A Definition of Money Is Not Sufficient, But it Is Necessary to Understand Economies
Paul Krugman takes aim today at me (though he doesn’t know me from shinola), and others of my ilk who are at least somewhat obsessed with coming to a coherent definition of “money.”
…people who spend too much time thinking about money in general — specifically, on trying to decode money’s true meaning and find the real, true measure of the money supply; they end up starting to believe that everything in economics hinges on getting that measure right, when in fact almost nothing does.
He’s certainly — obviously — right that defining “money” coherently would not be sufficient to give economists an understanding of how economies work. But I’m here to suggest that it is a necessary condition — that absent such a definition, economists are inevitably fated to wrestle endlessly with incoherent understandings of how economies work.
Economists are like physicists trying to ply their trade without a coherent, agreed-upon definition of “energy.” (That definition is not conceptually simple, but it is coherent and agreed-upon.) Absent that definition, physicists’ discussions would devolve into exactly the kind of unending, unresolvable mare’s nests that are the ubiquitous norm in economics. Cue Truman’s “one-handed economist.”
Without a coherent definition of “money,” it’s impossible to have a coherent discussion — or arguably, even a coherent understanding — of how economies (inevitably, monetary economies) work.
I’ve written repeatedly (you could start here or here) about what I consider to be economists’ central, crippling confusion: even some of the most careful money-thinkers out there (e.g. Isabella Kaminska, J. P. Koenig) frequently confute “money” with “currency-like things.” It’s understandable — we’ve always considered Roman coins to be “money” — but it’s a vernacular understanding that considered carefully, is conceptually incoherent.
I’ll end by again bruiting my preferred definitions of “money,” “financial assets,” and “currency,” and pointing to my many previous posts explaining those definitions’ undeniable virtue (and difficulties):
Money is the exchange value embodied in financial assets.
Financial assets are legal constructs defining claims. The exchange value of those claims is “money.”
Physical currency consists of physical tokens representing balance-sheet credits (claims), so it is actually an extra step removed from being “money.”
So financial assets (even dollar bills), which embody money, cannot “be” money.
These definitions cannot be “true.” I only suggest that they are the most useful, coherent definitions for thinking about economies that I’ve been able to come up with.
To return to Krugman: by this definition, the most useful measure of the money stock (in understanding and exploring how economies work) is not any measure of currency-like things (M1, M2, MB, even divisia measures), but household net worth.
In the big picture, money = household wealth: households’/people’s net stock of claims on all our real stuff (tangible and intangible). Or to be conceptually precise: the money stock = the exchange value of those claims.
Cross-posted at Asymptosis.
If I understand your definitions, then currency becomes a means of counting the exchange value. Currency counted is then a stand in for what ever portion of financial assets or what ever group of claims on financial assets one is considering.
Money becomes a number represented as counted currency based on “claims”. No claims, then no financial assets, then no money and thus no need for currency?
Thus, an economy is and acts as we “claim” or lay claim to. Nothing inherent to an economy? Fine with me.
Oh, I agree, Krugman and others need to have their definitions. Otherwise as you note, they can not possibly come up with any consistent truth and thus policy recommendations. Policy recommendations are the only thing that is ultimately important to society regarding economics. Or I should say should be the demand of society upon the “science” of economics. It is how society uses it’s sciences.
OOOOOOOOOOO, I have one.
No definition of money is like having no definition of Middle C. Yeah, enjoy your next band. : )
@Daniel: Middle C is a great analogy.
On your first, I think you’re confuting two conceptually different things: dollars, and “the dollar.”
The first is currency. The second is a unit of account.
The former is designated in the latter.
I put a comment on Krugman’s post saying economists shouldn’t give up on a coherent definition.
I may have brought this to you before, so I apologize if this is redundant, but I came up with a definition of money by first defining what money does (communicates information) and then empirically figuring out what best fit the data — in this case it’s physical currency that defines the “unit of account” … reminiscent of the kilogram in Paris.
Of course, this is the relevant definition for inflation (and long term interest rates) — it isn’t necessarily the correct definition in every circumstance.
http://informationtransfereconomics.blogspot.com/2014/03/how-money-transfers-information.html
Jason I think I understand what you’re saying, but I still think it’s confusing “dollars” with “the dollar,” which I don’t think makes sense conceptually. It’s like confusing a ruler with “the foot.”