Objective vs Subjective: Two approaches to money value.

["Harry Veeder" <veed0001@xxxxxxxxxxxxxxxx>]

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>From: "Jack O'Donnell" <jackodonnell@xxxxxxxx>
>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>Subject: Re: Saving and economic development
>Date: Thu, Mar 18, 1999, 4:46 pm

>Money only affects the ability of people to exchange what the
>own/control and its effectiveness in accomplishing that purpose is
>substantially affected by the confidence people have it will hold its
>value in the future.

This is what I call the objective theory of money value which says the value
of money is affected by individual expectations or perceptions of a value
that is objectively "given". Instead of actively measuring and defending (or
attacking) value, they passively percieve and react to value. This objective
value is commonly called the purchasing power of money. However, if
producers and consumers  can impress their will on prices to favour their
respective positions,  what is to stop them from similarly making and
defending their *own* measurements and calculations of money value?
(Such measurements are based on an individuals own standards and criteria
and can never be evaluated by economists).  I call this the subjective
theory
of money value.

As Keynes and Davidson have shown expectations can have no rational basis
whatsoever since the future is fundamentally uncertain. However, unlike a
state of expectation,  a state of appraising involves *setting* a price.
When idividuals appraise the value of money, they are not worried about its
future value, they are setting its present value as a means of exerting
their will on the world to conform to their judgements of their past
experience. Rationality is preseved and animal spirits and/or bounded
rationality are transcended when we exert our will-to-power on the value of
money.

Producers and consumers are constantly appraising the value of money.
Producers tend to under value money and consumers tend to over value money.
The nature of their different bargaining positions is revealed in their
attitudes towards money.  Typically the producer thinks, "what I am selling
is worth more than the money I am getting" and the consumer thinks, "I
should be able to get more for my money". In the aggregate, if the outcome
of these negotiations favours producers then prices will rise. If the
outcome favours consumers then prices will fall.  In both cases, their
bargaining decisions are based on past experiences.

The objective theory asserts that only an individuals expectations about the
*future* value of money can infleunce its present value.  This theory
overlooks the infleunce that value judgements, based on past experience, can
have on money's present value. I am not claiming that the objective theory
is wrong, just that by itself it cannot provide a comprehensive explanation
of inflation. It seems to me that it is particularly applicable in cases of
hyperinflation when the general populace shares a sense of powerlessness ie.
when they come to share the belief that some outside force is determining
the value of their money. Under such circumstances, the psychology of the
community (to borrow a phrase from Keynes) undergoes a sort of phase change
where people go from conceiving of money as will-to-power
to money as liquidity.

Harry Veeder.