Thursday, July 13, 2017

Does Money Still Function Well as "Half of Every Exchange"?

So long as money is mostly representative of tradable sector activity, prices serve as a fairly good measure of societal coordination. However, when time is arbitraged in the marketplace with no direct relationship to its existing aggregates, and time based services become more prominent in relation to tradable goods, total societal coordination eventually becomes less effective.

While listening to a podcast between David Beckworth and Steve Horwitz re monetary disequilibrium, I was reminded of some of the implications, when Horwitz stated that money is "half of every exchange". Even though this representation is perfectly suited for tradable sector activity; alas, it has only proven a partial solution for the introduction (and consequent dispersal) of knowledge use in the marketplace. A different set of dynamics comes into play, for money as representative of the non random nature, of economic time.

Since human capital investment makes additional claims on (all) existing resource capacity, the result in total factor productivity terms, has been additional input requirements in relation to aggregate output. These demand requirements translate into additional claims on existing revenue, such as what also occurs in recessions. As a result, monetary disequilibrium is no longer limited to recognizable recessionary conditions.

Which means today's increased dominance of time based service activity, includes disequilibrium effects which extend beyond the recession conditions Horwitz referred to in his podcast with David Beckworth. Recent recessions are increasingly a result of monetary tightening on the part of central bankers. This almost imperceptible tightening, may also represent an attempt to manage a gap which continues to grow, between the monetary value of finite time, versus that of "infinite" resource capacity. Presently, monetary tightening continues at an almost imperceptible level, even though economies may appear as normal or in recovery.

Inflation targeting in particular, is a blunt tool for central bankers to respond to the Baumol effect, which adjusts the value of time based services to to tradable sector income, in prosperous areas. The Baumol effect helps to explain the difficulties of adopting a productivity norm (as explained by George Selgin), which could take the good deflation of tradable sector activity, into account. The inability to do so, helps to explain the constituencies which oppose today's fiat monetary systems.

Yet interestingly enough, consider why the Baumol effect is actually a natural outcome, of the fact that money has functioned as half of every economic exchange! Since money has to coordinate for both "infinite" resource capacity and "finite" or limited time, policy makers are increasingly faced with a need to adjust nominal income as if time aggregates could somehow remain in a constant relationship with other resource aggregates. Yet this is not possible in general equilibrium settings. Fortunately, however, it is possible to account for time constraints in relation to other resource capacity, in alternative equilibrium scenarios.

Decades earlier, the monetary expectations of non tradable sectors, weren't so problematic. After all, tradable sector dominance included a domestic (national) monetary framework which was easier to understand. For centuries, time based product demands could readily be coordinated via the expanding revenues of tradable sector output. Whereas now, the production norm which would have worked well for a tradable sector dominant economy, is difficult to implement at general equilibrium levels, given the revenue requirements of non tradable sector dominant economies.

Meanwhile, aggregate output as measured by all resource capacity, continues to pull away from the finite limits of time aggregates - not to mention their representative asset formation, as banks become anxious to unwind balance sheets. When money has no choice but to "stand in" for more direct forms of coordination for time based product, the random and growing nature of total resource capacity, introduces elements of political and social uncertainty, for the continuation of knowledge use throughout the marketplace.

Even though spontaneous coordination of time based product (at national levels) remains desirable, limits to growth in this form of knowledge use dispersal, are becoming evident. It's important to maintain fiat money for spontaneous national coordination of time and knowledge value, but with a caveat: make room for local coordination of time based product, in which a unit of time functions as half of every time based exchange.To make this possible, a new institution would allow money to further back these transactions, as newly generated commodity wealth. Time value would finally receive the formal recognition that it deserves, as a basic economic activity.

Indeed, time arbitrage could gradually contribute to a productivity norm for time based services at equilibrium margin. Margin equilibrium adjustments would gradually decrease total factor productivity imbalances. This would allow the gap to grow - undisturbed by monetary tightening - between the valuations of total resource capacity, versus aggregate time value.

By allowing money to reinforce time value in relation to itself as a commodity good, no policy maker need be compelled to shorten (or tighten) the gap between time aggregates and other resource aggregates, in order to fight the Baumol effect. Doing so, is only unnecessary constraints on long term growth. Instead of attempting to manage the distance between finite time value and "infinite" resource value, it would be more conducive to allow money to assume an additional function, as commodity wealth for economic time value.

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