20.3 – Money and the Macroeconomy
Learning Objectives
By the end of this section, you will be able to:
- Apply the vocabulary and conceptual framework developed in the previous section to the Hierarchy of Money
- Explain money’s social origin in a monetary production economy
The Money Hierarchy and the False Duality of the State and Market
Hyman Minsky once argued that anyone can create money; the real trick is getting people to accept it.[1] What Minsky is pointing out here is that money, as a social relation, is a promise or an IOU. IOUs are useful social instruments that allow us to connect the present with the future. For example, if I take a beverage from the refrigerator, today, that belongs to one of my roommates, I might leave a note that says IOU a soda. That note is now an asset, or the promise of a delivered soda in the future. In addition to creating an asset, I have also created a liability or debt in the form of the future delivery of that soda.
What we demonstrate in this section is that all money is an IOU or two-sided balance sheet operation. Money is always an asset and a liability. So while I might be able to create all kinds of IOUs, if I break those promises and their status as assets comes into question (the certainty that the note will one day be redeemed for a soda), then my roommate might invest in a lock for his sodas and refuse to accept my IOUs. Thus, we want to explore the “trick”. Why do people accept IOUs of any type, whether they are promises from friends or the IOUs of the United States – Federal Reserve Notes, aka dollar bills?
This inquiry will again take us away from the orthodox narrative. As a reminder, from their perspective gold or a precious metal’s intrinsic value ensured money’s acceptance as a facilitator of exchange and reduced the transaction costs of a barter economy by solving the double coincidence of wants. This simple narrative sheds money of its social character and reduces it to a neutral commodity making real analysis possible. In the orthodox story, money emerges as a market phenomenon. One of the consequences of this plot line that we would like to consider is the adversarial or dual relationship between the state/government and the market it animates.
Under the terms of the orthodox origin story, we think of the market and the state as opposing forces struggling to direct economic activity. Given this orthodox framing, one might imagine the market as the strong lead character in pursuit of efficient solutions, and the state as a pesky nemesis taking resources from the market to achieve its own nefarious and often overly bureaucratic agendas. This plot, however, takes an unexpected twist in Modern Monetary Theory, as these two characters are revealed to be one and the same, or at least inseparable. The orthodox real analysis claims of duality between the state and the market are revealed to be nothing more than the byproduct of their methodology. The “trick” is not that we accept dollars, bu