Tuesday, May 5, 2015

Time Value in Relation to Medium of Account and Exchange

Money holds importance both as a medium of exchange, and as a medium of account. However, this relation also needs a better correlation with aggregate time value than is presently the case. Why so? While money will suffice for the exchange of all traded goods, time is the other, somewhat forgotten constant. One generally cannot buy goods or interact with resource potential, without the focused intent of time value.

Just the same, time value is not recognized for the same necessary position (much as money) it holds in terms of resource representation. Time aggregates are the stage, where the stories of human capital and knowledge use have a place to unfold. Without that relation, it is too easy for any society to fall out of balance in terms of nominal income and the other resource aggregates which make up a general equilibrium. In an earlier post from 2012, Nick Rowe writes:
Scott Sumner argues that it is the medium of account function that matters. My view is different...Demand and supply of the medium of account determine the equilibrium price level. Demand and supply of the medium of exchange determine whether the economy is in a boom or recession.
I agree with Scott Sumner that the medium of account matters most, because it is the sole component of monetary policy which is capable of expressing time aggregates in concrete terms, even if it is not presently being used to do so. Distortions in the service economy have - over time - meant time aggregate claims (in terms of preexisting medium of account) which cannot always be honored. Think of recent college graduates coming into the marketplace, who might not be able to collectively extend the present terms of a given medium of account equilibrium, in time value terms. Without a doubt there are central bankers aware of this phenomenon and its potential effects on nominal income.

Time aggregate subsets do not have a chance to clear and function in relation to other time aggregates, because many of them are exogenously determined in ways that do not allow normal coordination processes. As a result, price signals for high skill services value are generally determined by associations, instead of supply chains, customer demand and resource capacity in the marketplace. Even though price clearing in broad equilibrium still assists wage clearing in standard production settings, the lack of a marketplace for time value, has prevented the group coordination which would allow normal time/price setting to occur for knowledge use.

An increasing inability of (medium of account) primary equilibrium to transform human capital investment into knowledge use potential, explains why credit - which had a secondary role in monetary policy - now holds an arbitrary primary role. Not because inflation targets or interest rates work better, but because they are capable of obfuscating the now uncertain values of time aggregates and monetary policy as a whole.

Hence, Nick Rowe is right, regarding the medium of exchange role for money, but only in the sense of what is presently occurring, as opposed to what is normal for money as a tool for economic endeavor. While money as medium of exchange is certainly more important than the role of money as credit, monetary policy still needs the anchor of understandable time value relationships. When money is primarily viewed as a medium of exchange, it quickly becomes susceptible to pretzel logic and political struggle. In this context, money can quickly lose its meaning as a tool of societal economic coordination.

Granted, I have just moved this discussion into the realm of what "is" and what "should be". However, it is important to distinguish that what "should be", is an understandable nominal income context. Even though wage patterns will remain distorted in primary equilibrium in the foreseeable future, it is possible to begin remedying these distortions in local settings.

Knowledge use systems are one way to achieve this internal coordination, because they could maintain internal transmission structure for time aggregates, nominal income, local services and asset formation. Credit in such systems would be relegated to secondary roles (in favor of incremental growth), so that monetary policy once again has a chance to work through normal means.

Key to all this is the ability to create a unique production norm in service formation, as skills sets would function in relation to actual time use potential - instead of the indeterminacy of other resource aggregates. After all, it is the uncertainty between the two which has led central bankers to disregard the primacy of nominal income as the anchor that it needs to represent.

Knowledge use systems would be capable of measuring accurate service formation, which in turn would make it easier to once again determine the medium of account. Total "wage flexibility" (i.e. skills set valuation) is realized by the coordination of time as an equal beginning point of economic activity. Even though total wage flexibility for knowledge based work is not possible in primary equilibrium, the fact that it can be approached on these terms in knowledge use systems makes targeted growth possible.

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