Published on Macrobusiness, Sept. 1, 2012.
One of the consequences of economics pretending to be a science, when it is not, is the tendency to attempt to explain financial behaviour from its base constituent parts, rather as a physicist might build up a picture of a compound from its molecules. This repeatedly results in observations that are either banal or based on circular arguments. And once those observations are generalised, taken beyond their thought experiment circularity, they become consistently misleading.
There was an example of this in an article in The Economist that discusses the origin of money, or specie. Money, we are told, is “perhaps the most basic building block in economics”. Well, yes. Painters use paint, too. But money, unlike paint, is a little harder to define:
It is clear what it does, but its origins are a mystery. Some argue that money has its roots in the power of the state. Others claim the origin of money is a purely private matter: it would exist even if governments did not. This debate is long-running but it informs some of the most pressing monetary questions of today. Money fulfils three main functions. First, it must be a medium of exchange, easily traded for goods and services. Second, it must be a store of value, so that it can be saved and used for consumption in the future. Third, it must be a unit of account, a useful measuring-stick. Lots of things can do these jobs. Tea, salt and cattle have all been used as money. In Britain’s prisons, inmates currently favour shower-gel capsules or rosary beads.
It is interesting how this argument develops. There is no real definition of what it is other than it is a “mystery”, then we return to what money does, its functions. As Nobel laureate Sir James Mirrlees commented, traditional economic theory has no explanation for the existence of money. Not a small gap, to say the least. Then the article goes on to look at historical types of money, including barter at which point it has safely departed from any relevance to the meta money world that has developed in the global capital markets.
Taking a building block approach, in other words, gets pretty much nowhere. The quasi-science defeats itself readily enough … //
… Money is rules, and the patterns of individuality and co-operation or colectivism are revealed in relation to those rules. The question should be in this current bizarre world of meta-money: “What rules are good and what rules are either bad or dangerous?”
The answer will be found in looking at the balance between individual rights and freedoms and the collective good.
(full text and many comments).