What is Money?

Money is power in its liquid form, and power is the ability to do work. People having power are therefore naturally interested in money; and the economics profession has come into being to assure that these interests are serviced. This much is trivial: we all want powerful people to do the work we think needs doing.

Today’s post offers a definition of money that consolidates my recent musings on foundational microeconomics, i.e.: micro- and macroeconomics are governed by unrelated forces, and must therefore be analyzed as separate causal systems that are complete within themselves.

If macroeconomic science were to accept this premise, then it might then do well to re-ground itself on the many naturally-occurring macro economies that have been in continuous existence for 500,000 or so years. Familiar examples of these systems would be the termite mound and the ant colony, both of which are instances of what social biologists call ‘superorganisms’.

To be sure: individual members of the termite mound and the ant colony all have their intimate bodily organizations. But the superorganism has something of a ‘biology’ as well. Individuals have internal organs that must cooperate in biological homeostasis for the animal to be healthy. By analogy, the superorganism presents us with a division of labor, accumulations of capital in different forms, and an array of intermediate products whose output rates must be somehow regulated so as to maintain order in the hive.

Biologists explain ‘order’ in terms of a drive toward a homeostasis that might be expressed in terms temperature, acidity, blood chemistry, etc. In examining naturally occurring superorganisms, it is difficult not to see homeostasis in terms of a general economic optimum – a harmony among contributions from distinct labor specialties that eventuates in best conditions possible within an available technology.

If a superorganism is to maintain internal order, it must continuously circulate some sort of ‘information-carrying particle’ to convey where the system is in relation to its homeostasis and what is needed to adjust the system in that direction. Biologists have identified insect societies’ information-carrying particles as chemical pheromones, and have even decoded some of the information passed by smell among citizens of these societies.

(Analogizing human societies to insect colonies will labeled as inhumane for its failure to account for homo sapiens’ respect for their own and others’ individuality. Accepting this critique as worthy of address at some point, we proceed to draw our analogy as if the individual were just one more potato in the bin.)

Man, as Aristotle said, is a political animal. He has no more chance surviving outside of society than has a termite who wanders away from his mound. Higher primates, by contrast, can survive as individuals in isolation from their troops. Unlike termites, apes do not rely on complicated divisions of labor that individuals would be incapable of mastering if survival depended on it. In this respect, the chimpanzee is to man what the highly individualistic cockroach is to the termite: an immediate but asocial ancestor to a eusocial descendent. Human society is the primate’s way of achieving the efficiencies of a hive for an animal having the power, range, and dexterity of an ape.

History’s record of societal collapse shows that human beings are still trying to get the hang of living together in a superorganism. Indeed no animal having more complexity than the mole-rat has ever succeeded at this endeavor for any span that might be significant in evolutionary terms. Man’s self-awareness of his individual personality, which gives rise to his immemorial discomfort with his artificially-created social leviathan, is undoubtedly at this problem’s root.

As evolution has yet to create a natural pheromone with which humanity might organize the superorganisms it calls cultures, man must invent an artificial information-carrying particle for that purpose. Nominating ‘value’ for this role is obvious enough because rival cultures most typically distinguish themselves in terms of the values shared among their populations.

Taking values as the pheromones of a given primate superorganism leads immediately to an operative definition of money as humanity’s information-carrying particle: prices express value; and money calibrates prices. Money’s artificially then gives us an account of societal collapse: monetary corruption falsifies the information that is carried by prices; and when prices cease to express value, the superorganism collapses in chaos.

Thus economic science is deluded by money as its focus of study because money prices are inherently corruptible manifestations of the deeper reality expressed in the notion of value. But economists generally reject the possibility of objectively measuring value because values are the expression of an individual personality. In doing so, economists refuse to attempt that which their discipline might most usefully accomplish. So it will be while macroeconomics thinks it must rest on a micro foundation.

A self-contained science of macroeconomics would express commodity and labor values in concrete units of measure that are no more variable than the board-foot, the troy ounce, or the short ton. Where economists have determined that the computations behind such measures of value would be complex beyond the possibility of human comprehension, the SFEcon system that I espouse exhibits these computations operating continuously over time in a general, global, and physical input/output context.

SFEcon continuously recalculates values on the basis of nothing more than physical asset levels, the shapes of sectors’ underlying technical and utility tradeoffs, and the premise that commodity and labor values are the markers by which an economic system directs itself to a general optimum. Values are expressed through money prices in this system. But, absent external meddling, money is nothing more than the accumulated stocks of savings and investment that are the current resultant of past physical transactions and the prices at which they occurred.

This normative model is expressed through instructional video games that can be exogenously meddled-with in the manner of monetary authorities. If economists were to offer such models in the classroom, the public would become entirely capable of independently evaluating monetary initiatives for themselves.

But would that be good for the economics profession? If you also think not, then we have arrived together at one reason for economics being the dismal science that it is.

Galileo’s Telescope

In my post of 25 July on The Real Problem with Microfoundations I had my say about one aspect of economic heterodoxy’s critique of neoclassicism, addressing the presumed deconstruction of orthodox macroeconomics based on marginalism’s empirical and conceptual irrelevance to familiar microeconomic behavior.

While the thinking and data behind this conclusion are by now unassailable, I noted that linking these (negative) truths with macroeconomic causality would be counter-indicated in any science other than economics. Explanations of the whole are always different from explanations of its constituent parts in all science that is characteristically Western. Insisting that macro systems must ‘sum-up’ micro behaviors is, however, a recognizable trait of medieval scholastic thinking.

Heterodoxy’s foundationalism is of course only one of the three legs on which their neoclassical strawman stands. The second leg is neoclassicism’s necessarily equilibrium point of reference; and the third asserts that money is obviated as a necessary element of economic causation when viewed at stasis. This post seeks to establish that 1) equilibrium is no more necessary to neoclassical thinking than the aforementioned microeconomic foundationalism; hence 2) banking and money are vital to an illumination of orthodoxy’s premise that economic order owes to the general affinity between marginal revenues and marginal costs.

I realize that this endeavor cannot succeed while scholasticism governs the debate. The Ptolemaic system was not overthrown by Copernicus’ arguments or by his data. It was overthrown a generation later by Galileo’s telescope. “Demonstration” said Galileo “is the essence of science”; and his successful carrying of the argument by making Jupiter’s moons visible is the beginning of that very scientific tradition that heterodoxy breathlessly presumes to impose upon economics as a matter of simple decency.

The two heterodox critiques addressed here will be recognized as ‘general negatives’ in the formal, logical sense. These are statements of what cannot be done, which certainly have their place in science, e.g.: Euclid’s assertion that one and only one line can be drawn parallel to a given line through a given point defines plane geometry. General negatives usefully define a science by saying, ‘until you provide a counter-example to my assertion, you should be persuaded by the deductions to be made from it’.

Medieval Catholicism’s assertion that the universe contains nothing that does not orbit the earth is also a general negative. Heterodoxy’s assertion that a tendency toward general optimality cannot be shown to control an economic system’s disequilibrium states is another. Both should be open to refutation by counter-example. Readers of my introductory post will have noted my offer of the demonstration running continuously at …

www.sfecon.com

… as a counter-example worthy of refuting the heterodox assertion. If we are to address one another as ladies and gentlemen of science, then I suggest our discussion must place heterodoxy either with Euclid or with Medieval Christianity. I offer the SFEcon demonstration as depositing heterodoxy with the later confession. The program generating this demonstration is freely available in the form of an ordinary Excel workbook at:

http://www.sfecon.com/3_Exemplars/31_Windows/Excel/M0.3.2.3.xls

The workbook contains open-sourced VBasic programs (that will set-off anti-virus software; but not to worry: nobody involved has anything to gain by sabotaging your computer.) The directions for using this apparatus and the plans for its construction are in a .pdf available at:

http://www.sfecon.com/3_Exemplars/31_Windows/Excel/Companion.pdf

I am told that such materials have been bouncing around the academic world for decades, and no one has yet been able to point to a specific instance of fraud or misrepresentation.

Experimenting with this desktop prototype should reveal neoclassical premises coordinating the variables of interest rates, currency values, prices, physical inputs and outputs, and the ensuing financial flows in a general, goal-seeking system. I note specifically that this model’s financial flows include interest payments and resolve to stable imbalances between savings and investment at equilibrium; and that this elementary expression of leverage determines the investment term – which in turn presents me with a satisfying, quantified expression of the world’s current economic crisis.

I do not know how anything less can be expected of a science calling itself economics. And I do not know where economic science has accepted such demonstrations as even being possible. If you know of one, please advise.

In any case, if heterodoxy can set SFEcon aside in favor of their mere textural logic-chopping, then I see economics assisting our civilization past the height of its arc toward its return to the feudal norm. On the economist’s famous other hand, heterodoxy might redeem itself by presenting ITS dynamic model of stable economic adjustment controlling something like SFEcon’s suite of variables on the basis of some premise other than a tendency toward general optimality. You guys got one of those that you’re proud of yet?

The Real Problem with Microfoundations

Peter Dorman’s post ‘The Problem with Microfoundations: Bad Micro’ (at http://econospeak.blogspot.de/2012/07/the-problem-with-microfoundations-bad.html) instantiates a thicket issues that I presume economic science might address in a more useful manner.

First, let us agree that “all the disciplines where people study behavior in a scientific way” have safely established that neoclassicism’s ‘economic man’ does not occur in sufficient proportions for his behaviors to register in studies of our familiar, everyday interactions.

Second, we would all observe that neoclassicism attributes the orderliness of our macroeconomic system to a mutual affinity between marginal revenues and marginal costs. This premise has begotten the conjoined conceptual twins of utility/optimality (neither can survive the other’s demise) which in turn necessitates the existence of an ‘economic man’ devoted entirely to gain and endowed with perfect knowledge.

Current economic thought divides as to what we are to make of these contradictory verities: orthodoxy somehow manages to dissemble the first observation, while heterodoxy asserts that it is sufficient to falsify the second. But have not both these attitudes tacitly accepted a planted axiom to the effect that micro behaviors must be foundational to our science of value?

This foundational axiom has had its fullest development by the Austrians, whose science is sourced in von Mises’ Human Action (at http://mises.org/document/3250/). Here we see ‘foundationalism’ getting us precisely nowhere: the causal link between individual behavior and macroeconomics must be interrupted by what von Mises and his current acolytes persistently describe as “the literal miracle of the market”. If there is to be a science of economics, then markets must cease to be the plaything of an omnipotent and inscrutable deity and become data to be explained.

Comparisons with specifically Western scientific thought reveal foundationalism to be a remnant of medieval Scholasticism. The medieval mind required unity of its universe, and this would (for example) logically require that the utility function for an economic sector be built up from the utility functions for all the firms or households composing that sector. Conversely, if the optimization of utility functions cannot be found in the observable affairs of actual firms or households, then they cannot describe the economic affairs of larger economic aggregates.

Science in the Western tradition begins with a realization that such God-like knowledge of the universe is not given to man. Our shamans no longer proclaim Truth. Rather, they create metaphors that are valid in certain degrees for certain applications. They accept that observations taken by instruments having different lengths of focus will reveal different phenomena requiring their specific, unique, explanatory models, e.g.:

Schrödinger’s wave equation explains the periodic chart of elements; but it has no grasp of the Newtonian world that is familiar to us. And Newton’s mechanics have no application in the sub-atomic world.

However useful Schrödinger and Newton are in their respective realms, neither is complete even in its own area of application. Schrödinger does not explain why the number of stable elements should be limited; and Newton’s particle – mass without volume – is philosophically absurd.

(While it is true that unified field theories are sought-for in the hard sciences, these efforts have yet to be productive, and might never constitute more than an acceptably modern form of seeking the deity.)

Summing to this point, we should conclude that economics’ current (medieval) habits of dispute would, by their very nature, disestablish all of what we know as ‘science’. So let us try thinking about our discipline as a Western scientist might.

Economics’ scientific pretensions might begin having some validity if its tacit ‘foundationalism’ were dismissed for its hostility to practical application. Liberated from any obligation to microeconomics, a true creature of macro thought such as the economic sector would be entitled to its own, unique, descriptive apparatus. Rejecting the utility/optimality premise as inoperative for actual firms and households would then commend, rather than disallow, its application in multi-sectoral contexts.

What would this require? First, a reasonable approximation for neoclassicism’s economic man would have to be identified as operational at the sectoral level of abstraction. It should not be difficult to project the securities analyst into this role: he is preoccupied by gain; his placements of capital among sectors are undertaken for the sake of overall efficiency; and he has proprietary knowledge of the firms in his sector because he is inevitably among these firms’ directors. Finally, we note that securities analysts are not likely to have their unique vocation’s peculiar behaviors reflected in studies conducted by behavioral psychologists because they are as much a rarity among the general population as would be the case for any other division of labor.

Second, the utility/optimality duo would have to be shown emerging as a useful scientific metaphor when viewed at a macroeconomic level of abstraction. A useful analogy here would be to Newton’s force/mass duo, which emerges into its own out of its subatomic foundation because ‘mass’ has proven to be an exploitably consistent property of matter.

Newtonian practice for measuring a theory’s boundary conditions is to run the theory ‘in reverse’. His notion that force equals mass times acceleration provides the theory: a unknown mass is subjected to a standard force; its acceleration is measured; and mass is computed as force divided by acceleration.

The analogous process for orthodox macroeconomics is a bit more complex, but the principle is the same: we observe physical transactions with the prices at which they occur in some general I/O format; we presume the observations are optimal because actual; and we calculate the utility parameters implied by our premise. If the utility parameters so measured are usefully consistent, and change meaningfully over time, then we might conclude that utility is exploitable as a measure of economic potential. This empirical conclusion would further indicate that tendencies toward general optimality are objectively real for processes of macroeconomic adjustment.

While economists might find these possibilities agreeable as possibilities, they are universally rejected as sterile. To be an economist of any persuasion one must have professed that neoclassical macroeconomics is complex to a point that there can be no non-trivial quantification of general optimally. Hence there can be no formal dynamic representing an economy’s progress through the chaotic physical states and disequilibrium prices toward the unique, equifinal general optimum to be realized if (as will never be the case) utility remained constant. Hence there is no theory that might be run ‘in reverse’ in order to test the neoclassical premise by Newtonian criteria.

Except that the necessary theory was synthesized more than forty years ago at a quite prominent institution, MIT/Sloan. Its emulation prototypes for ordinary Excel workbooks have been downloadable to your desktop since there has been an internet (see www.sfecon.com). This SFEcon system has been run in reverse to track the economic potential of several economies over decades. It was the basis of my course in international business economics at USF’s less-than-prominent business school. And it has received peer review in several disciplines at economics’ perimeter, e.g.: complex non-linear system dynamics, managerial cybernetics, and computable general equilibrium.

In other words, all of the issues cited through the body of Peter Dorman’s post have objective, quantified embodiments that have been tested (and can be re-tested) by the strict scientific criteria he laments as missing from economics. Indeed. And the 17^th Century Curia would not look into Galileo’s telescope because they reeeeeally wanted Ptolemy confirmed. Methinks economics’ real problem is its parallel unwillingness to submit its bases for moral authority to scientific confirmation.