Does money have a dual or singular nature?

Great Debates
1

In the second page of You do not appreciate what you didn’t earn a debate has emerged on the interpretation of the role of money in economic theory.

To sum up my argument there, I assert that money has a dual nature: It can represent the value of an object, or it can act as an object and have its value represented. I am using the word “object” in its most general sense, as something, concrete or abstract, to which value can be assigned.

I am arguing that money fundamentally differs from other measuring systems. For instance, a “metre” has a singular nature in that while it can represent length, it cannot itself be represented. It has a representional meaning but not an objective meaning; it is impossible to manipulate or operate on the concept of “metre” as an object.

Scylla seems to disagree with me; I will allow him to summarize and extend his previous argument himself.

2

If you read a monetary theory textbook looking for a straightforward definition of money, you’ll be disappointed. Generally speaking, the definition ends up as:

“Money is what money does”.

The author will then helpfully point out that you know it when you see it.

The properties of money are:

  1. a unit of account (solves the coincidence of wants problem in barter)
  2. A medium of exchange. (It is readily acceptable for transactions)
  3. A store of value. (You are confident it will have value in the future)
  4. It is liquid. (you can exchange it rapidly for stuff)
    And some other stuff.

In reply to the OP, money is differnt from other measuring systems because it is not only a measuring system. It is also an asset.

Notice that there is a spectrum of assets which are imperfect substitutes that are regarded as money: currency, reserves of commercial banks held at the central bank, chequing accounts (but not cheques), term deposits etc. These differ according to acceptability and liquidity.

3

As Feynman describes it, money actually posesses neither of the qualities he assigns it.

Money does not “represent the value of an object.” It does not measure. An inch is always an inch, but the true value of a dollar is illusory. Money is primarily a medium of exchange.

It does posess intrinsic value of its own (otherwise we wouldn’t use it.) As a medium of exchange, as a provider of liquidity, and whatever the value of the paper or coin it may happen to be printed on. Besides this, it has no inherent value.

The fact that we use fiat currency (without any backing,) is a direct acknowledgement of this fact.

I would urge anybody interested to read the last few posts of the Thread Feynman entions before replying. I’d provide a link, but am an idiot about such things.

4

That in fact goes to support Feynman’s point about duality. Let me explain. One of the two functions of money is to measure price; we use it for this every time we buy something. It is wholly irrelevant that prices fluctuate. That they do so doesn’t mean that the value of a dollar is illusory any more than the fact that I can lose weight means that the value of the kilogram is illusory.

What makes the value of a dollar illusory is when two financial instruments of unequal dollar value are exchanged for one another.

Up until this point, the argument is factual. Where we get into the opinion pieces is when I argue that exchanging two financial instruments of unequal financial value is inflationary. This is not necessarily bad, but once as big a percentage of our economy is based on it as it is, severe problems begin to emerge.

5

I know of no way to say this clearer. Money is NOT a measuring device. It is a medium of exchange. If you convert miles into kilometers through an equation, that equation is not measuring miles.

The main difference with money and an equation like I’ve described, is that money is a constantly changing equation.

6

I can convert dollars into loaves of bread through an equation, too. The only difference is that this equation must take time, place, and contingencies into account, whereas the equation for converting miles into kilometers is constant.

7

Matt:

You say that money is used to measure prices. This is false. The CPI number is the price of a fixed basket of goods and services.

These are basic goods and services whose utilitarian value is assumed to be fixed. Simple food, clothing etcetera.
What the CPI measures is not the value of this basket of goods (which is fixed,) but the dollar’s fluctuation versus it. What’s being measured is the dollar’s efficiency as a medium of exchange vs. time.

You said:

“What makes the value of a dollar illusory is when two financial instruments of unequal dollar value are exchanged for one another”

As you’ve stated this, it simply does not occur in today’s financial markets. You cannot make an even swap between securities unless the dollar values are exactly equal.

NOBODY sells $10,000 market value in T-bills, to buy $8,000 in market value of corporate bonds without getting change.

If what you mean is that there are innefficiencies in the market where somebody who is unwary may sell an undervalued asset to purchase an overvalued asset, then, yes, of course this occurs.

There are people who do nothing else but look for such innefficiences. They take advantage of them. By doing so they narrow the innefficiency until it ceases to exist. Such persons are called Arbitrageurs.

Over or undervaluation of securities is generally considered to have little if any effect upon the inflation rate.

During the speculative bubble of huge ovevaluations in the japanese markets in the late 80’s early 90s, inflation was basically nil.

It has also been basically nil during the recent fantastic expansion of the u.s. stock market during the 90s.

Our familiarity with the dollar, and its recent relative stability has led many to believe that this is its nature.

Nothing is further from the truth. If you had put your life savings into CDs in the early seventies as many did, you would understand this in a very unpleasant way.

8

Actually not by the usual meaning of inflationary.

Inflation means there are more dollars (or rubles, etc.) representing the same amount of physical (concrete) or abstract objects of value. When two financial instruments are exchanged, the total number of dollars remains the same, thus failing to fulfill the definition of “inflation”.

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As to the OP, we seem to have two professional economists (picmr and Scylla) appearing to contradict each other. It appears that GBS may be right, “If you laid all the economists in the world end to end, they wouldn’t reach a conclusion.”

This reminds me of when my hero (the real Dick Feynman) asked a group of philosophers whether the inside of a brick constituted an “essential object” (a fairly basic term in some particular philosopher’s system).

It seems intuitively obvious (and therefore I might very possibly be wrong) that a dollar is measuring something. It also seems intuitively obvious that I may purchase dollars with a promise (a promise of more dollars in the future). It seems obvious that a dollar may measure value (when I sell my car, I will sell it for a certain number of dollars). It also seems obvious that a dollar may be measured; a dollar-now may be purchased for dollars-later.

Come on, guys, this can’t be harder to explain than the wave/particle dualism.

9

Tracer:

Yes. You can change a loaf of bread into dollars. That fulfills money’s purpose as a medium of exchange. The bread has a readily apparent inherent value. The money does not. You only think it does because you and others believe that it does. All that you can do with that money is exchange it for a loaf of bread’s worth of goods and services. It is never a start or end point.

What you are actually doing is exchanging a loaf of bread for what you perceive as a loaf of bread’s worth of goods and services through the medium of money.

Stopping at dollars during the exchange process is an affectation, just as stopping at FC units would be an affectation not meaningful in and of itself (see my final post in previous thread)

10

In order to compare the loaf of bread and the equivalent amount of goods and services, don’t you need a common system to measure their values?

In physics, a “medium” is a tangible thing (like a body of water) through which a force can be transmitted. Does economics consider the “money supply” as a medium in the physical sense?

11

Feynman:

No, it’s not a medium in the physical sense.

If I take a buck to the bank, they lend out a large portion of that buck. When it gets spent, the money supply has just increased. More money now exists! If that money then gets deposited in a bank, it will get lent out again, spent again and the money supply will have increased again.

This seem to be in violation of the law of conservation of mass. If money were actually physical, we would have a problem here. Since it’s not we’re cool.

As for measurement? Well, in my last post on the previous thread, do you think that my hypothetical FC unit actually measures anything?

All it does is describe the relationship between farenheight and Celsius, which in my example was in flux.

If you think that that is a measurement, so be it.

I don’t. Here’s why.

If money measured, then theoretically you should be able to take a loaf of bread and sell it for cash. A week later you should be able to walk into any market and buy an equivalent loaf of bread. In a stable economy like we have right now, you may very well be able to do this (I’m ignoring the profit that the market would make off the transaction.)

However, as the week passes, the price of bread relative to other goods and services may vary and that same amount of money may now only buy 1/2 a loaf of bread.

Has the money measured bread?
Has it measured goods and services?

The only thing that’s been measured is the relationship between bread and other goods and services.

Now if I’m smart, and understand that money is only a convention that describes relationships, I can do fun things. I can take my dollars, convert them to Eurodollars, then to Yen, and back to dollars, and have more than I started with!

I will have taken advantage of inefficiencies in money’s ability to describe the relationships between goods and services between countries as represented by their currencies.

Europe needed dollars. I suppied them. Japan needed Euros, so I helped them out. The U.S. needed Yen and there I was.

This kind of thing happens all the time. Everything’s value is constantly changing in relation to everything else. There are no absolute units, so therefore there is nothing to measure in absolute terms. All you can do is describe current relationships.

The fact that the money in your pocket gives the appearance of stable value is the miracle of a free-market economy, and is dependent upon your confidence that it will continue to do so.

If you wish to compare the price of two new cars in terms of dollars, then you are free to do so.

When I see that commerical that says that the price of a Camry has dropped for three years in a row, I laugh.

  1. In terms of Yen, the price has skyrocketed!

  2. The price of a Camry has increased in real terms.

  3. The price of a dollar has just increased faster in terms of Yen

  4. The price of the Yen has fallen relative to the dollar.

All the above are true.

In the same fashion physicists talk about time beginning at the big-bang. Before that nothing existed. There was no matter and nothing happened. Time was meaningless. It only exists in terms of what it describes.

Is their absolute time?

Galactic central?

If my brother gets in his Porsche and takes off at an appreciable fraction of the speed of light for an hour or so, he may return to find me an old man.

To him an hour has passed. To me its been 30 years.

Is his time wrong?
Is my time right?

Time describes a relationship. We think that there are units of time, and that those units of time have absolute meaning because that is what we are used to.

Saying that there is such a thing as an absolute measurement of time called a minute is false.

We may measure things with units of time, and as long as we are careful within our context we will be correct.

With money you have to be a lot more careful, because it is much more slippery than time.

Matt seems to beleive that there is some sort of absolute measurement of value intrinsic in the concept of money.

As do you.

There isn’t.

12

Scylla: My apologies for asking a question that appears to offend you and supplying my admittedly limited understanding as a starting point for discussion. From now on I will avoid discussions of economics since my apparently feeble brain cannot comprehend your mysteries.

Thank you for clearing up my ignorance of my proper place here.

13

Feynman:

I’m not offended in the slightest.

Attempting to measure absolute value is a confounding problem.

In 1997 the Nobel prize winning experts at Long Term Capital devised a system of “Riskless Trading,” that would take advantage of the inneficiencies of the market. They the proceeded to quite literally lose more money than actually exists in the whole world! Great system, huh? They fell victim to the inneficiencies that their system in turn created, and went bankrupt. Fortunately a bunch of Financial firms stepped in, picked up the woefully undervalued pieces and saved the world! Well, on paper anyway (making a nice little profit in the process.)

In 1995 the real estate enveloping a 100 mile radius of the center of Tokyo was worth more than the rest of the world, and everything in it! (Again on paper.)

When things get shaky and I get confused because something particularly weired is going on, I look for a stable currency or commodity and put the problem in those terms. Usually things start to make sense again. Hence the phrase “Let’s look at that in Chicken for a moment.”

The problem as I see it is as follows:

While the two examples I just gave you actually occured, neither of them was REAL.

The world was not about to end because a couple of guys on Wall Street thought they were too smart to screw up.

Even sadder, Japanese who owned property near Tokyo in 1995 beleived those valuations. In their heads, they converted their land or apartments into Yen, and those Yen into Dollars (most weren’t aware they were doing this last part,) and concluded that they were rich. Some used these valuations to borrow more money in which to purchase more land to increase their wealth still further.

Of course the whole thing was a house of cards.

A large part of the problem was that most Japanese thought that a Yen was a Yen and that it had a certain value all its own. It was too valuable to spend. They put it in the bank , and left it there. Interest rates fell and fell, and then the value of the Yen fell.

Many people were wiped out, and an enormous amount of wealth was lost due to unrealistic beliefs.

The dollar is not invulnerable to such fluctuations.

A belief in absolute currency, or in currency as some kind of absolute measurement can be very dangerous.

If I in turn have offended you, or appeared to belittle you in any way, I assure you that was not my intent.

14

Feynman:

In a genuine attempt to clear things up rather than confuse them, let me try this.

You said:

"I am arguing that money fundamentally differs from other measuring systems. For instance, a “metre” has a singular nature in that
while it can represent length, it cannot itself be represented. It has a representional meaning but not an objective meaning; it is
impossible to manipulate or operate on the concept of “metre” as an object. "

If I say that a dollar doesn’t measure the value of an object, but is actually a mutually agreed upon substitute for that value, will that help?

What a meter measures is clearly defined and immutable. Since the value of a dollar changes with the relationships of the relative value of goods and services, what is it measuring?

I don’t see how one can operate or manipulate with a dollar any more than one can with a meter.

15

Last off, I’m not an economist. As I mentioned elsewhere, I’m a money manager and a financial consultant. I’m more interested in market dynamics in the real world, than economic theory.

what pimcr was describing was the concept of “money.” THe concept of money would have all the properties he describes. He also states that things like currency and bank reserves are not actually money.

Economists attempt to create a workable concept of “money,” by adjusting dollars for inflation and such, or setting a year as a baseline and trying to measure the cost of goods and services from there. Then people can make silly and useless statements like “A can of soda costs $4.00 in 1965 dollars.”

While it’s fun to try to play with baselines “It’ll cost you $300,000 a year in today’s dollars to send a kid to college who is born today,” they don’t actually say very much and have not historically been good predicters.

In other words, past performance is no guarrantee of future returns.

16

Scylla said:

Not quite. The Consumer Price Index is NOT a measure of the prices of goods, but rather a measure in the change of the average price of a market basket. The goods selected are not chosen because the “utilitarian value is assumed to be fixed.” (no such assumption is made) but rather they are chosen by sampling techniques from all goods and services purchased by the reference population based on data from the Consumer Expenditure Survey. The broad categories are

More info is at CPI FAQ from the Bureau of Labor Statistics

I wouldn’t really consider the CPIs (there are several different indexes, not just one grand CPI) measures of the efficiency of the dollar, but rather as a comparison measure with wage and salary changes or with the Producer Price Index, or with the Employment Cost Index to show how different aspects of the economy move.

pin"yes I am an economist"qy

17

Pinqr:

Thanks for the clarifictions. I don’t consider it nitpicking.

I disagree that with your contention that the CPI’s value is not assumed to be fixed.

From you link:

“The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today’s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period.”

While there are many cpi’s, I’m sure you agree that everybody knows what you are referring to when you talk about THE CPI.

18

What I always get a kick out of is when I hear official reports on Inflation/CPI and they say something like “Excluding volatile energy and food prices, inflation only rose x per cent this year.”

Excuse me, but I don’t have the option of excluding “volatile” food and energy prices from my budget.

The problem this thread illustrates about money boils down to what we might call the unit of account. What is a “Dollar?” Years ago, it was defined as a fixed amount of silver. Such distinctions have vanished, and now a dollar is merely what it says it is, or what it will buy. It is not constant.

For an example, ponder this. Exchange rates fluctuate daily, meaning I am entitled to trade a specific number of our national paper for a specific number of their national paper.

Can you imagine the outcry if, when you went to sell your ten acres of land you bought 20 years ago, the state said, “Well, we’ve adjusted the acre, as we felt the acre policy was too limiting.” You now own what was then 12 acres.

Or, you heard on the news ‘The metre lost several centimeters against the yard in heavy measuring yesterday’

While we can be paid in a numerical equivalency, obviously the dollars paid into Social Security, for example, during the 1940’s had a much higher value than the ones that are paid out in 2000. Interestingly, the gov’t has recognized this to a certain extent with their new “inflation indexed securities”; and also “I” bonds, which pay a fixed rate + the CPI inflation rate. Theoretically, a $500 bond will maintain its equivalent purchasing power for 30 years. Unless they decide to become less than honest on the true nature of the CPI, which is entirely possible.