensured that there can never be no more than 21m coins in existence. Bitcoin therefore is like gold: its value lies in its scarcity. This potential shortage has added to the currency’s speculative allure, leading to a rise in its value. However, these rises and falls in value made it unreliable as a means of exchange.

Second, Bitcoin is not buttressed by any of the institutions that maintain advanced monetary systems. These include the rule of law, accountancy and criminal justice systems and central banks. It is these institutions that (try to) keep us honest. By contrast Bitcoin’s great attraction is precisely that it bypasses the state and all regulation. Indeed Bitcoin appears to be based on distrust. “Bitcoin was conceived as a currency that did not require any trust between its users” Jonathan Levin wrote recently.

Equally its scarcity means that unlike the endless and myriad social and economic relationships and transactions facilitated by credit, Bitcoin’s capacity to generate economic activity (trade, investment, employment) is limited – to 21 million coins. Like the architects of the gold standard, Bitcoin’s designers intend to deliberately limit economic activity to 21 million coins in order, ostensibly, “to prevent inflation”. In reality the purpose is to ratchet up the scarcity value of Bitcoin most of which are owned by originators of the scheme.

As this article is published, speculators have inflated to delirious heights the value of Bitcoin. The winners will be those who sell – just before the bubble bursts. In the absence of institutions that reinforce and uphold trust, the losers will be robbed.

Money is both a many-splendoured but also a many-layered thing. We all know what it is. We deal with it – in tangible or intangible form – every day. Most of us think it important. Not so economists. The dominant economic orthodoxy – taught at every university to the exclusion of other schools of thought – declines to take money, banks or debt seriously, as Professor Steve Keen argues. One prominent economist – whose anonymity we shall protect – once discouraged a PhD student from majoring in the subject, arguing that the study of money or credit is “a matter of third order importance.”

As a result of that neglect, those who control our money system escape close scrutiny. As a result too, there is widespread public ignorance of how the system for both creating and pricing money is effectively controlled not by central banks, but by the commercial banking system and by private, global capital markets. Despite all the hype around central bank decision-making, the public authorities have little impact on the management of the global financial system.

Perhaps one of the most disturbing aspects of academic neglect of money and monetary systems is the public’s failure to appreciate that the monetary systems of advanced economies evolved as a result of great struggles between private wealth and wider, democratic society. The success of these historic struggles meant that monetary systems in advanced economies evolved to become a great public goodserving wider interests. However, periodically monetary systems are recaptured by the “robber barons” of private wealth, and then controlled and manipulated to serve their own rapacious greed.

To shine more light on the subject of money, and to broaden the discussion to a wider public, I published a short e-book aimed mainly at students – especially women students and green campaigners. Its title is Just Money: how society can break the despotic power of finance.

While we all know what money is and means, there is still a great deal of confusion. In the book I try to draw out the key differences between economists that rely on the classical or neo-classical tradition of monetary theory; and those who take a radically different perspective on credit and money. These include great economists like the Scot, John Law, John Maynard Keynes, Joseph Schumpeter, JK Galbraith, contemporary economists like Prof. Victoria Chick, Dr. Geoff Tily, Prof. Randall Wray, Prof. Steve Keen, Standard and Poor’s Chief Global Economist, Paul Sheard; anthropologists like David Graeber; and sociologists like Geoffrey Ingham.

They all understand that the thing we call money has its original basis in a promise, a social relationship: credit. The word credit after all, is based on the Latin word credo: I believe. “I believe you will pay, or repay me for my goods and services, now or at some point in the future.”

To understand this, think of your credit card. There is no money in most credit card accounts before a user begins to spend. All that exists is a social contract with a banker; a promise made to the banker to repay the debt incurred as a result of spending on your card, at a certain time in the future, and at an agreed rate of interest. And when we spend ‘money’ on our credit card, we do not exchange our card for the products we purchase. This is because money is not like barter. No, the card stays in our purse. Instead the credit card, and the trust on which it is based, gives us the power to purchase a product. It is the means by which we purchase the good.

Your spending on a card is expenditure created ‘out of thin air.’ The intangible ‘credit’ – nothing more than the bank’s and the retailer’s belief that you will honour an agreement to repay – gives you purchasing power.

That is why money and credit is a great public good. As a result of monetary systems it is wrong to ever suggest that “there is no money” – for childcare, education, the arts or for the transformation of the economy away from fossil fuels. The bigger question is this: is our money system just? And as a public, not private good, does it serve the needs of wider society?

As long as we remain ignorant of how monetary systems operate, for so long will the public good that is money be captured to serve only the interests of the tiny, greedy minority in possession of private wealth.

This article originally appeared at British Politics and Policy at LSE

Riverboat gamblers, money traders and other key speculative behaviours

What are the similarities between riverboat gamblers, money traders and other speculators? There aren't any - just degrees of "acceptability" based on who employs you. Essentially all these men do is gamble on the possibility of making a profit from the turn of a card, the roll of a die or the chance that the other guy will blink first. Each of them is concentrating on making a profit from an illusion of skill.

Michael Cullen is drawing no long bow when he points out that it was the actions of men, in the same profession as John Key once was, whose gambling caused the collapse of Lehman Brothers and Merrill Lynch.

For anyone who understands the use of analogy and of examples when arguing a case Cullen's comments make perfect sense and provide a solid logical progression to an inevitable conclusion. For the benefit of the media and other commentators it runs like so:

1) Merrill Lynch was a financial institution that had made its reputation from speculation on the futures markets and currency trading which are simply sophisticated forms of riverboat gambling.
2) The money traders employed by Merrill Lynch are highly paid gamblers who use other people's money to take bets on the possible value of commodities and currencies that might eventuate as a result of a rumour, a possibility of a storm, flood, pestilence or the failure of a sports team to win a crucial test match.
3) John Key's reputation is not based on his political acumen but on his gambling ability and instincts developed while employed as a currency gambler by Merrill Lynch.
4) As a high stakes currency gambler Mr Key was successful - but only while the house of cards built up on successive levels of speculation remained standing.
5) Once the house of speculation collapsed the reputation of the currency and commodity gamblers must be called to question just as the security of the finance houses like Lehman Brothers and Merrill Lynch must be called to question and account.
Therefore: Given that John Key is still, at heart and reputation, a money trader (gambler / speculator) and has had well publicised ties to the firm of Merrill Lynch which collapsed because of the poor judgment of the currency and commodity gamblers employed there then it must follow that questions about Mr Key's ability to take control of a country's economy must be called into question.
However, the spin doctors, the Herald agenda driven reporters who appear to lack an understanding of the nuances and subtleties of language and logic have all leapt to the illogical conclusion that John Key was the cause of the collapse of Merrill Lynch. ( Would that were true - it would really make some earlier gambling trades that went sour on individual traders look like small bikkies.)
What people should recognise is that no one is saying that Key caused the collapse of Merrill Lynch but one does begin to doubt the ability of a currency gambler to make sound economic judgments.
This is not negative campaigning. This is not personality attack. This is not dirty politics as the Crosby Textor script would have it. This is legitimate questioning of the perception that Mr Key has the ability to make sound judgements based on the evidence that other currency gamblers obviously have none as they caused the collapse of Lehman Brothers and Merrill Lynch.
The conclusion then becomes obvious.