Modern Money A Critical Realist Approach

1. Modern MoneyA Critical Realist Approach Pavlina R. Tcherneva Assistant Professor of Economics Franklin and Marshall College pavlina.tcherneva@fandm.edu PEF/CEA conference OTTAWA, Canada

2. The paper • Why Methodology, why ontology • Structure of Scientific Practice and the link with Actual Practice • Actual practice is theory laden; theoretical practice is ontology laden • Unpacking the ontological commitments of competing money theories • taxonomy • Three theories; three ontologies. • Metalist/Commodity Money (Mainstream), Sociohistorical (Geographical), and Chartalist (Modern Money) theories of money. • Assessing the knowledge claims about money of different paradigms • Ipso facto critique the theories themselves emanating from problematic ontologies • Answering specific questions about the origins, nature, and role of money • Money as a creature of the market vs. creature of the state • What exactly is money? Why do we use it? • Role of legal tender laws • Causal generative mechanisms • Policy implications

3. Story #1: Metalist/Commodity money view • ORIGIN: a market phenomenon • Individuals have universal proclivity for exchange • Trouble with double coincidence of wants • Common, mutually agreed medium of exchange • FUNCTION: primary medium of exchange, based on ‘intrinsic’ value gold • Secondary functions: means of payment, unit of account, store of value. • NATURE: Money=thing/asset, but it is neutral, only lubricates transactions, no impact on production, gives price equivalencies • GOVERNMENT • usurps power over the gold stock and production of coins • Debases coins due to tendency to overspend • Markets  barter  gold/coin  governments  paper  (hyper)inflation

4. Story #2: Sociohistorical account • ORIGINS: social norms and custom • FUNCTIONS: multiple • defined by the social uses and cultural meanings of existing currencies (Zelizer, 1994 The Social Meaning of Money) • mental map a subjective image we carry in our heads (Cohen, 1998 , The Geography of Money). • In a global world domestic currencies circulate abroad, 1-currency 1-nation regularity is being undermined, because our territorial images/our mental landscapes of money are changing • NATURE: neither culturally neutral nor socially anonymous, • a symbolic token, mental image infused with meaning by cultural and social norms • Does not exist independently of culture • GOVERNMENTS: • One nation-one currency regularity • Role of the state in the origins of money is limited to legal tender laws • Money is accepted because of collective trust or law

5. Story #3: Chartalist or Modern Money view • ORIGINS: not a market phenomenon • Predates markets and barter (barter is not an organizing economic principle) • Early forms of money - first evidence of writing and number • Money predates coinage by at least 3000 years. • FUNCTIONS: primary – unit of account, secondary – store of value/medium of exchange/means of payment • NATURE: a very specific social credit-debt relationship denominated in a state-administered unit of account • DEBT: Two-sided affair. Anyone can issue debt. • HIGHERARCHY OF MONEY: least to most acceptable debts. Most acceptable that of the state (delivers its own liability in final payment) • CREATURE OF THE STATE: state imposes a tax liability, determine what ‘thing’ will be used as payment and thus establishes the unit of account, markets adopt that ‘thing’ for transactions. • GOVERNMENTS: central authorities, modern nation states (church, temple, king, priest) • Early penal system: to pay=to pacify, to make peace • Central price administration/internal accounting system in Mesopotamia • Key: non-reciprocal obligations to the authority • CENTRAL AUTHORITY/GOVERNMENT  taxes/dues unit of account  medium of exchange /means of payment  MARKETS

6. 3 ontologies: Positivist • Positivist ontology: “to BE is to be perceived” • Reality is made up of unrelated, atomistic, isolated events that are observable • Seeing is believing • Scientist examines surface phenomena • What cannot be observed cannot be studied and is denied ontological birthright • Positivist science aims to uncover relationships among independent and atomistic events. • it posits a world of chaos but ties to discover order!

7. Positivist views of money • Metalists conundrums? • Why does money exist and persist? • existence: 1) money is a universal because rational agents use it; and 2) rational agents use it because it is universal. • Reducing transaction costs do not explain why all agents settle on a particular medium of exchange • NO DEFINITIVE PROPERTY, infinite regress, spontaneous choice is a theoretical necessity for this approach (hence the helicopter drop) • No notice or explanation of the 1-nation 1 currency regularity: • OCA  EU (exception to the rule) • Logically necessary vs. socially necessary relationships? • Policy implications

8. 3 ontologies: Hermeneutics • Hermeneutic ontology: “to BE is to be meaningful” • To understand objects, their material existence is unimportant (which hermeneutist do not deny) but the meaning they carry • Theories are culture specific. There is a social constitution of reality, but objects gain ontological significance only when they are integrated into the cultural universe. • If there is no cultural context, for all practical purposes, the object itself does not exist • Anthropomorphic approach • objects exist only if we are around to perceive them (as in positivism) or to endow them with meaning (as in hermeneutics) • hermeneutic paradigm is self-referential; it has circular epistemology: the truth of a proposition refers to the proposition itself. Interpretation of an object’s meaning refers to the collective meaning society has endowed it with.

9. Hermeneutic view of money • Self referential sociological and historical accounts (Zelizer and Cohen): • “…General acceptability…falls within the perplexing but fascinating group of phenomenon which is affected by self-justifying beliefs. If members of a community think that money will be generally acceptable, then it will be, otherwise not.” (Cohen 1998, 12) • No definitive property that makes $ acceptable, no underlying causes, generative mechanisms and essential structures. • Explanation ultimately boils down to universal trust and legal tender laws. • Why I invoke these stories? • Laws, just like trust, pertain to the hermeneutic dimension of society. • define social meaning and ground it in legal code. • Infinite regress? Why do some societies use currencies they do not trust? • Policy implications?

10. 3 ontologies: Critical Realist • Critical Realist ontology: “to BE is to be able to do” • Reasons must be causes otherwise they will be ontologically redundant, must be immanent (event if latent or partially manifested) • Not a ‘regulation theory of reality’, but a ‘causal-generative theory of reality’ • The world exists outside of us (or our ability to understand it), it is stratified with depths not readily observable • We discern their existence by their material consequences • Real structures interact with and are elaborated by agency • 2 types of agents – not atomistic and independent individuals that add up to general society (positivism) or products of culture themselves (hermeneutics), but primary and corporate agents (the latter are organized, with power, able to affect change and therefore make and remake the social reality and the structures within which we all operate and which in turn influence us). • Reality is open and changeable • Ontological reflexivity is key: if critical realists no longer produce explanations consistent with actual reality they are forced to modify the relationships that constitute the posited (or theorized) social reality.

11. Critical Realist View of Money • Legal tender law • Not a causal mechanism for the existence or use of $, not all countries have legal tender laws • But tax laws ubiquitous : 3rd dynasty of Ur 20-21c BC, earliest codes of law stipulating punishable acts and their settlement in monetary fines • Settlement in court • Not the power to print or issue money but the power to create “the promise of last resort” (Ingham, 2000, 29) • Power to tax and determine how taxes will be paid is a causal power. • Launches a currency • Establishes a unit of account and the thing which will serve as medium of exchange • Causes the private sector to transfer real g&s to the public sector • Power to make final payment by delivering its own IOU. (no one else can do this) • Power to deficit spend (as taxes do not finance spending==money has to be spent into existence first, before it can be collected back in taxes) • Power / obligation to mobilize the monetary system for the public purpose • Obligation to accept its own IOU is payment of debts dues • Obligation to maintain its value • Obligation to maintain a sound stable monetary system • Some nations abdicate these powers: EU, Dollarized, Boards of Fixed exchange rate regimes. • Some mismanage their money, Weimar, Zimbabwe • Some mobilize them for the public purpose, some don’t • SOVEREIGN vs. NON-SOVEREIGN key distinction (non-sovereign governments mimic the commodity money view but they essentially handicap themselves) • Net saving of the private sector? Deficits as the norm. But how and on what government spends? • Policy implications: if money is a creature of the state, a public good and a public monopoly • the payments system is a public institution and must be regulated as a public utility. • Key role for government