Re: A General Framework For The Analysis Of Currencies...[Was: Re: two

[Warren Mosler <mosler@xxxxxxxx>]

Gunnar Tómasson wrote:

> Warren:
>
> Below are some comments on the introduction to 'A general framework for the
> analysis of currencies and other
> commodities':
>
>           Keynes lashed out against neoclassical theory for treating
> capitalism as a barter or
>           "real-exchange" economy, and offered his "monetary theory of
> production" as an
>           alternative to the traditional approach based on the "Classical
> dichotomy." This aspect
>           of Keynes's work has been developed by two traditions, the Post
> Keynesian and the
>           Circulation Approaches (Deleplace and Nell, 1996). Post Keynesians
> have elaborated,
>           among other topics, the relation of money (and money contracts),
> uncertainty, and
>           historical time (Davidson), asset pricing and financial
> instability (Minsky), and
>           endogenous money and credit creation (Moore, Wray). While Post
> Keynesians have
>           generally emphasized money as a stock of wealth, circuit theory
> (Graziani, Parguez,
>           Schmitt) has highlighted the importance of a rigorous analysis of
> the circulation of
>           money for understanding the operation of capitalist economies,
> including the principle of
>           effective demand.
>
>           Both Post Keynesian and Circulation Approaches accept the widely
> held view that
>           modern money is not commodity money but rather token (or fiat)
> money (see, e.g.,
>           Moore, 1988; Graziani, 1988). But they criticize conventional
> theory for continuing to
>           utilize a framework that treats modern money as though it were
> still a commodity money.
>           This paper begins with two comments on this fundamental point.
> First, while modern
>           money does not derive its value from its status as a commodity,
> once a token is
>           declared necessary for the payment of taxes it can be analyzed
> like any other
>           commodity. Second, absent from most Post Keynesian and Circuit
> analyses is the
>           institutional process by which a token obtains its value (becomes
> money). Many
>           analyses "add in" government spending and taxation, and the
> central bank, after an
>           initial investigation of the operation of a private money-using
> economy (see, e.g.,
>           Lavoie, 1992, pp. 151-69).
>
> Comment:
>
> The proposition that "while modern money does not derive its value from its
> status as a commodity, once a token is declared necessary for the payment of
> taxes it can be analyzed like any other commodity" does not make sense - the
> fact that modern money has ZERO cost of production distinguishes it
> fundamentally from commodities in that its supply is theoretically infinite.
>
>           Analyses of the circuit that begin with banks financing firms'
> production (or households'
>           purchases) and end with firms (or households) paying back their
> loans leave
>           unanswered the question of why anyone would initially sell real
> goods or services for the
>           unit of account. The "common-sense" reply, "because they can use
> the funds to buy
>           other goods and services" is not a satisfying one, for the further
> 'infinite regress'
>           question remains the same: "why do those sellers want the unit of
> account?" What is
>           missing is the process by which the unit of account is endowed
> with value.
>
> Comment:
>
> The 'circuit' - or the "process by which the unit of account is endowed with
> value" - begins with Entrepreneurs issuing their IOUs to Banks in exchange
> for Modern Money which they hand over to Suppliers of Factor Inputs for whom
> such Money represents Purchasing Power - the 'value' of intrinsically
> worthless IOUs - in the market for Goods and Services.
>
>           This paper takes the position that the question remains unanswered
> because it cannot
>           be (adequately) answered unless the State is incorporated from the
> very beginning of
>           the analysis. "Money is a Creature of the State" (Lerner), and
> thus a "monetary" analysis
>           cannot be conducted prior to the introduction of the State.
> Interestingly, the Chartalist
>           view of a tax driven currency can be found in the writings of
> Keynes (not to mention
>           Adam Smith!), the Post Keynesians, and the Circulation theorists,
> yet it is almost always
>           presented as an aside, with the implications remaining unexplored
> (see Wray, 1998, on
>           Smith, Keynes, and Post Keynesians such as Minsky; for the
> Circulationists, see
>           Graziani, 1988).
>
> Comment:
>
> It is within the framework of the Law of Contract - a "Creature of the
> State" - that intrinsically worthless IOUs acquire 'value' in the form of
> Purchasing Power through exchanges between Economic Agents which may or may
> not include the State.
>
>           In the Chartalist view, the State, desirous of moving various
> goods and services from the
>           private sector to the public domain, first levies a tax. The State
> currency unit is defined
>           as that which is acceptable for the payment of taxes. The
> imperative to pay taxes thus
>           becomes the force driving the monetary circuit. The present paper
> seeks to refine the
>           concept of the monetary circuit using a multidimensional model
> designed to reveal and
>           illuminate the workings of a tax- driven currency. It will also be
> shown that this same
>           model lends itself to the analysis of any commodity. In an
> adaptation of Moore's (1988)
>           terminology, the model includes "horizontal" and "vertical"
> components of the monetary
>           circuit. Following outline and discussion of the model, it will be
> utilized to dispel the myth
>           that deficits imply future taxation, as well as to briefly analyze
> the 1997 Asian Financial
>           Crisis.
>
> Comments:
>
> The proposition that "the State, desirous of moving various goods and
> services from the private sector to the public domain, first levies a tax"
> is analytically vague - the tax IS such goods and services, with associated
> State Money aspects reducing to accounting procedures whereby the State
> chooses to collect the tax.
>
> Gunnar
>
> ----- Original Message -----
> From: "Warren Mosler" <mosler@xxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Monday, January 14, 2002 3:02 PM
> Subject: Re: two currencies and Korean war
>
> > An income tax alone won't 'drive the model'
> > see 'A general framework for the analysis of currencies and other
> > commodities'
> > www.mosler.org
> >
> >
> >
> ----- Original Message -----
> From: "Warren Mosler" <mosler@xxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Monday, January 14, 2002 3:02 PM
> Subject: Re: two currencies and Korean war
>
> > An income tax alone won't 'drive the model'
> > see 'A general framework for the analysis of currencies and other
> > commodities'
> > www.mosler.org
> >
> >
> >