Wednesday, February 1, 2017

A New Monetary System From Scratch, Part 8: Taking Credit Notes to the Bank


Andy makes his first round-trip to the village (see Part 7). He sells apples, buys copper and returns to town with some copper and two credit notes (each note in circulation, ten in total, has a face value of SK100).

After holding the two credit notes for a week and having misplaced them twice, Andy thinks it best to return them to the bank.

Meanwhile, a couple of villagers with credit notes, six notes in total, have come to the bank and expressed their willingness to open an account. They have got their new accounts credited for the notes. (Could we interpret this as the villagers depositing the credit notes?)

The central bank has hired a new employee who has been tasked with taking in credit notes and opening accounts. As Andy arrives at the counter with notes, the newly-employed teller mistakes him for a villager, asks for his ID (assume no difference between a town ID and a village ID) and in all silence, apart from humming to himself, opens a new account for him. The teller credits the new account and debits the account "Credit notes in circulation", both with SK200.

Here's an overview of the bank ledger after the latest entries:



BANK OVERVIEW
Deb(i)ts/LiabilitiesCredits/Rights
Andy(1)950200Credit notes in circulation
xxxx
xx200Andy(2)
xxxx
xxxx
xxxxxx


Andy finds out about the mistake when the teller gives him a new ETRS gadget (see Part 4 for more on the ETRS system and the gadget). Andy explains the situation to the teller and asks him to net the two accounts against each other and then close the new account. Employee debits new account and credits old account, both with SK200. (Could we interpret these two entries as Andy repaying some of his debt to the bank?) Then he closes the new account.

An overview of the bank ledger after the correction:


BANK OVERVIEW
Deb(i)ts/LiabilitiesCredits/Rights
Andy750200Credit notes in circulation
xxxx
xxxx
xxxx
xxxx
xxxxxx



I have placed two questions within the text in parentheses. This is because I've come to see my posts more and more as conversation starters. Well, not really as starters, but as a continuation of the conversation taking place in the comments section of my posts. It is that (long, winding and, at times, frustrating) conversation which really matters to me. By writing these posts I want to feed that conversation and, I hope, take it forward, or at least on a somewhat new track when the old one starts to repeat itself too much (not that I personally wouldn't like repetition!).

Warm thanks go to Johan, Oliver and Roger for having kept up the conversation so far! When you put people with so different backgrounds  with a burning interest to all things monetary as the only common denominator  together, what you get is always going to be a surprise.


204 comments:

  1. Antti: Thanks for the comment of shared appreciation. My motives for participation may be selfish. I find myself learning concepts and practicing rhetorical writing in a beneficial exercise.

    Rather than answer the two questions right now, I wondered why you have been placing the amount of outstanding credits on the same line as Andy's account? It seems to me that the credits issued were a debit on the account owned by the bank itself.

    I recall that Andy was issued the original paper credits and had a corresponding original debt increase recorded. With this treatment, paper credits were being handled identically to apples (with the only difference being that Andy both would have sold and received apples in a single unique gift event).

    In my money models, I assign great significance to the creation of money. If money is "physical", then creation is building something from nothing. Another analogy is a hardware store issuing a gift certificate, which would be a 'something from nothing' event.

    Getting back to my question (why are the paper credits on Andy's record line?), it seems to me that the bank needs a "bank account line" to record the amount of paper credits issued. I think this would correspond to the bank making a recorded gift to Andy, identical as if the bank produced apples and gave apples to Andy (in a single unique event).

    My question may not be the direction you would prefer the discussion takes. No offense taken if you prefer not to consider this question at this time. I can wait. :-)

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  2. Roger, have a look at the "Bank Overview" in Part 5. That's the format I use in all my posts, and there you can see that there's no "Andy's line", only Andy's account which appears either on the debit or the credit side, depending on its balance. The notes in circulation are an item/an account on their own, separate from Andy's account.

    Try to think of the "Credit notes in circulation" in this way:

    If there is a positive balance (cannot be negative, ever), that means that there are credit notes held by someone else than the bank. In Part 7, when Andy got the notes, I explained (or tried, at least) how we could have replaced the name of the account, "Credit notes in circulation", with Andy's name. If Andy later gave all the ten notes, SK1,000 in total, to a villager, we could name the account after the villager (IF the central-banker could always observe who is holding the notes -- which isn't true, and that's why I'm only talking about how to handle this mentally :-)). If Andy gave half of the notes to V1 and half to V2, then we should in our minds view the "Credit notes in circulation" as two accounts, one under the name of V1 and the other under the name of V2, with a SK500 credit balance on both accounts.

    Do you see what I mean? The notes are no more gifts from the bank, or debt of the bank, than are any credit balances (say, the one on Betty's account after her first banana trade with Andy).

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  3. Antti: Don't we have a contradiction here? While the credit notes are not gifts, at the same time they exist and have value.

    (The notes are exchanged for copper, exist in the hands of Andy and villagers for variable periods of time, and are honored at the townsmen's bank to result in quantified accounts.)

    Credit notes are obviously not apples, but, credit notes (or their corresponding electronic symbolization) have every other physical feature that make both apples and credit notes 'commodities'. Both can be located in time and space.

    Do you see what I mean? Except for color and other physical characteristics, apples and money (a credit) are the same. Both can be created and located in time and space (A gift creates a credit).

    The similarities (to me) are compelling. Apples and money (credits) are commodities. Commodities can be gifted and the gift recorded. The bank created credits and gave them to Andy.

    So I see a contradiction. :-(

    O.K. on the single entry recording. I understand that there is no significance to (Andy's single entry (a debt here) and the bank's (single entry) record of credit notes outstanding) both Andy and Bank having entries on the same line. :-)

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  4. Roger, contradictions are not necessarily the end of the road. An arrangement can be developed in which inconsistencies can exist alongside each other and thus be reconciled, usually as a process… like the neat example given by Marx:

    "… it is a contradiction do depict one body as constantly falling towards another, and as, at the same time, constantly flying away from it. The ellipse is a form of motion which, while allowing this contradiction to go on, at the same time reconciles it."

    What might that reconciling form (or form of motion) be?

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  5. You're the one doing all the heavy lifting here. So the thanks go straight back to you...

    Could we interpret this as the villagers depositing the credit notes?

    I suppose so. But I'm not sure that's the kind of 'deposit' those people have in mind who like to talk about depositing 'money' at banks. Such arguments usually run in the opposite direction in that there exists money (you know, the stuff that falls from the sky), which can then be deposited at a bank in exchange for something that didn't exist before, namely credit notes. Banks can then issue more credit notes than they take on in money deposits because of fractional reserve banking. Basically, if money IS a credit note, then depositing such a note in the sense of handing it to the same bank that issued it in exchange for an entry in the books makes no sense. But I suppose that's what you're trying to argue. Monetary Judo tactics...

    Could we interpret these two entries as Andy repaying some of his debt to the bank?

    Yes, but I don't think the story rests logically on a mistake on behalf of the bank. All it takes is a further 'complication' from the 'one bank' / 'one account per person' world you're building on. As soon as you have more than one bank or different types of accounts, the act of explicitly repaying debt, as opposed to automatic, real time netting, makes perfect sense and is perfectly legitimate, in my opinion. But I guess we've been there, so you may be going somewhere else with this?

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  6. Johan, please continue :-)

    Oliver: You're right about deposits. I guess commercial banks in the real world don't deposit notes at the central bank when they deliver the notes to the bank and get their reserve accounts credited.

    You said: "As soon as you have more than one bank or different types of accounts, the act of explicitly repaying debt, as opposed to automatic, real time netting, makes perfect sense and is perfectly legitimate, in my opinion."

    Let's assume that it would have been OK for Andy (and the central bank) to keep the two accounts (what was originally a bug became a feature). What would the nominal value of his debt be and to whom he would owe it?

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  7. Johan writes: "What might that reconciling form (or form of motion) be?"

    The inconsistency that might be reconciled seems to be how a gift might not be a 'gift'. The implication is that the gift is not real (does not exist). Yet, despite being not real, the bank will give Andy "paper credits", record the transaction, and maintain a record of how many "paper credits" remain in circulation. How can we resolve reality?

    Perhaps a concrete, hands-on, example will establish a version of "reality". Following establishment of "reality", we can remove one assumption and observe the resulting changes.

    Let's assume that credits are a commodity (Just for the moment and just for the sake of discussion.).

    If credits are a commodity, they are the only commodity that the central bank records. The bank does not record apples, copper, or any other commodity. There is nothing wrong with that.

    But here is what is interesting: The bank is keeping track of how many credits (SK) are in existence. Credits are created at each trade. The bank keeps a record of the remaining value in 'circulation'.

    Now shift focus to the town council paying the town sheriff. For the sake of simplicity, let's assume that paying the sheriff is the very first transaction under a new gifting system. Under the previous system, the sheriff was paid in apples at the rate of one bushel per week; under the new system he will get SK100 per week. What is the value of the SK? Some will think it is equivalent to the rate of 'one bushel of apples" for every SK100. This would be a logical scale of value.

    Remembering that credits are still (for the sake of discussion) a commodity, we can see that there is a different total value of commodities before the sheriff is paid vs after the sheriff is paid. The bank has created credits (in conjunction with the town council) and issued them (ultimately) to the sheriff. The bank has created a commodity with value.

    Now let's retract our assumption that credits are a commodity. How does that change our story? Well, what do we remove from the story? The gift would still be made, the sheriff credited, and the comparison between apples and SK made. We would continue to record the total of gifts outstanding. Gifts would continue to be the only (abstract concept) tracked by the bank.

    There seems to be no conceptual difference between 'gifts' and commodities (credits or money) as realities that can be located in time and space.

    We still have not reached the vision Antti describes when he writes "The notes are no more gifts from the bank, or debt of the bank, than are any credit balances (say, the one on Betty's account after her first banana trade with Andy)."

    The reconciliation that seems most logical is to recognize that notes (paper credits) and the credits-attributed-to-Betty are both gifts from the bank. Both are quantified physical records of the
    exchange event. Both are brought into existence by the bank.

    Does this seem like a logical reconciliation?


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  8. Roger said: "The reconciliation that seems most logical is to recognize that notes (paper credits) and the credits-attributed-to-Betty are both gifts from the bank. Both are quantified physical records of the exchange event."

    To me this doesn't make any sense.

    Let's say you and I give often each other gifts and expect those gifts to be reciprocated. We have trouble keeping track of the gifts we give and receive. Being aware of the fact that explicit records of these gifts might ruin the "spirit of gifting", we nevertheless ask Johan to keep records of the market price of our gifts. You give me socks priced at $10. Johan credits your account and debits mine. This means that you have given me a gift which I'm expected to reciprocate later, say, by buying you a $10 bottle of wine.

    Did Johan give you a gift in the form of a credit?

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  9. Let's assume that it would have been OK for Andy (and the central bank) to keep the two accounts (what was originally a bug became a feature). What would the nominal value of his debt be and to whom he would owe it?

    I say the answer is the same, regardless of whether there is an offsetting credit to the debt or not. In the end, because all debits and credits cancel out, it is perfectly legitimate for one Person to owe (to society) and be owed (by society) equal amounts of goods at the same time. Or in other words, there is no logical necessity that net debits and net credits be divided among different individuals.

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  10. What does matter, however is that no one may issue such a balance sheet expansion upon himself, but rather that the economic viability of it be vetted by the gate keeper (bank) first who then also issues it. It is of secondary concern whether the resulting balance is used to consume ahead of producing or whether it is first saved for future consupmtion, which then may or may not then take place prior to future production. Of course, it is fairly silly to borrow money in order to save it except maybe to cover daily expenses. But that's a practical objection, not a logical one.

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  11. Antti has the question "Did Johan give you a gift in the form of a credit?"

    To begin, we notice that "Being aware of the fact that explicit records of these gifts might ruin the "spirit of gifting", we nevertheless ask Johan to keep records of the market price of our gifts."

    Johan is "asked" to keep records without specification of how to do the task. Johan is aware that the "spirit of giving" is important and that exact reciprocation is impossible to achieve. To solve the challenge of 'evaluation' he requires each of us to agree on a single number, based on a SK scale that he will provide. Johan agrees to record whatever number we pick.

    In response to our request, we see that Johan has made a gift. His gift is the use of his SK scale and the gift of record keeping. Probably he also named his record columns, providing the names 'credit' and 'debit'.

    This sequence of 'you and I giving with records kept' continues for several events. Then we ask "is Johan giving us credits and debits?"

    I think he is. Credits and debits are his method of locating (in space and time) our action events.

    By being analytical, we can see that our (your and my) use of the terms 'credit' and 'debit' is to adapt his terms for our needs. We can begin to use 'slang' to describe our 'gifts'. Hence, I can say "Johan gave me a credit," when (in a more direct way) I could have said "I gave you a gift."

    Maybe this is making sense now. Translating mechanical actions (like a gift-with-uncertain-value changing ownership) into physical exactness suitable for recording is a tricky exercise.


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  12. Roger and Antti, I try to respond to your discussion later.

    Meanwhile I cannot help thinking about the following. If someone was on the limit and desperately wanted to have a HAT but only has SOCKS to offer for sale. Socks which nobody at that time really wants! Would I (as the bookkeeper) buying them actually thus be the one giving a gift to the one offering the socks. Or more generally, would anyone agreeing to buy the socks be the one making a gift, so that the poor fellow would be able to get the hat. If yes, is it significant that the fellow is on the limit?

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  13. Roger, I agree with your comments somewhat. But in making the terms interchangeable one must never commit the fallacy of adding them up, as could well be done if they were both commodities in the sense of being ontologically identical. If I give you a banana and you give me a 1 banana gift certificate in return, then we are still only one banana or alternatively 1 gift certificate apart, never 2. That does not change irrespective of whether I earned my gift certificate before hand, say by gifting a banana to someone else, or whether I borrowed it (the certificate) from a bank. Per that one transaction, the two of us have a delta of 1 banana (OR 1 certificate).

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  14. Johan: I am looking forward to your comments. While waiting, I have been thinking about your "meanwhile" example/query.

    (The words we use certainly channel our thinking. I wrote about record keeping and used labeled 'columns'. Of course, the reader was channeled into thinking the record keeper was a 'bookkeeper' and used a ledger. That's not the only way to keep records.)

    Let's assume that the record keeper decided to keep the records (for Antti and I) in two boxes labeled 'Antti' and 'Roger'. His method could be two pre-labeled paper squares marked "credit" and "debit", write the amount-called-in on the correct paper square, and drop the completed form into the correct box. No adding or subtracting is done unless someone calls requesting information.

    Using this record keeping method, paper squares will accumulate in each box. Eventually, a call for information will be received and the record keeper could remove the paper squares from the requested box and calculate. Then, he could write the total on a new square, deposit the square, and respond to the information request.

    There would be no need to destroy the (recently removed) paper squares with amounts entered. They could be stored for future reuse.

    Now we can make some observations:

    1. The record keeper is an independent third party with a mind of his own.

    2. The record keeper could respond to the plight of the hat seeker. He would have the means (used certificates) but would he have some higher over-looker who dealt with limits (on the hat seeker)?

    It seems to me that your "meanwhile" question introduces a forth decision maker into the story. (two gift-exchangers, one record keeper, one limit decision-maker).

    Your "meanwhile" question is worthy of further (deep) consideration :-)

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  15. Oliver: You are observing a very important point. While the two gift-exchangers may only be moving one item between them, the record keeper is introducing at second item as a a tool to accomplish his task. The second item (from the record keeper) is a symbol representing the gift-exchange.

    Johan just introduced a deep question (the role of limits and enforcement). I think you are introducing a second deep question (how do we socially view the record kept by the record keeper).

    My previous comment to Johan (at 6:52 AM) has a relevant twist to the story. :-)

    You know, this all can be related to cryptography! :-))

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  16. Roger, I was originally thinking that even though a credit note (or entry) is not a gift, but merely a record of a gift given, it still has value, as you said. Thus, it having value *is* the factor resolving the contradiction so as to make them equal in the context of exchange. But only when the social context where it happens constantly reproduces itself! No new commodities offered for exchange = no value in the record previously received. That means we're still sort of confined to the procedural standards Antti has been emphasizing, i.e., commodities must be introduced into the system of exchange at a pace sufficient enough so that it won't break the social trust in the whole credit-system.

    Having said that, when exchange *is* constantly reproducing itself, or even expanding as to variations in outputs offered and betterments of the same, it seems that credits become more like gifts as to their value (not the same as gifts proper) in that a credit holder can always buy anything new offered within the affordable price range whereas the commodity producer cannot be sure (s)he will be able to sell a commodity, at least not at some expected price (e.g. at a profitable price). This is not an issue as long as we're not dealing with credit limits. But if/when we are, all this becomes elementary. Accumulation appears important in this context. Depending on the extent of the market: the general principle of the mode of production can swiftly turn from "giving something back in exchange"… to …"exchange for credits". Yet all the same: this can only happen as long as commodities are being produced and offered for exchange at a socially satisfactory rate and scope.

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  17. Johan: I am thinking (nearly exactly) along the same lines.

    I think Antti's gifting model (so far) is a great vehicle to use in getting started to understand money. He may not agree with the direction we commentators have taken the model but in my mind, his model seems to evolving, becoming more robust in ability to morph into today's reality.

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  18. Johan: I have read and re-read your 9:03 AM comment. I think that slow, sequential, addition of traders, expansion of the Record Keeping business, and product addition can build into the "socially satisfactory rate and scope".

    I haven't done this yet. (It brings to mind Brian Romanchuk's SFC computer model that he is building.)

    The only logical limit on the supply of credits and who held them would come from the limit decision-maker. It is logical that gifting (or loans) of stored credits by the Record Keeper could accelerate the rate of gift giving (by creating a limit work-a-round).

    What unstated but crucial assumptions are we making? One is that we need a widely understood number system. (Does it need zero and negative numbers?)

    The Record Keeper could provide a simple initial value scale. The gift exchangers would soon add to the scale their-experience. The value scale itself could be numbers (without backing) so long as we were only applying the scale to commodities (credits and debits are not yet commodities).

    Repeating Antti: (from a comment to Nick Rowe) "The MoE doesn't act as the UoA; the MoE is denominated in the UoA." There is no MoE until society has adopted the Record Keeper's terminology and effectively turned 'credits' into a physical commodity (in their minds). At early stages of development, 'credits' are just the Record Keeper's tool, not actually traded.

    I am looking forward to Antti's comment on all of this. He has a lot to read and absorb :-)

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  19. Citing Roger: << The only logical limit on the supply of credits and who held them would come from the limit decision-maker. It is logical that gifting (or loans) of stored credits by the Record Keeper could accelerate the rate of gift giving (by creating a limit work-a-round). >>

    I would be somewhat vague to call any determinate limit a "supply" of credits. Yes, in a way, any determinate limit will give the maximum range of potential indebtedness at one point in time—like a snapshot. For example: with a general limit of -5 person A having an outstanding balance of -3 still has a Δ2 debit-range; person B has a balance of +3 and thus has a Δ8 debit-range; total (aggregate) range being Δ10. Without changing the total range it's quite possible to change the range-distribution between A and B. That would be the continuous pulsation of endogenous gifting and crediting without the limit decision-maker having to make any decisions other than keeping the limit at some determinate level. In principle there's no limit to the amount of transactions being done within that limit.

    I argue that it is the definite limit which makes persons otherwise innocent of any notion of "money" immediately conscious of the distance between their outstanding credit balance and the limit. That distance (Δ2 and Δ8) will immediately stand out as an alienable factor. So if we want to keep the "innocence" we must get away from definite limits. Removing limits altogether seems dubious, so we're left with some way of determining the elasticity of limits in relation to the "pulse" of debits and credits. But aren't we then introducing some notion of velocity (income) in through the back door? Once velocity is in, it seems difficult to remain "innocent".

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  20. Oliver said: " In the end, because all debits and credits cancel out, it is perfectly legitimate for one Person to owe (to society) and be owed (by society) equal amounts of goods at the same time."

    I don't understand this. I don't think legitimacy has anything to do with this. Neither has the fact that debits and credits cancel out. This is about what the records tell us (or the community).

    We are talking about one recordkeeper, who is keeping records of goods taken and goods given. Negative balance says one has taken more than given, and the opposite for positive balance.

    In case of Andy's two accounts, the one with the negative balance tells us that Andy has taken SK950 "worth" of goods more than he has given. Note that this is supposed to be a net figure; it is not a record of Andy's takings only. The other account tells us that Andy has given SK200 worth of goods more than he has taken. Both cannot be true. Neither is true. As far as this recordkeeper's records are concerned, Andy has taken SK750 worth more than he has given. That is Andy's debt towards the community, as recorded in this recordkeeper's books.

    In case of two or more recordkeepers, then it is clear that we can say that in one recordkeeper's ledger Andy has a debt to the community and in another ledger claims against the community. As I explained in Part 7, this also applies to credit notes, and Andy is liable to prove that a debt recorded is not a real debt, because he has claims/rights recorded somewhere else.

    So, I'm against stating that Andy has a SK950 debt to the community when it is clear to all involved that this is not true.

    I'm aware that I might sound like a crank :-)

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  21. Oliver, you said earlier: "...the act of explicitly repaying debt, as opposed to automatic, real time netting..."

    This is where our views differ. If the debt is a debt of goods, and the "creditor" is the community as a whole, then the debt is repaid when the goods are delivered. The rest, including your "explicit repayment of debt", is about updating the records.

    When thinking about this, I find it useful to separate these two things:

    1. That which we are keeping records of.

    2. The records we are keeping.

    I argue that all phenomena we relate to word 'money' belongs to #2, and to see 'money' as something we keep records of ("money owed to the bank", "account balance as a record of money holdings", etc) is a mistake.

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  22. Roger, I'll start to provide comments you've been waiting for :-) (I didn't write earlier, because I didn't have the time it takes to be thoughtful, and anything less would be unworthy of the very interesting conversation you three have had in my absence... Let's see, though, if I manage to be thoughtful.)

    First, seeing that the concept of 'gift' I've had in my mind (multilateral credit) is stretched by you

    " Johan has made a gift. His gift is the use of his SK scale and the gift of record keeping"

    and Johan

    "Would I (as the bookkeeper) buying them actually thus be the one giving a gift to the one offering the socks."

    I suggest we don't talk about 'gifts'. Or then we use it only in the strict sense which it is used in some of the papers I've linked to, where it is about multilateral credit. Otherwise, confusion follows.

    In Johan's socks-hat example, the seller of the socks is giving. Whatever the motive (altruistic or otherwise) of the buyer, the buyer is taking, or receiving.

    In your example (about Johan and me), Johan is altruistic and is providing a recordkeeping service free of charge (assumed to be a 'pure gift', no reciprocity).

    Can everyone agree on this?

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  23. Another issue I'd like to clear away before we continue the discussion:

    Roger, I remember you saying earlier that in your thinking/theory, you put a lot of focus on (the act of) "money creation". As you might have already figured out, I think this focus is generally not warranted, but this we can discuss later :-) Now I just want to point out one aspect of your thinking where I think you clearly go too far:

    You said: "There would be no need to destroy the (recently removed) paper squares with amounts entered. They could be stored for future reuse."

    You also said: " It is logical that gifting (or loans) of stored credits by the Record Keeper could accelerate the rate of gift giving (by creating a limit work-a-round)."

    In terms of the logic of the system, it makes no difference whatsoever whether we assume that the recordkeeper destroys all credit notes once they are not in use and prints new notes as needed, or reuses old notes. There's no difference.

    So, the only way I can understand your focus on these "stored credits" is as a part of your attempt to make 'credits' or 'money' as commodity-like as possible. It isn't working :-) If that's your goal, you're getting too far from what (I think) Johan, Oliver and I are discussing. What separates me from Johan or Oliver is something very subtle (so subtle that I don't even dare to try to express it here). It is nothing like commodity vs. non-commodity.

    So, I'd suggest we leave the "stored credits", as something not relevant, out of scope. Is that OK for everyone?

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  24. Antti: "Can everyone agree on this?"

    Hmmm, I'm not immediately grasping your meaning about "multilateral credit".

    I think "multilateral" refers to many bilateral gift decisions, each recorded with a number in two places. In each case the number used would be supplied by the gift giver-and-receiver (it was a consensus) based on a SK scale provided by the Record Keeper.

    Does it matter if the Record Keeper enters a gift request for his services? I am thinking that the requested gift would be 'de minimis'.

    Are you thinking of something entirely different (from my restatement)?

    I think that the numbers written by the Record Keeper become very important to society in some context.

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  25. Antti: "So, I'd suggest we leave the "stored credits", as something not relevant, out of scope. Is that OK for everyone?"

    Maybe I should point out two things:

    1. Stored credits are one of the two things we asked the Record Keeper to accumulate.

    2. Johan's comment 'Feb. 5 at 5:16 AM. He is also concerned about the supply of credits and more. He is mostly concerned about the difference between number positions that accumulate on the Record Keeper's records and how those are interpreted by individual persons (if I am understanding him correctly).

    Hmmmm. :-?

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  26. I'm aware we're repeating ourselves. I also understand your logic. But since there's joy in repetition, I'll defend mine as follows:

    Debt is considered legally (i.e. by society) repaid when when the record is updated accordingly. The record is updated either if you can prove that the goods were delivered or if you can prove that the obligation to deliver goods is void. You can also withhold evidence (not show the proof) and thus remain legally in debt, even though the goods have been delivered. So, the records are evidence of real world events, but, as in a court of law, evidence only counts if it is presented, admitted and deemed (by society) convincing. There is no automatism, expect maybe in a simplified procedure. You're arguing that the world can be understood within the framework of such a simplified procedure. That may be true as far as it goes, but I'd argue that you lose too much real world information. Also, you'll need to define the subject you wish to net onto. Is it individuals, adults, citizens, people with bank accounts, tax payers, registered voters, households, families?

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  27. Sorry, I just realised you wrote 2 replies to my comment. The above was a reply to your last one only.

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  28. Roger said: "Does it matter if the Record Keeper enters a gift request for his services?"

    I misunderstood you there. My purpose was to bring in Johan as an outsider-recordkeeper, not as a member of the gifting system. In economists' language, Johan was "a costless recordkeeping technology" or something like that :-)

    The numbers recorded are important to the society. They help to enforce overall budget balance, while also allowing trade to be flexible (one can take even if one doesn't have anything to give back right now).

    What do you mean by this: "a SK scale provided by the Record Keeper"? Is it even a scale if we don't know the maximum? Anyway, the "scale" is there already in my first post (Part 1), and the recordkeeper is a user of it just like others, not a provider of it. Goods are priced in skilos in bilateral trade, and goods are priced in skilos when multilateral credit enters the picture. No goods are priced in "recordkeeper's credits", or anything like that.

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  29. Roger, could you explain what exactly you mean by "stored credits"?

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  30. So, I'm against stating that Andy has a SK950 debt to the community when it is clear to all involved that this is not true.
    I would agree if you said: Andy has a SK750 NET debt to the community. But that NET debt can be the result of a GROSS debt of SK950 and a GROSS credit of SK200.

    Does it make a difference? I think it does, in the sense that the gross debt tells us something about what we, as society, may expect of Andy. From the point of view of society, he is expected show proof of the provision of SK950 worth of goods. That is all we know. If he then chooses to show us proof that he has already provided us with SK200 worth of goods, we are obliged to correct our expectations accordingly. But that is his choice. The burden of proof lies with him. There is no omniscient, omnipotent netting agent who can do it for him. Maybe I've been living in Switzerland for too long, but I find records to be a predominantly private matter as long as there's no legal reason to lay them open, say charges of fraud or death.

    Your'e correct that this all has little to do with the fact that debits and credits cancle out. I was merely pointing out that I see the symmetry itself as the underlying mechanism, not the distribution of debits and credits.

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  31. Oliver said: "Debt is considered legally (i.e. by society) repaid when when the record is updated accordingly."

    I agree: considered repaid. I might fulfill my obligation, and in that sense repay my debt, by selling goods. But for my debt repayment to be publicly acknowledged, for the debt to be considered repaid, the recordkeeper must (a) be informed about the transaction, and (b) approve the transaction -- the latter usually means acknowledging the buyer's right to take the good. Without these conditions, I could sell goods to some vagabond at a sky-high price.

    I admit this gets more complicated when we get different kinds of accounts (say, a time "deposit"). But as the system stands, I don't see any reason why we shouldn't consider some of Andy's debt to the community repaid already at the point when one of his two accounts are credited. (As you might remember, this is related to my post on ovedrafts vs. traditional loans.)

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  32. Oliver said: "From the point of view of society, he is expected show proof of the provision of SK950 worth of goods. That is all we know. If he then chooses to show us proof that he has already provided us with SK200 worth of goods, we are obliged to correct our expectations accordingly. But that is his choice. The burden of proof lies with him."

    But in this case the proof is already out there, in the SK200 credit balance? The recordkeeper acts on behalf of the (rest of the) society, and he has already acknowledged that Andy has delivered SK200 worth of goods and thus has no SK950 debt. For some reasons these records might not be netted against each other for a while, but Andy doesn't need to prove anything to get them netted. Likewise, when I "repaid" my student "loan", I just asked the bank to debit my checking account and credit my loan account (the timing was up to me in this case; the bank would have been happy if I hadn't wanted to net these two accounts against each other for ten more years). I didn't need to prove anything, because the proof was already there for the bank to see, in form a credit balance on my checking account.

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  33. Antti writes "What do you mean by this: "a SK scale provided by the Record Keeper"?"

    We are beginning a new way of thinking about money so we need a new way to identify relative values. Repeating the obvious, there are low value gifts and high value gifts, with every conceivable additional gift not yet pegged as being either 'low value' or 'high value'.

    Hence, in the beginning, someone(s) must begin a numerical scale (we need to understand arithimatic) and peg (at least) two commonly traded items to values. Every additional item will have either a higher or lower value than either of the two now-located items. Every additional item is then located someplace on this increasingly-populated scale.

    I suggested that the Record Keeper provide this initial scale. I will now add that 'this initial scale must be populated with at least two tradable items'.

    I anticipate that neither Andy or Betty (our original persons) will agree that the first gift given is listed on the first scale. They must make a judgement as to where the first gift will be placed (valued).

    Once their judgement is made, they inform the Record Keeper of their decision and the decision (a single number) is recorded.

    I further anticipate that Andy and Betty will remember their decision and will make future value-judgments partly based on this first judgment.

    You see, this is a natural, unavoidable monetary scale. Once provided initially by the Record Keeper, every other subsequent monetary scale is a scaled version of this natural-original-scale.

    Not to detract from your salt-based SK scale, but, your SK scale would be a secondary scale because it has reference to a single commodity. [You will protest, saying 'the SK and zero are the two initial reference points, making the SK scale THE original scale.' I will respond that we do not know the slope between salt-value and zero. It takes at least two points to establish a line (and a slope) and salt is only one item.]

    Why didn't I make this constructive criticism on the first gift-theory post which built the SK scale? I am learning a lot as we consider your gift model. The necessity of a natural scale of value is just one of the basic monetary concepts I am finding.

    Thanks to you Antti, for creating and participating in this most interesting discussion. :-)

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  34. Johan, you seem to be aware of many of the nuances I, too, am paying attention to.

    You said: "...even though a credit note (or entry) is not a gift, but merely a record of a gift given, it still has value, as you said. Thus, it having value *is* the factor resolving the contradiction so as to make them equal in the context of exchange. But only when the social context where it happens constantly reproduces itself! No new commodities offered for exchange = no value in the record previously received."

    At first glance, it might seem like a paradox: the seller gets nothing in return for his goods, yet the public record of this fact is of value to him. This is, of course, no paradox when we consider that the whole system is built on the principle of reciprocity. True, the seller gets nothing in return in that particular trade, but he can expect to get something in return later (unless he has already received something in advance; that is, he is the one giving the community something in return later).

    As you say, the record is worthless if there are no goods offered for sale (within this particular system). Alternatively, we can think of this as a case where the prices of goods offered for sale are approaching infinity, while the (old) record in question is a smallish figure (say, 10 marks in Germany in 1923).

    It is here I keep on strongly disagreeing with you: "...to make them equal in the context of exchange".

    To me, there is no "them" being exchanged. No two objects, or items, exist to be made equal. You are equating an object with itself. 5 = 5. The agreed upon price of the transacted good equals the price (of the same good) that gets reported and recorded.

    If you're the seller, no, you're not receiving 'a price' (I think you asked about this in the other thread). You're not receiving anything, and this fact is recorded -- it's this record which separates a purchase from a theft. It is recorded so that the community can keep track of your overall budget balance.

    I think our disagreement boils down to this:

    The credit (debit) entry alone cannot be said to be a right or a claim (an obligation or a debt). This makes the notion 'entry' "double abstract" (cumulative entries lead to either rights or obligations, which themselves are fairly abstract notions).

    If the entry made sense, as I suggest, only if we understood it as referring to prices of goods, then our inability to talk about it as an independent entity, without referring to prices of goods, would be understandable. Well, you might say that you're able to talk about it independently by naming it "a general expression of exchange-value" (it's the entry, not the credit balance?). Yet, it seems that you are willing to admit that the "value" you see it "embodies" (from the point-of-view of the accountholder) depends both on the goods offered for sale and their prices.

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  35. I said: "You're not receiving anything, and this fact is recorded -- it's this record which separates a purchase from a theft. It is recorded so that the community can keep track of your overall budget balance."

    We are taking a macro perspective, so I should point out that here there is, of course, a buyer who receives something without giving nothing (in this particular trade). His budget balance, too, is kept track of. He doesn't steal, because he has expressed his willingness to bear the consequences of taking goods from you -- the consequence being that he is expected to produce/give to others in turn (this could have happened prior to this trade, though) because he took from you.

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  36. Antti writes "Roger, could you explain what exactly you mean by "stored credits"?"

    First, what I don't mean: Assuming that the Record Keeper is using the box-paper-squares method of recording, I do not mean the credit-squares that are potentially reused. I consider these as disposable, just tools ready for use or reuse.

    To me, "stored credits" are the accumulation of credit-squares
    (each with a value number) in each of the boxes. Each box has an accumulation majority of either credit or debit squares.

    I anticipate that at least one account box will accumulate a large number of credit squares. [This being the result of human diversity. Some persons are more productive than others.]

    Is this sufficiently exact? :-)

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  37. But in this case the proof is already out there, in the SK200 credit balance? (...) Andy doesn't need to prove anything to get them netted.

    I see your point. Maybe mine can be made more clear if we scroll back to physical cash for an instant. If you keep the SK200 as cash under your pillow, you have the proof and you can produce it at any time. But, for whatever reason, you haven't yet produced it and so the banker officially knows nothing. As per your own statement, holding cash is equivalent to you having SK200 credited to your account. I agree in word, but it seems not 100% in substance. To me, your accounts are your's to handle within the contractual limits set by the bank until until you choose to net out some debits and credits between your accounts. Only then have they been officially 'presented' and 'accepted'. (-SK950 + SK200) =/= -SK750 until I say it is. I am distinguishing between a private and a public domain with the banker as a service provider somewhere in between, whereas for you, all trade is part of the public domain.

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  38. Antti... the 'context of exchange' does not have the same analytical meaning as 'them being exchanged'. It is the constant reproduction of exchange—exchange as a social iterative pattern—which makes them equal.

    Must rush now so maybe later…

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  39. Antti writes "What do you mean by this: "a SK scale provided by the Record Keeper"?"

    :-( I wrote a reply (taking about an hour) and managed to disappear it. :-(

    Maybe for the best because my thinking has evolved since. :-)

    There is undoubtedly no uniformity in understanding on the valuation-price-value issue. I will think some more about this before replying.

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  40. Roger, if that is what you meant by "stored credits", then I don't understand this:

    "...gifting (or loans) of stored credits by the Record Keeper could accelerate the rate of gift giving (by creating a limit work-a-round)"

    How does the recordkeeper gift, or lend, "stored credits"? Or do you mean he gifts or lends credits which become "stored credits"? Are there really any other credits than "stored credits"?

    I think this subject is hard enough without the introduction of new concepts like "stored credits".

    Too bad you lost your reply :-( It has happened to me, too, on Blogger, and that's why I keep on copying (on clipboard) any longer answers now and then during the writing and one last time before pushing the Publish button.

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  41. Oliver: I see your point, of course. As I wrote in Part 7:

    -----------------------------------------------------------------

    As long as Andy remained in sight of the central-banker, it was as if Andy had had two accounts in the central bank ledger: one with a positive balance of SK1,000 and one with a negative balance of SK950. What really mattered was the net balance, which was so far unaffected. Andy had no liability to give goods to others; he had a right to take goods worth SK50 from others without incurring a liability.

    Once Andy left the central bank premises, the central-banker became unaware of his net balance/position. Recordkeeping became decentralized. From that point onwards, the central-banker had to assume that Andy had a net liability worth SK950. If he was in possession of credit notes which reduced his liability recorded in the ledger (SK950), or even cancelled it altogether, it was up to him to prove this to the central-banker by presenting the notes to him. Once he did this, the central records could be updated to reflect Andy's actual position. It was not a case of Andy paying a debt by handing over the notes.)

    ------------------------------------------------------

    My insistence on the "mental netting" is, as I explained, very much related to my seeing an equivalence between an overdraft and a traditional loan (and a discrepancy in when we consider debt to have been repaid; disagreement even on what kind of debt that is -- as Nick says, an overdraft is a liability to sell goods, while a loan is a debt which is repaid by delivering "green money" to the bank...).

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  42. Johan: When you put it like that, I'm not sure where we, on substance, disagree. I think it's possible we are describing the same phenomena but from two different perspectives, using different language, different concepts. In that case, our disagreement is about how to put it, how to describe what is going on.

    I would like to hear your thoughts on the last two paragraphs of my reply. In those I didn't assume you meant "a second item" (that which you say exists and I say doesn't) is exchanged for goods, or vice versa.

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  43. Antti writes "What do you mean by this: "a SK scale provided by the Record Keeper"?"

    The fact that I lost the first reply was indeed fortuitous. I decided I needed a post on my own blog for such a complicated issue.

    You will need to read the post at

    http://mechanicalmoney.blogspot.com/2017/02/the-natural-monetary-chart.html

    before you can hope to understand my answer.

    Replace "several apples" in the chart label with salt-after-the- shock. Salt can then be valued on the Natural Monetary Scale. The SK value of salt would be 3.

    I anticipate that a bookkeeper with this knowledge would set up Natural Monetary Scale to begin the task of recording gifts.

    The post is much more complete than the work I lost this morning. :-)

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  44. §1 | A "double abstract" is not that much of a problem. For example, a price in an abstract unit of account is also a double abstract. As I pointed out earlier, commodities can have exchange-value without exchange-value being expressed in a standardized quantitative measure, in this case: without being expressed in an abstract unit of account. However, when the abstract unit of account is introduced, price becomes the particular way in which magnitudes are signaled. Price is a more specific notion than exchange-value, residing higher up on the abstraction ladder. But obviously when talking about entries we're usually implicitly denoting to that which the entries signify (which, in turn, depends on the way accounting is done and the particular social setting).

    §2 | When a villager sells a commodity he either gets a credit note or an entry in the ETRS. They essentially signal the same thing: that the villager has given a commodity without having received a commodity in return.

    [FULL STOP HERE: it is right here where the particular social setting becomes important in whether the meaning of the record also indicates something more than mere recording of a commodity given without the giver having received something.]

    If it is required that the villager must have such a *record* (recorded by way of a physical note or a credit balance) before he can buy—i.e., before any reciprocity can be actualized— then the recording has already an extended social meaning. It is proof which actualizes the right to receive. True, we could say it is proof of not having stolen. However, it's also something more than mere proof of not having stolen in that it must be shown before the social recognition of a right to reciprocity is activated. So, it is also a "means" by which the right to receive is activated for the villager.

    If that record can be given to another villager (by handing over the note or via new entries in the ETRS), who has not given anything to anybody, but with that note/recording alone, can buy something from anybody, it has yet another extended meaning in that such recordings are alienable. This is why we may talk about them as "independent entities" expressing exchange-value in general. *General* because exchange-value does not relate to any specific commodity but to whichever commodity in the market at any price. If the note/recording signifies a magnitude of 10, any commodity offered for sale for the price of 10 or less is attainable; any commodity offered for sale for more than 10 signals the amount still needed before it becomes attainable. So, any commodity offered for sale for a particular price (e.g. SK 10) has its equal in terms of exchange-value in a SK10 credit note, a positive credit balance of 10 for a villager or (at least) a debit-range of 10 for a townsman.

    The focus here is on the villager's position, but the same logic can also be present in town. All that is needed is the introduction of limits to debit balances—the limits don't even have to be the same for all. So it's always possible to isolate a portion from any debit-range (or the whole) and make it alienable according to the same principle presented above.

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  45. Roger: I'm sorry to say this, but the purpose of your exercise escapes me.

    Could you please read Part 1 again? That is about prices. There's no recordkeeper in Part 1. Once the recordkeeper is introduced, he just records the prices reported by transacting parties. He doesn't provide any "SK scale".

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  46. Johan said: "For example, a price in an abstract unit of account is also a double abstract."

    Exactly. The price only makes sense when it is connected to a good -- or multiple goods. What you seem to be saying is this:

    "Here's a price/number related to a non-existent 'thing' called 'a general expression exchange-value', which you possess if you have unused 'debit-range' on your account. Go and find its equal in the (prices of) goods offered for sale, and you will get that (or those) good(s) the (aggregate) price of which matches this price/number."

    Whereas I say:

    Go and find goods for sale priced at SK100 (unused "debit-range") and you can take those goods if you like. Your purchase will be recorded and if you are allowed a negative balance, you will incur a debt (increase your obligations) by purchasing these goods.

    Of course we could call the unused debit-range a "general expression of exchange-value" one possesses (right?), but I don't find it necessary at all. On the contrary, I would find it obfuscating.

    Let's try to understand this part first? I will save for later comments on the rest of your comment.

    By the way, I like the (unused) 'debit-range' concept you have introduced! It fits well with my defining 'purchasing power' as "an ability to debit one's account".

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  47. Overall, I think we are discussing 'money' (or, arguing whether 'money' exists or not) on a very advanced level. After we are done, one day, Johan and I should dominate the very small monetary theory circles in Finland -- if we were ever invited to join :-)

    To paraphrase Fama (see quote in Part 1):

    Our discussion is so advanced that terms like money, money-things, money-proper, medium of exchange, means of payment, government/bank IOU, money creation, money flow, and temporary abode of purchasing power have long ago fallen from our vocabulary.

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  48. Antti, I wouldn't say it's non-existent since I think value exist. Second, the element in which exchange-value is expressed can vary (notes, coins, ledgers, dog teeth, whatever). It just so happens that we have been discussing all this mostly within the framework of recordkeeping where negative balances are possible, thus the adoption of the "debit-range" for that specific circumstance. Third, we don't need to tell anything pertaining to 'general', 'expression' or 'exchange-value' to the fictional characters in the story because it is already assumed the working of the system is internalized in how they behave. It is us, as discussants, which may utilize such vocabulary in order to dig deeper into the underlying meanings of that whole system and what the story under consideration conveys. After all, it's the context of exchange we are dealing with, hence exchange-value as a natural notion within that realm. And even more importantly regarding this context: exchange-value can be transferred from person to person as long as there's constant reproduction of commodities which are brought into the system.

    In short: exchange-value is the general attribute of the phenomenon we are discussing; price is the more specific attribute built on the general one. Using the more specific notion (price) won't make the underlying (exchange-value) disappear.

    *****
    [Slightly off-topic: Most of us are familiar with Marx's circuit of C—M—C. In our discussion it's C—?—C. But, of course, the more fundamental point in Marx is the movement towards M—C—M' (for us: ?—C—?). Perhaps that's where 'general expression exchange-value' might become even more useful as an analytic tool in understanding the underlying logic of such transformation?]

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  49. Antti writes "Roger: I'm sorry to say this, but the purpose of your exercise escapes me."

    Following your suggestion, I read again Part 1.

    I think this quote from Ralph Hawley helps us set the stage:

    " In fact a unit for the measurement of debts is indispensable. Where a commodity is used as money, it naturally supplies the unit for the measurement of debts. Where there is no money, the unit must be something wholly conventional and arbitrary."

    The Natural Monetary Scale is "wholly conventional and arbitrary". It is "wholly conventional" because it is replicated physically named and defined units. It is arbitrary because the units have no scale of their own; units must be linked to something else to have symbolic meaning.

    The "exercise" is to follow Kitson in the fashion you quote:

    "Arthur Kitson has suggested something very similar to our concept. Cowen & Kroszner[5] explain Kitson's idea like this:

    An abstract medium of account can be defined by setting the value of any commodity on a given day equal to “one” and pricing all commodities in terms thereof. For all succeeding market periods, however, this link is severed and only the abstract medium remains. Market participants set prices (in terms of abstract media) by reference to the abstract medium-denominated prices of the preceding period. The abstract medium is derived from a sequential process which ultimately refers back to an original commodity value."

    The Natural Monetary Chart is a map, upon which, the Kitson-method can be traced.

    My illustration uses 'several apples' as the initial entry point. "Several apples" trace to the arbitrary value of 3. Because '3' is not "one", the "abstract medium of account" has no linkage to anything on the vertical commodity relative-value scale. This is an example of valuation using a purely "abstract medium of account".

    Now let's map the creation of your Skilo using the Natural Monetary Chart illustration. You begin by placing salt on the vertical scale. Draw a link (containing the right angle) to the number one on the horizontal scale. Your hypothetical economy uses this Natural Monetary Scale for some time, establishing a well defined vertical value scale.

    Then a shock occurs; the value of salt relative to every other commodity changes by a factor of one half. Rather than change every price, your hypothetical economy just moves the value of salt to 0.5 SK. You can see from the map (the Natural Monetary Chart) that your scale did not change. All your hypothetical economy did was to move the value of salt relative to a constant (but still arbitrary) scale.

    In hindsight, maybe we could say that my exercise was the logical development of a map connecting physical commodities and a physical monetary scale. A mechanical link between physical commodities and any possible monetary scale has been demonstrated.

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  50. Roger: I got it (I think). As my approach is not mechanical, I probably take for granted things you focus on. For the task at hand as I see it, I don't see much use for "a physical monetary scale", depending on what that 'physical' there is supposed to mean?

    I still cannot see how on earth the recordkeeper would need this kind of scale, not to speak of him providing it? For all he knows, there could be 10 peas changing hands in one transaction at price of SK10 and at the same time the same amount of peas would be priced at SK0.05 in another transaction. The recordkeeper is not concerned with goods. He just records the prices of goods changing hands, without any record about what kind of goods were in question (and yes, he makes changes to records without even asking if there were some goods changing hands).

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  51. Johan said: "I wouldn't say it's non-existent since I think value exist. Second, the element in which exchange-value is expressed can vary (notes, coins, ledgers, dog teeth, whatever)."

    So, money = value, and because value exists (no matter how abstract it is), then money exists? What I meant with non-existence has to do with this:

    Let's go back to the moment adoption of the system. Andy is able to buy bananas priced at SK100 because...? As I understand it, you are saying that Andy possesses general expressions of exchange-value (no matter if his account balance is zero) and a portion of those, SK100, equals the price (or exchange-value?) of the said bananas. By giving up (not giving to Betty, though) these expressions of exchange-value, Andy gets the bananas.

    It's interesting that you seem to imply that you are explaining some underlying logic of the system which may remain invisible to the users. What makes it interesting is that I see my mission to be just that: explaining the underlying logic (or a plausible logic anyway) of our actual monetary system, a logic which is obviously invisible to all who see 'money' :-) Now that I think of it, this might be something to be expected if I really am presenting an alternative (description of the system's underlying) logic?

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  52. Antti: I think the physical link becomes important when we follow Johan's logic regarding the importance of any limit. Limits are physical boundaries on our economic activity.

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  53. Antti, I don't think going back to the moment when the system was adopted will help us much. There's a reason why I brought up the whole notion of value when the narrative seemed to pull together a minimum of social components so that we're able to talk about a "monetary system"—whatever that is—in an intelligible way. Limits are part of such requirement, together with a momentary distinction between centralized and de-centralized recordkeeping and explicit reshuffling of credit-debit balances without direct connection to a particular commodity-trade. That seems to me to be the minimum setup we must have.

    Roger, yes, limits are important in many ways: like when each line drawn on a blank paper will not only add to an aggregate collection of lines, but as something creating boundaries, which eventually helps us recognize at least some rudimentary contours of a recognizable character being illustrated.

    What would lead us to an even sharper picture would be to introduce something of an integrated production system. That's because we would then see exchange-value and prices in yet another light, in the underlying mode of producing commodities (and perhaps as prices a signaling device for value-creation?): not for own consumption but with the foremost aim of producing commodities for exchange; and not only for exchange but also for profit. Only then would all those lines drawn on the blank paper be fully crystallized for a "total" discussion of value, exchange-value, money, monetary economy etc … Something resembling Marcel Mauss' insistence on looking at the 'gift' in its social "totality".

    This is always going to be abstract in some way or another because value is something which is socially determined, hence there's always going to be malleability in terms of how the particular mechanisms conveying value are manifested.

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  54. Roger: I don't regard 'creditworthiness' as a physical boundary. The limits reflect different individuals' creditworthiness (as judged, subjectively, by whomever is trusted with that task). If an entrepreneur manages to build a convincing investment case, to be presented to the people deciding on his limit, his 'boundary' from yesterday will be moved today.

    Furthermore, what makes the limit 'physical'? Two neighbors might form a small gift economy, and their bilateral economic activity is coinstrained by some unspecified limit (say, the relationship will break up if one of the neighbors considers the other to be "freeriding"). That is a credit limit. But why would we say it is a physical limit? If you mean 'physical limit' in the sense that one can cumulatively take only so much goods more than one gives up goods, then we don't disagree.

    How the limits behave in aggregate is interesting. As Johan might have said earlier (?), the "supply of credits" is never a limiting factor in aggregate. If we have an economy of 10 people, all with a credit limit of SK1,000, then the aggregate limit could be said to be SK10,000. Yet, in aggregate the people will always be SK10,000 away from that limit; that is, at zero.

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  55. Johan said: "Limits are part of such requirement, together with a momentary distinction between centralized and de-centralized recordkeeping and explicit reshuffling of credit-debit balances without direct connection to a particular commodity-trade. That seems to me to be the minimum setup we must have."

    I was actually assuming a specific limit for Andy in the example, although I left it unsaid. But that would not be enough? Even when we could clearly talk about his 'debit-range' and point at things that are too expensive for him to buy? Would he not be missing some "expressions of exchange-value" in that case? Or would it still be like I say, that what he needs is a record of him having given up more goods?

    What you call "explicit reshuffling of balances" is there from the start, even if we haven't set any explicit limits (implicit limits are always there). First, the recordkeeper will never know if there really was a trade of goods behind the instructions to make entries. Second, we can think of many plausible reasons, following the logic I offer, to do it (I call it adjusting records, not reshuffling of balances). For instance, a mother might be doing most of the selling in the family, whereas the father is doing most of the buying. Absent a common family account, the mother will instruct the banker to adjust the records so that what she has given will show up as a right of his husband to take. In that case, the family's total givings and takings are what is effectively kept track of, which sounds natural.

    Another way, available from the start, to divorce the records from actual delivery of goods is to agree on delayed delivery of goods. Andy could sell apples @SK100 today with a delivery in one month. If Andy had a negative SK100 balance prior to the trade, this would mean that his multilateral obligation is replaced by a bilateral obligation (multilateral credit -> bilateral credit). Still, this is about a goods trade, where the buyer accepts that it will be reported that Andy has given up goods although he hasn't yet delivered those goods. The buyer trusts Andy's promise.

    Now, what if Andy next month didn't have the apples, and he offered to cancel the trade, and instruct an amendment to the records accordingly, should the buyer wish so? Should, or must (not 'could', because it is clear to me that we could), we interpret that this was a loan of 'money' between Andy and the said buyer?

    Next, assume that there was no intention to deliver the apples, but it was clear to both parties that the trade will be cancelled in one month's time (lending tactics popular in China?). Again, multilateral credit -> bilateral credit. Makes no difference to the recordkeeper, who is interested in enforcing overall budget balance of individuals to the extent they participate in the multilateral credit system. And that 'overall budget balance' is about goods given and goods taken (following, for instance, Ostroy). The recordkeeper won't ask if goods really were given or taken, because it doesn't concern him -- people are free to act in bilateral relations as they see fit.

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  56. Antti wrote: << I was actually assuming a specific limit for Andy in the example, although I left it unsaid. But that would not be enough? Even when we could clearly talk about his 'debit-range' and point at things that are too expensive for him to buy? Would he not be missing some "expressions of exchange-value" in that case? Or would it still be like I say, that what he needs is a record of him having given up more goods? >>

    Well, if Andy now gets a transfer from someone (Δ10, SK) and thus Andy is able to buy something, we can look at that procedure and define it as a transfer of value* (Andy's debit range grew as much as someone's was reduced). That's no different than someone handing someone else a credit note—it's usually not just a valueless piece of paper without any other social meaning changing hands. Clearly he did not have to give up anything in that case; he needed perhaps a recoding as such, maybe someone else's. These are not mutually exclusive statements.

    * I guess some would insist on being picky at this point and say it's actually a transfer of "value-form", but who others than having a labor theory of value in mind really cares when the particular context is clear enough?

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  57. Johan, another thing:

    You said: "There's a reason why I brought up the whole notion of value when the narrative seemed to pull together a minimum of social components so that we're able to talk about a "monetary system"—whatever that is—in an intelligible way."

    This is something I don't fully get. (And something you have been talking about from the start, I think.)

    If there are no explicit limits in the start (that means each individual needs to decide whether he wants to test where the limit goes and risk his reputation while doing it, or not), would that mean that the records don't matter? Of course not. And if they matter, then the value behind them must be already there.

    We humans are the only animals that can be said to be "discounting the future". We anticipate future. Should we differentiate between 'value here-and-now' and 'anticipated value'? To some extent, I'd say yes (although defining value here-and-now is difficult). As you say, your "general expression of exchange-value" is (nearly) worthless if there are no more goods offered for sale within the system, ever (or if the prices of goods approach infinity). That shows how any value you place on your "general expression of exchange-value" is fully dependent on the prices of goods offered for sale (no goods offered for sale = infinite price).

    By giving up goods now, one gives up value now (possibly in anticipation of receiving value later). From the seller's perspective, the value of the goods is not replaced by some general expression of exchange-value, equal in value with the goods, in the here-and-now.

    Should this sale lead to a (larger) credit balance, we could say that the individual gave up goods (and value) in anticipation of receiving goods (and value) later.

    Should this sale not lead to a credit balance (that is, the balance after the sale is zero or negative), we can say that the individual gave up goods (and value) now because he had earlier received goods (and value) from others.

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  58. Overall, I think this discussion is becoming very tiring. Few things in life are as frustrating as trying to talk intelligibly about 'value'.

    At this point, I'd like try to provide more context for this discussion. A couple of words about my past attempts to explain my theory.

    For two years I more or less banged my head against the wall by pointing at the actual monetary system and giving my interpretation of the actual phenomena. I used the actual system as my 'model'. Not surprisingly, people were not able to not see 'money' in the system :-)

    Then I came up with a way to build a "system from scratch", which would allow me to explain the "building blocks" of my theory without people seeing right away 'money' in the model. Yet, if I wanted to show that my theory is about our actual monetary system, then my model eventually needs to look like... our actual monetary system. We need to have the same kind of phenomena in it as we witness in reality, but that phenomena will be interpreted, described, in a different way (= a different theory).

    Here we are. I feel that Johan makes a jump -- I don't exactly know where, although he is clearly doing his best to explain -- where he discards the "building blocks" I've presented and replaces them with a fairly conventional description of the phenomena which includes 'money' no one can put a finger on, but which can be understood as 'value' (Johan in the end of the previous thread: "just think of money as a form of value and you'll be fine. ;-)").

    I guess this shouldn't come as a surprise to anyone. I cannot blame Johan. All I can ask you is to try to put yourself in a position of John, an aspiring monetary/macro theorist in our model economy, who has never heard of our earthly monetary system, not to speak of earthly monetary theory.

    Even if the laymen in our model economy would start to see 'money' in the system, would it not be possible for John to resist the temptation and keep on describing the phenomena from the viewpoint of recordkeeping relating to goods given and goods taken, the purpose of which is to enforce overall budget balance without imposing bilateral balance, that is, to make trading more flexible and increase total welfare?

    Note, that I have now made explicit the difference between a "record of goods given" (credit entry), or a "record of cumulative price of goods given surpassing the cumulative price of goods taken" (credit balance), and "goods actually given". It doesn't matter if goods were actually given, as long as the counterparty -- the one who's account is debited -- is fine with there being a record that states that goods were received by the counterparty. It is "as if goods exchanged hands". The records serve the original purpose of the recordkeeping, which is of course not to track budget balance as it comes to any trades, but only trades done within this system.

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  59. Antti writes "We humans are the only animals that can be said to be "discounting the future". We anticipate future"

    Could I point to bees who create and store honey for winter food? In some way, each bee is a society member who plays a different role in survival of the bee colony. The bee society (as a whole) plans ahead for winter.

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  60. Antti, I quickly wrote a reply before I saw you last post. So now I'm hesitant to post it at all. Look, I'm looking at "value" from a very specific point of view, and that point of view is mostly adopted for what we (at least I) call the capitalist system. So you are right in complaining about me jumping over some steps in your own exposition. Sorry about that. I have mainly treated this as an exercise in mirroring your model with the capitalist economic model so as to bring the differences and potential familiarities into clearer view. So obviously, if your model eventually implies a somewhat different logic for the whole system, then "value" will also have a different meaning from what I've been presenting here. So maybe it's better for me to wait and see with more patience how the narrative evolves. I still like your approach overall.

    Ok, I post my original reply anyways, maybe to suggest what you should be focusing on… well I tell you right now: focus on the production aspect because that's what mainstream has totally sidestepped in their modelling-madness.

    Antti wrote: << As you say, your "general expression of exchange-value" is (nearly) worthless if there are no more goods offered for sale within the system, ever (or if the prices of goods approach infinity). That shows how any value you place on your "general expression of exchange-value" is fully dependent on the prices of goods offered for sale (no goods offered for sale = infinite price). >>

    Yes, if you give away a commodity and for that you get a record with the social recognition that you have given up a commodity and you will not get anything in return, ever... then that record is worthless for you.

    So yes indeed, the value of the record is contingent on what its social recognition implies. And insofar as it implies you have given something up with the social recognition that you'll be remunerated as to your social record to the same amount as the price of the item you gave away—i.e. you just expanded your debit-range which by assumption is never infinite, meaning you still need some kind of debit-range—then I think there's value in such a recording… insofar as there are commodities in the market you can buy, of course (why else have such a record?).

    I don't think exchange-value is fully dependent on the price of goods offered for sale because we're (hopefully) talking about somewhat normal circumstances. Hence the underlying assumption I have is that most goods offered for sale has to be produced first. That means there's commodities used up, consumed and transformed in the process of production and reproduction of the system itself. One of the most important commodities used in production is labor (or labor power), and that is of course also remunerated according to the same principles as giving away commodities in the market. The value created by the labor process and the price of labor in the process of production will thus become a regulating and a mediating factor as to market prices. So I don't think a scenario with an infinite price of a commodity offered at the market and infinite prices of the means of production and the wage bill producing the commodity sold at the market is that meaningful. In that case we might ask ourselves: what market? In short: if exchange-value is worthless as per your example, then commodities and the labor input producing the goods in question is also worthless. Market prices may fluctuate wildly but they are almost never (in aggregate) divorced from the conditions which produce them.

    In a way, Antti, with your emphasis on making sure one gives as much as one takes, it seems that sentiment is somewhat near the idea of value creation regulating market prices at some fundamental level, especially in that when they are moved further away from each other, it usually means the system is starting to crack.

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  61. "-- the one who's account is debited --" is obviously a key player here.

    'Andy' has been the symbolic substitute for "-- the one who's account is debited --".

    Now it seems to me that Andy has the potential to create two accounts: one account would be with the seller (bilateral), the second account with society (multilateral) represented by the bookkeeper. Either source of accounts is capable of recording credits and debits.

    We may not need to speak of 'money' but why do we record unless we seek to keep track of 'value'?

    In my mind, money is a synonym for stored value -- 'stored' because value of some kind was traded to someone who had a mechanical means of storing value. For example, my work (an hour's labor) could be traded for 'stored value'.

    I am trying to build bridges here. If we are to create a new monetary theory, we need commonly understood word-symbols. :-)

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  62. I'll continue to try to build word bridges.

    Let's think about 'limits' for a few minutes.

    'Limits' are have a mercurial quality in the sense that they are arbitrary.

    To be 'limits', limits must have a physical enforcement element with a definite 'yes or no' controlling result. The mercurial quality in limits is the result of human decision.

    Limits are not mechanical -- they are arbitrary -- but, at the same time, limits are physical in enforcement (a 'yes-no' controlling event).

    It seems to me that 'limits' are constraints requiring judgement by the driver of the car. The driver will make a yes-no decision based on VALUE(?). (The decision may be based on fiscal (value?) records but is physical in results.)

    Has anything been built? :-)



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  63. Roger said: "The bee society (as a whole) plans ahead for winter."

    Well, figuratively, yes. Less figuratively, the colony is not unprepared when the winter comes. But the difference is that there is no deliberate planning going on, no individual is imagining, anticipating the future (in its mind). That's the sense I had in mind when I wrote it.

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  64. Johan writes "What would lead us to an even sharper picture would be to introduce something of an integrated production system."

    That would be good! The judgmental quality of the word 'value' presents a challenge, partly resolved by the arbitrary nature of the natural monetary scale but 'value' is not yet linked to production-as-an-event.

    The role of 'value' and how to measure it certainly seems to be a key of some kind. :-)

    'Limits' seem to be a second 'key'.

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  65. Antti writes "But the difference is that there is no deliberate planning going on, no individual is imagining, anticipating the future (in its mind). That's the sense I had in mind when I wrote it."

    Your comment (and the extensive context that preceded) triggered a thought in my mind. Planning is an example of individual decision making.

    Of course, planning can also be a sequence of decision making by the larger society. Planning includes making-a-judgement about fellow human behavior. Planning places an expectation on the performance of our surroundings (including the performance of each person). Planning sets boundaries of expectations, which can become limits if the expectations are not met as time unfolds.

    The bottom line here, is that sellers and society (if it is a credit giver) can extract promises and set limits that are enforceable in a physical way. Often the enforcement is a simple "no" to a request for additional credit. A "no" decision represents future-planning-in-action, occuring because Andy has demonstrated that he is not willing to gift-in-exchange.

    Antti, does this story capture your thinking?

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  66. Johan, no reason to apologize, at all.

    About production... I'd like to understand better how you view it. You mention "value creation". Is there a direct link between that and production?

    An example:

    I employ Andy to help me with "carrying on an undertaking of great advantage, but nobody to know what it is" (until the product is launched). Andy does everything I instruct him to do, with no fault. Yet, due to my miscalculations, the product is buried before it's launched.

    No value created? Andy's effort, and perhaps mine too, wasted. Value lost? Andy gets his account credited as agreed, because he did what he was asked to do: he provided me with his (labor) services.

    How do you view this?

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  67. Roger said: "Now it seems to me that Andy has the potential to create two accounts: one account would be with the seller (bilateral), the second account with society (multilateral) represented by the bookkeeper. Either source of accounts is capable of recording credits and debits."

    Well spotted. When I define 'purchasing power' as an ability to debit one's account, I have in mind not only a bank account but possibly a bilateral account with the seller (in the seller's ledger, a debit on the buyer's account increases the buyer's liabilities towards the seller).

    I'll get back to you tomorrow on the rest of your comment(s)! Now I need to rest :-)

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  68. Antti, yes there's a direct link in that value is assumed to be created *in* production. But of course, value being a social phenomenon, the commodity produced must satisfy the condition of having utility for others. Without that, it's useless, ergo no value. Like a transmission without reception.

    Value is however lost in the sense of Andy consuming a bundle of commodities previously produced (input) without managing to transfer such value into any new exchangeable output. The 'effort' put into the production process does not itself determine whether value is created or not.

    If that happened to every producer in the economy, then we would also see an epic fall in the value of the laborers' social records, regardless of their previous remunerations. Again: no reproduction, no commodities, no value in the records.

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  69. OK, Johan. How about Andy's (labor) effort, is that value lost? Is it 'input' like the commodities? Mainstream usually views that effort as bringing disutility to Andy.

    I would think that effort cannot be recovered, whereas it is possible that the product itself has 'scrap value'; that is, the value of the input-commodities can be recovered by taking the product apart and by putting the commodities into other uses.

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  70. Antti, I wouldn't call it value nor value lost in the sense discussed here. I only talk about value in the sense of a commodity's value within the context of (capitalist) production and exchange. I don't make inferences as to aesthetic, ethical, moral, sensory or any other values in that terrain. But yeah, if it's possible to find some purchaser of the scrap, then fine, there's some value left in the item (it wasn't totally lost).

    I don't really take the notion of disutility—as in the aggregate of unpleasant feelings—to be a relevant measure of value in production. We do well in trying to stick to some physical units like labor-time and other physical quantities. For we know that in order to reproduce the whole system into an ever new cycle, real quantities of physical material and labor time is needed. We don't know how much aggregate unpleasant feelings are needed. Although we know, that should *all* labor stop in a capitalist society for a week, or a month, there's going to be feelings across the whole spectrum for sure.

    So if we were to empirically test the relationship between production values and production prices we're in a better spot to do such test.

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  71. Antti, I also think I've solved (in one way at least) how your model can be reconciled with the criticism I've thrown at it.

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  72. So, 'labor time' and commodities represent valuable inputs, inputs of value. And hopefully output of some value (value is created if output value > input value?) follows.

    Price is a proxy for value?

    How do we measure the value of input independently of the value of output (see my example of Andy's labor input -> worthless output)? By looking at the opportunity cost?

    As I see my theory at the moment, it has very little directly to do with value. There is no doubt a link between price and value, but I don't see much reason to study that link. Instead, I take "at face value" (literally!) whatever price is arrived at by the trading parties. It doesn't need to be the "right price", or the "just price". It is just a price. That price is recorded, whether it correctly reflects any value involved or not.

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  73. Antti, value could be the proxy of labor and price a proxy of value. When looking at an integrated production system where commodities enter into each other's production directly or indirectly there's a labor component in every commodity, from raw materials to any end product. By definition then, material cost trend towards zero (ultimately being the gifts of nature). The only thing left transforming one bundle of commodities into a new one at a higher value is the labor time bringing such transformation about.

    This does not however mean that the commodity will necessary sell on the market in the same proportion as labor time spent creating it. Empirically prices of production are determined by values to approximately 90 percent, i.e. relative variations between values and prices of production is often found to be under 10 % in studies (regressions), even under turbulent conditions. More about the empirical findings in Anwar Shaikh: The Transformation from Marx to Sraffa, or the lecture here: https://www.youtube.com/watch?v=1ji_3v5yWLg

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  74. So here: Adam Smith and especially David Ricardo had prior to Marx already emphasized how labor (Smith) and total labor-time (Ricardo) is the only factor giving value to a commodity. Marx, in turn, emphasized that it's not total labor time which creates value in the capitalist mode of production but rather 'socially necessary labor time'. Mind you this is all now discussed high up at a macro level as a "totality". To simplify immensely: think of what would happen to the capitalist mode of production if labor were to seize completely… the whole production system would collapse and not reproduce itself (especially in 1867!, but also today in many ways). Yet as technological development—through labor of course—advances, productivity goes up and the labor component (as in the labor time necessary to at least reproduce the system) goes down. Fast forward to a hypothetical scenario where robotization is so advanced that hardly any human labor is needed in order to keep up the basic reproduction of the material production system; in that case we couldn't possibly hold the labor theory of value anymore (human labor would have seized to be the dominant way of value creation with respect to commodities in general, i.e. being the dominant factor in keeping up some material standard of the society). The society in question would be vastly different from the kind of industrial mode of production wherein the theory first originated in.

    So what would be left in such theory, where [value = socially necessary labor time], when [socially] [necessary] and [labor] is taken out from the equation. The only thing left is 'time'. Competition would shift even more towards getting our attention/time rather than our labor. Hence value = time. Or as Benjamin Franklin would have had it: time is money.

    Jump to Antti's macro-scenario where whenever someone gives something to another one (s)he is remunerated by way of an increased debit-range in the social record. What's the meaning of such remuneration in a society which may not be describes as particularly capitalistic one but could be either rudimentary or vastly advanced? It could mean that the remuneration in question is 'time' in the sense that (s)he will not have to spend time laboring in order to get a commodity of a similar value. In that sense the recording can have value and be transferable to the benefit of someone else… and yet at the same time be a record of merely having given away something while the remuneration is not describable as money in the ordinary sense.

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  75. Antti writes "Price is a proxy for value?".

    I would say "no; rather, there is only 'original value' until a newly built product is resold at-which-time 'price-resets-value'."

    Now there is a complicated sentence!

    You offered a good example. Andy (and you) worked hard but the product was a failure (assume complete failure, the 'rocket blew up'). The only thing Andy and you got out of the exercise was the knowledge of failed effort.

    Here is the way I calculate the value lost (or maybe the 'value of knowledge gained'). Find the owner of the value that was provided to Andy and you (and all the other project suppliers); that owner has lost value.

    That-owner you just found cannot repeat the exercise (using the knowledge gained by failure) unless he puts additional value into the effort.

    Does that complicated sentence make sense now?

    That is how ".... we measure the value of input independently of the value of output." :-)

    It sounds to me that your theory is correct in treating 'price as value'. I think establishing-a-price (established by exchange) resets value to a new physical (and fiscal) reality.

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  76. Johan: When you write the word "seize", do you mean to say "cease"?

    'Cease' as used in "If you remove the wheels from a car, it will 'cease' to move."

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  77. Johan said: "...whenever someone gives something to another one (s)he is remunerated by way of an increased debit-range in the social record"

    I don't see any reason to talk about (materialistic) "remuneration" in any other sense than in "getting goods from others". Those goods from others form the remuneration. An expectation of getting those goods is an expectation of remuneration, not remuneration itself. If one can be 99,99 % sure one gets those goods, then one can be 99,99 % sure of getting remunerated.

    If increased debit-range could be seen as remuneration, I would be sending credit applications to banks.

    The fact that you are given goods by others, instead of you having to produce them, saves you time. No doubt about that.

    Sorry for the blunt reply. As I said, I think it's too hard to talk intelligibly about 'value'. I'm automatically suspicious of sentences like

    "Empirically prices of production are determined by values to approximately 90 percent, i.e. relative variations between values and prices of production is often found to be under 10 % in studies (regressions), even under turbulent conditions"

    and

    "value = socially necessary labor time"

    I don't even want to argue about 'value'. I don't see how it is related to my theory. Perhaps I'm blind.

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  78. Roger said: "The only thing Andy and you got out of the exercise was the knowledge of failed effort."

    No. Andy got goods (say, food and booze). As I said, I got his account credited as agreed. He was an employee of mine.

    So Andy got goods. Which I would say represent some kind of value to him. Did he give up something of value to receive those goods? Yes he did. He probably worked his ass off, sacrificing time he could have spent with his children.

    I'm not sure if it's possible to talk about 'value' in more precise terms as I do here.

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  79. Antti, remuneration = increase in the debit-range.

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  80. Antti: No, you are failing to see the role of ownership. New production is owned by the producer until sold.

    Betty got credits because she gave up something that she produced using her labor. She played the role of owner.

    What gave you the right to employ Andy? It was your control of credits that could be moved. It was your choice to move credits to Andy in reward for his work.

    Macro theory is forced to address 'value' if it is to conform to the world we live in.

    Of course you got the value of your labor as you performed the work designed by others. Others provided value to you as was THEIR CHOICE. Perhaps you could read the comment again--carefully? :-)

    Sorry if I sound a little terse. :-))

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  81. Yeah, ok, we can dispens with the word remunerate and simply say 'get', 'will be'etc. The term might be misleading. In fact, 'exchange' might also be somewhat misleading to some extent.

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  82. Antti: Perhaps I should apologize. I wrote my comment as if you and Andy were both working for someone else. You intended that Andy should be working for you.

    If Andy works for you, you are the owner whether the project fails or succeeds.

    If Andy works for you, you can only employ him up to your borrowing limit (your negative credit limit). When Andy works, he gets the benefit of an increase in either negative credit limit or positive credit accumulation. You take the same credit increment as Andy but in the opposite direction.

    It is still the case that you have the right to employ Andy only because you have the ability to transfer credits. (I am assuming that you and Andy agree on the price of his labor.)

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  83. Roger, employment is a bit of a conundrum in regards to incentives. You want something in the market it is easy because the commodity is already there in plain sight. Employment on the other hand is more difficult to conceive of as a commodity out there ready for anyone's taking. The employer might want something but (s)he also then needs to convince the intended laborer to perform. What does the prospective employer respond when the potential laborer asks why he should go down in that mine and dig out some coal for the benefit of the stranger asking? Is it a matter of being close to the debit-limit forces the laborer down in the mine?

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  84. Johan, yes, I understand.

    If a debit-limit exists, it will have a role whether the personalities forward plan or not (so long as there exists a limit enforcer). Thanks for clarifying.

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  85. Roger: You're not the only one who sounds terse :-) As Nick says, it's frustrating to get one's head around this stuff.

    Johan: I worked for six years in Pharma (as an analyst) and that might be one reason I don't find the link between price and value especially strong :-) Or if anything, the value is the value of the product to the user or to the society (for instance, the patient can continue working instead of living on benefits). In the patent period, the drug price reflects that kind of value, which is often high (try to put a price tag on life). When off-patent, the price often drops drastically as it comes closer to cost of production.

    Alternatively, you could adopt the pharma industry viewpoint (I somehow feel you're not eager to do that...) and say that the high price reflects the high R&D costs (overhead; how do these appear in Shaikh's explanation?), not only of that particular drug but all the failed drugs, the costs of which need to be covered through high prices of blockbuster drugs.

    An extreme example are the cases where the price of an old drug has been raised by 1,000 % just because "we can" (after some finance guy has taken over the company).

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  86. Antti, individual sectors like pharma with huge profit ratios or the paper industry with relatively small labor costs don't make that much of a different when the whole integrated input-output matrix of a national economy is involved. That's the macro perspective proper. It boils down to simple math in the end. It is exactly *that* point which Shaikh illustrates in his paper and in the lecture (already illustrated by David Ricardo btw.). The relation holds even with extreme fluctuations like during the great depression of the late 1920s.

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  87. Johan: Yes, employment is a quite complicated subject. Especially when it comes to the link between price (wage/salary) and value.

    If I was employed for one year on a fixed salary in a typical white-collar job (that is, one where my output is hard if not impossible to measure!), we could say I'm selling my services to the employer and in exchange I get goods from the "market". If my salary is $100,000, then the value of my services might be said to be equal to value of whatever goods total $100,000 in price. But of course I might be shirking as much as I can (instead of working I could be commenting on blogs 50 % of the workday -- not that hard to accomplish!), while my colleague with the same salary works hard and puts in some unpaid overtime, too.

    Now, my output could be equal to my colleague's output. Probably it isn't. Whether it is or not might not matter. Our employer, or most likely its agent (our boss), might use some proxy measure, like working hours or "feedback from internal customers", to measure our (immeasurable) output. The measure might be no good, though. But let's say the employer was quite certain, and for good reasons, that my colleague was a high performer, while I was a low performer. I would get sacked after one year, my colleague would get a raise or get promoted.

    So, employment should often be seen as a long term relationship, where the compensation for services provided by the employee one year might not come only, sometimes not even mainly, in the form of salary during that particular year, but over the coming years, too. You might work your ass off for ten years on a low salary only to get into the corner office, at which point your salary is $1,000,000 and you spend half of your days on the golf course.

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  88. Johan: Could you help me to understand what Shaikh really is talking about... Is it that the aggregate wage/profit ratio is quite stable? I don't see what 'value' has to do with this. Is the trick to say that labor has something to do with value, and then proceed to show that the price of labor explains most of the product's price -> therefore, we can conclude that "prices of production are determined by values to approximately 90 percent"?

    'Value' seems to be a slippery concept. It slips into these equations by stealth? Or then I'm just too tired, or too dull.

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  89. Antti: I think you made a good employee illustration.

    I like to break the relationship into what you (as an employee) provide as value, and what the employer owns at the end of your employment period (be it week, year, or what ever).

    While we know what you are paid (you made an agreement), the employer does not know the value of your effort (except to know what he paid you). The employer will not know your work-output-value until the product is sold. As an analyst, you know how hard it is to sum all the product costs, assign taxes and overhead, adjust inventory, and then calculate the true change in financial position for the employer-'product owner'.

    Nick is right--this stuff is hard. :-)

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  90. I am currently reading a fascinating book "HECLA: A Century of Mining" by John Fahey. It is about mining, not economics, but I am enjoying it more because of my interest in economics.

    Let me illustrate some of our language with word pictures based on the book account.

    Ownership:
    Mine owners found lead ore in the 1890's. What they found was metal bearing rocks. They filed a claim with the Federal Government that gave them ownership rights so long as the claim fees continued to be paid.

    Labor:
    The mine owners did not work the claims themselves (for the most part). They had to convince employees to create a mine and then dig deep into the ground.

    Ownership (again)
    Once the ore was on the surface, it needed to be 'processed' in several stages:

    1. Concentrated for shipping in a local mill.
    2. Stored until transportation was available.
    3. Stored until refining was available.
    4. Stored until sale of the refined product.

    Value
    The mine owners easily found their cost of labor. It was mostly an up-front cost--up front by months and, yes, years when mine structures were built.

    The mine owners did not know the value of their claim. Was it a big ore body or small? They did not know. The vein could vanish at the end of tomorrow's shaft extension. Often it would 'pinch'. Owners could only hope for vein enlargement and richer ore with each advancement of the drift.

    The cost of electric power, transportation, and especially refining were all choke points that could pinch profits.

    The value of all the accumulated cost remained unknown until the metal was finally sold, usually at the refiner's finished product door.

    Price
    Price was set at the refiner's finished product door.

    Value to the mine owners
    Once price was known, the mine owners subtracted cost to learn value-of-their-effort. With value-of-their-effort known, they made the decision to 'continue/not-continue'. They seldom shut down unless they first lost stored-value (a complex word you don't like, Antti :-)). The mine owners shut down when they did not think they would ever recover their on-going input cost.

    I have some history in the region that makes the book doubly interesting to me. The link I see to macroeconomics enhances the story.

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  91. Antti wrote: << Could you help me to understand what Shaikh really is talking about... Is it that the aggregate wage/profit ratio is quite stable? I don't see what 'value' has to do with this. Is the trick to say that labor has something to do with value, and then proceed to show that the price of labor explains most of the product's price -> therefore, we can conclude that "prices of production are determined by values to approximately 90 percent"? >>

    Yeah, I wrote the figures from memory so I quickly checked and it's in fact around 85 % (not 90).

    The vertically integrated profit/wage ratio is part of the "disturbance term" which means that it determines how much deviation in distribution [(1 + r/w)i/(1+ r/w)j] can impact the deviation between prices of production and values [Pi/Pj dev. Vi/Vj)]. The disturbance term can also be algebraically decomposed into [(1 + Kt/Lt)i/(1+ Kt/Lt)j] where Kt refers to the total integrated capital stock and Lt total integrated labor time (together they basically form a structural relationship for one sector at one point in time). In a full integrated matrix where every sector is rekated to each other in direct or indirect ways, the wage rate and the profit rate will by definition be averaged out since we're talking about the whole system. So we're left with the distributional factor as a determinant. The disturbance term sort of gives the boundaries in which fluctuation between values and production prices can fluctuate on a macro scale. The fundamental question is after all: Why do prices deviate from values (theoretically they could be the equal)?

    The fundamental price equation given by Ricardo is: Pi/Pj = (vulc)i/(vulc)j x the disturbance term, vulc being the vertically integrated unit labor cost. From that we derive three different hypotheses: (a) structural, (b) cross-sectional and (c) time-series hypotheses. The first one being how much can deviations in distribution affect the deviation between prices and values. The second is sort of related to 'should we really care'; with the result that we shouldn't because the error term is quite small even under extremely turbulent conditions like the great depression. So we might as well use prices of production as a proxy for labor values (not unlike you asked earlier if price = the proxy of value). The third hypothesis pertains to how much does a change in the structural component of production (values) correspond to a change in prices (both production prices and market prices) over different time intervals. In the video Shaikh goes through each of them with newer data than in the article.

    These are fundamental macroeconomic questions in that (a) refers to the STRUCTURAL element of production whereas (b) refers to the COMPETITIVE element between producers and (c) finally to the MARKET EXCHANGE element. As scientist we want to understand how each is determined and how each impacts each other. These are empirical questions which we can answer to some degree. It's not perfect but much better than trying to estimate aggregate degrees of good and bad feelings.

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  92. I'm oginf to allow myself to blast you with a lengthy quote, which I believe handles the above questions elegantly, without once using the term 'value'.

    (...) Now, money is a very peculiar ‘object’, which has too often been mistaken for a real good. As recent developments in banking theory have confirmed, it would be both anachronistic and wrong to take money as a material thing. This makes things clearer if not easier: money is an immaterial entity issued by banks every time they carry out a payment on behalf of their clients. Referring to the famous economic distinction between stocks and flows, we would say that money is a flow whose instantaneous circulation has a stock of income (or capital) as its object. Banks create the flow but not its object, which is closely related to production. This is to say that money and credit are not one and the same thing. In order to provide their clients with credit, banks need to back it with a positive deposit, that is, with a positive amount of income or capital. Contrary to what happens for the creation of a simple flow (a numerical vehicle with no positive value), the income banks lend is not of their making. Correctly used, double-entry book-keeping does not allow for the creation of income independently of production. Thus, by creating money banks simply provide the economy with a numerical means of payment, the object of the payment being derived from the association of money with current output.
    According to monetarism, money is indeed a positive asset allowing barter to be split into a sale and a subsequent purchase. Money is thus conceived of as a stock and the money supply is seen as the quantity of this stock determined, directly or indirectly, by monetary authorities. Yet, if money is identified with a positive asset, then banks are bound to benefit from the extraordinary power to create riches out of nothing, as it were, which is plain nonsense. In reality, banks act as monetary intermediaries, which means that money is issued as a flow any time banks carry out a payment on behalf of their clients. Every payment is a tripolar transaction involving a bank and two of its clients, in which each of the three agents involved is simultaneously a purchaser and a seller on the labour, commodity, and financial markets. As a purely numerical form money never enters a net sale or a net purchase and must therefore be clearly distinguished from bank deposits, net assets and liabilities entered as stocks in the bank’s balance sheet and that can only result from the association between money proper and real output established by production. Knapp’s idea that money is essentially state money is thus contradicted by the fact that, like any other economic agent, the state cannot finance its spending through money creation, that is, by issuing its own acknowledgment of debt. In a logical (as opposed to pathological) system, public spending is constrained by the amount of income the government can obtain through taxation, private loans, and the sale of public goods and services, which simply means that, again like any other agent, the state can finance its purchases only by simultaneous and equivalent sales on the commodity and financial markets.(...)

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  93. (...) What lies behind the confusion between money and income is the concept of credit money and the wrong belief that when banks create money they grant a positive credit to the economy. This is particularly clear in the monetary analysis of production proposed by the members of the so-called ‘theory of the circuit’. Apparently unaware of the absurdity implicit in maintaining that banks can create positive financial assets out of nothing, these economists claim that production is financed by newly created credit money that firms spend to cover their costs. Their misunderstanding of the very peculiar nature of bank money leads them to believe that ‘having access to bank credit, firms benefit from an almost unlimited purchasing power’ (Graziani 1996: 12, our translation). What has been entirely missed by the theorists of the circuit is the ‘vehicular’ nature of money. Its understanding requires entering the world of purely numerical magnitudes and of double-entry book-keeping. What ‘circuitists’ and post-Keynesian economists have clearly seen is that money is bank money. What they have failed to see is that banks create a purely numerical magnitude that is simultaneously positive and negative, and that this magnitude exists only instantaneously, as a circular flow. Furthermore, most of these authors miss the particular nature of labour and end up sharing the neoclassical view that labour is nothing but a factor of production among others. In reality, as the Classics and Keynes knew well, labour is the only macroeconomic factor of production, and it is through the payment of wages that physical output is given its numerical form and that a positive income first appears. Income is thus a stock (a bank deposit) whose value is positive because it defines money’s real content – produced output – expressed in wage units.
    The very nature of bank money is numerical. Real goods and services, on the other hand, are physical (albeit not necessarily material). What of production then? Is it a process of transformation taking place continuously or discontinuously in chronological time? From a physical point of view, it is. But this should not be an economist’s main concern. It is from an economic point of view that economists must analyse production, and from this viewpoint production is the process by which physical output is given its monetary form. The association between money and output being the result of an (instantaneous) payment, production itself is an instantaneous event. Surprising as this may appear at first, it must be recognised that it is the only result consistent with the fact that physical goods and services are given their numerical form (money) only through the payment of their costs of production. Through a process of physical transformation, raw materials are given a new utility-form, but it is through a payment that the newly manufactured objects are transformed into economic goods.
    Production and consumption are events of a macroeconomic nature. With the notable exception of Keynes’s monetary approach, production has mostly been analysed as a linear process (sequential Austrian models), as the result of a simultaneous adjustment (general equilibrium models), or as a circular process (input–output models). As is confirmed by the use of production functions and technical methods of production, in all these analyses production is considered as a process of physical transformation that can be represented by a set of functional relationships or as a sequence of fabrication stages. According to this broad approach, production is therefore a process of transformation carried out by a certain number of factors – usually registered under the headings of labour, capital, and ‘land’ – whose costs are covered by firms. But then no distinction is possible between the social (macroeconomic) and the microeconomic costs of production: both from the aggregate and from each single firm’s point of view, production is a process of transformation whose costs derive from the different inputs entering the process. (...)

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  94. (...) A truly macroeconomic analysis of production is possible only if human labour is recognized a different conceptual status from the other factors, and money is no longer identified with a positive asset. According to a modern interpretation of Keynes’s monetary analysis, production is thus an economic process resulting from labour alone and giving rise to an economic output defined in wage units. Since it is through the association of money with produced output that income is formed, and since income is the specific result of production, it follows that, from a purely economic viewpoint, production is the instantaneous event (the payment of wages) through which produced output is issued as a positive amount of money income. In its most rigorous definition, production is then an absolute exchange since it is the very transaction through which output is changed into a sum of money income, that is, through which output becomes the object of a bank deposit. The macroeconomic nature of production follows immediately from the fact that each single payment of wages increases the amount of national income currently formed.
    The economic nature of production emerges when referred to profits and to their definition as a net surplus. Since Quesnay’s contributions, profit has been identified with a surplus, produced either by nature (as maintained by the Physiocrats), by labour (as claimed by the Classics) or by the process of production itself (Sraffa, Leontief and Pasinetti). The existence of a net product within a process of physical transformation is somewhat mysterious. If production is considered for its physical nature, there is no point in looking for a real surplus. Lavoisier’s principle of transformation applies, and no positive difference can ever appear between outputs and inputs. A critical analysis of the attempt to identify profit with a net surplus leads us to choose between two reciprocally exclusive alternatives. Either we maintain that no net product can ever be formed in the economy (which is thus reduced to an infinite series of processes of physical transformation) or we claim that the whole output of any period is a net surplus. In the latter case, production is considered not as a physical process of transformation, but as a truly economic event in which output acquires its original economic form. Quantum monetary theory stands by the latter alternative.
    As far as consumption is concerned, its macroeconomic nature appears clearly as soon as it is related to the final expenditure of income, that is, to Keynes’s identity between total supply and total demand. In contrast with the notions of consumption function and equilibrium advocated by mainstream economists, the macroeconomic analysis advocated here shows that, like production, consumption concerns the absolute exchange between money and output. Interpreted as the expenditure carried out for the final purchase of produced output, consumption is an instantaneous, macroeconomic event defining the destruction of a positive income. (...)

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  95. Roger said: "The employer will not know your work-output-value until the product is sold."

    Will he know it at that point? I don't think so.

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  96. Johan: Vi/Vj = (vulc)i/(vulc)j -- correct or incorrect? Value = vertically integrated unit labor cost?

    From your answer I didn't find any clear explanation of what 'value' is. Before I understand that, I cannot know what is meant by sentences like this: "Why do prices deviate from values (theoretically they could be equal)?"

    What is the unit in which value is expressed?

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  97. Oliver: Thanks for the Quantum Econ stuff! I have secretly wished that you would bring in that viewpoint more often.

    From your quote (you didn't mention the source?): "Its understanding requires entering the world of purely numerical magnitudes and of double-entry book-keeping."

    This is my world, right? 'Price' could be understood to be the "purely numerical magnitude".

    If only Quantum Econ would stay there and forget 'money' :-) Re-defining 'money', as they do, is not very helpful in my opinion. It -- just like coming up with your own definition of measurable 'value' -- creates boundaries for the discussion, as it "de-commonizes" the language we use. Once you get into that school of thought, once you put effort in learning their language, you can say they "handle questions elegantly". As I said earlier, Johan might see a lot of sense in talking about 'a general expression of exchange-value', while I might call it "abstract nonsense" (only because I haven't got the same big picture in front of me which Johan and Shaikh have).

    This absence of shared language is why I want to

    (1) avoid talking about stuff we cannot talk about in clear terms we all share, and

    (2) create a new language which we could eventually share.

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  98. Antti,

    Value = vertically integrated labor-time = L + L(1) + (L2) + (L3) + … (Ln).

    Here's a paper showing examples of how to calculate labor values in different ways, regardless of units in which the input-output data is first presented in—physical or monetary units alike—(Leontief showed the way by introducing the inverse matrix): http://copejournal.com/wp-content/uploads/2015/12/Chilcote-Vertical-Integration-and-Classical-Economic-Theory-1998.pdf

    Defining value according to the classical tradition in the paper:

    "The vertically integrated 'sector,' associated with classical economic theory, is superior to the input-output 'industry' because it reduces all the complex heterogeneous inputs to a simple homogeneous input. Marx thought in terms of comparing the total labor used in the production of commodities in each industry. Vertically integrated labor coefficients are constructed through the whole intricate pattern of inter-industry connections, but capture all the labor inputs in a simple summary statistic, which Marx called value."

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  99. An example from Oliver's quote: "Income is thus a stock (a bank deposit) whose value is positive because it defines money’s real content – produced output – expressed in wage units."

    Anyone "uninitiated" person will be confused after reading this, right? I'm not wholly uninitiated, and besides, my perspective seems to be in many places compatible with the Quantum perspective. I interpret that as drawing a direct link between 'income' and the 'goods that are produced and will be consumed'.

    Income defines produced output expressed in wage units... That's what it says. Are 'wage units' skilos in our model economy? If Andy had a wage of SK500/day, and the goods he was producing (with others) would cost SK1,000 a piece, would SK1 be a 'wage unit'?

    Again, I'm against using the word 'income' in the sense used here. Only in their narrow model (I assume) can they say that a bank deposit is 'income', and this because they directly link that deposit to the goods that have been produced and will be bought by the "deposit-holders".

    I'm partly guessing here. How do you see this?

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  100. Johan: I should probably tell you that neither 'value' (as you understand it) nor 'utility' plays any important role in my theory. If they show up at all, they show up as vague ideas of some unquantifiable measure (like "not worthless", "of use to someone", etc).

    That means I'm not concerned with the same scientific questions as you seem to be when you say that we cannot talk about prices without understanding value (?). I'm not asking "why that price?", "what affects prices?", "how are prices formed?". Not in my work where I focus on the monetary system as a recordkeeping system. I don't see those questions of relevance in that context.

    Having not had time to get very deep into the value vs. price discussion, I'm forced to assume that the reason why intelligent people don't seem to agree on it (after what, more than 100 years of debates?) is that there is no way to agree on a sensible definition of 'value' in this context.

    When I introduce the kind of production you have in mind in my model, I'm going to be concerned with the recordkeeping where the abstract UoA is used, not with "value creation" and how to measure it.

    I think this focus of mine is probably in line with what is said about production in Oliver's quote (although I would never use the same language, which I cannot say I even fully understand!): "...production is the process by which physical output is given its monetary form. The association between money and output being the result of an (instantaneous) payment, production itself is an instantaneous event."

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  101. From your quote (you didn't mention the source?): "Its understanding requires entering the world of purely numerical magnitudes and of double-entry book-keeping."

    This is my world, right? 'Price' could be understood to be the "purely numerical magnitude".


    Yes, sorry, I forgot to mention the source. It's by Alvaro Cencini, found in the introduction to Quantum Economics (QE) here: http://www.quantum-macroeconomics.info/national-economics/

    I do think it is very much your world. On the other hand, by linking your world of record keeping with a 'value added' world of production and consumption, beginning with the identity of income = output (and generally sticking to conventional economic language), QE manages to compress much more information into its base model.

    The idea behind the 'purely numerical magnitutide' is congruent with your SKILO and also Roger's mechanical scale, as far as I can tell. It is the initial price paid as wages as a result of wage bargaining process in the labour market, which they consider sweparate from the goods market. The output that labour produces is then sold on the goods market , which in turn determines profits or a losses. Prices realised above wage costs (+ intermediate goods that, as per the classics, can be said to be accumulated wages) are recorded as profits and prices realised below wage costs are recorded as losses. I.e., in a non-growth environment, profits + losses = 0 in aggregate. No need for another term like 'value' to be introduced.


    If only Quantum Econ would stay there and forget 'money' :-) Re-defining 'money', as they do, is not very helpful in my opinion. It -- just like coming up with your own definition of measurable 'value' -- creates boundaries for the discussion, as it "de-commonizes" the language we use.

    I agree the verbiage is sometimes a bit thick and some of your terms are easier or more intuitive to understand. On the other hand, it builds on existing economic terms and concepts. I do find their use of the term money to be helpful e.g., in that it lets them distinguish between records of macroeconomic significance and records that have no such macroeconomic significance (shuffling around / lending existing 'income'). Generally, I find they manage to draw a clear line between economic and non-economic events (e.g. home production) as well as macro- and microeconomic events (such that change the size of the pie and such that don't). It isn't the easiest language, or easiest use of existing language, but, once one has gotten used to it, it does turn out to be quite precise, I find. And it's probably designed to be used in conversation with other, clasically trained economists rather than with our 'intelligent pupil'. I'd have no problem if you managed to 'translate' their content into more accessible language :-).

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  102. More generally speaking, I think the choice of the basic model is important. The molecule of your world (up until now) is an event in which goods change hands, which is recorded by a third party. That explains how records come about and how they affect the parties involved. It does not, however, attempt to explain how the goods that change hands come about or how they disappear. I think it is the strength (and possibly also the weakness) of the Quantum approach, that it attempts to say something about both events within the same basic economic 'molecule'. They choose to use two different terms to describe each side of their molecule (physical events and money), unlike yourself, who attempts to describe one side in terms of the other (events and records of events). I'm interested to see whether you will incorporate economic production and if so, how it will affect the complexity of your, until now, very accessible language. Intuitively, I think it should be possible.

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  103. Antti, yeah, ok. That's probably fine in the early stages of model building and formalization. After all, the model-building might stall if too much information is considered at once.

    ------
    Regarding the quote: I too find it somewhat difficult to comprehend. Yet somehow this might relate to something similar. Just leaving it here for the record (so not meant as an argument for or against):

    "... the concrete labours are thus counted as social labour only when they are valorized, and the necessity of exchange value lies precisely in the fact that it is through this device that a society containing apparently independent private producers comes to grips with the social content of their individual labours" (Shaikh, 1987, p. 9)

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  104. Antti writes "Roger said: "The employer will not know your work-output-value until the product is sold."

    Will he know it at that point? I don't think so."

    A philosophical view of 'value':

    The single word 'value' can be defined as 'a judgement (derived by a single person) relating the item judged to every other possible item under consideration, reduced to digitized certainty by selecting a single number to represent the item judged'. [my definition]

    In the example quoted, the employer is establishing his "single person" judgement of related items AND reducing the judgement to "digitized certainty" by expressing a single value.

    Later, the macro-economist comes along to use the employer's digitized number. As a second person, it is no surprise that the macro-economist wonders how a single 'value' could be picked using the data available to the macro-economist. By this example, we allowed two people to view two sets of items and [they]
    reached two separate digitized numbers expressing value. What else might we expect?

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  105. 'Price' can be defined as 'a single value picked by two persons in judgement of a single item'. [my definition]

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  106. Oliver said: "the identity of income = output"

    Before even reading the rest of your comment(s), I want to comment on this one.

    How should we understand this? Forgetting that they say that income is the bank deposit, a stock, I would like to conclude that the output, once it finds its way into the hands of those who produced it (at aggregate level), is the income derived from production. In very simple terms (autarky): I go fishing and any fish I get (and eat) will be my income.

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  107. Roger: Sounds fairly sensible. But you missed my point (the fault is probably mine): The employer will know the price of the product, but he won't usually know how much I (what I had in mind was a modern white-collar worker) contributed to it. Try to figure out the bottom-line effect of some sales analyst [add here a list of most of modern job titles].

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  108. Oliver said: "...distinguish between records of macroeconomic significance and records that have no such macroeconomic significance (shuffling around / lending existing 'income')"

    Could you elaborate this? Especially the "lending existing 'income'" part.

    If there are credit balances (on checking accounts) in the bank's books, how are they differentiated? I'm now thinking of one credit balance being created when a company uses its overdraft to get an employee's account credited (bank deposit as income?) and another credit balance being created, say, when the government uses its overdraft to get some benefit-receiver's account credited ("transfer payment"; not income linked to production?).

    You said: "...between economic and non-economic events (e.g. home production)"

    Is this their language? I think 'economic' is usually replaced by 'market' in this context. Home production is non-market production, etc.

    If you have time, could you find the simplest example they give of the process and post it here? Perhaps I could try to translate it. I remember they have had examples that are very much like the Circuitist examples (I think I read somewhere that Graziani has acknowledged his debt to Bernand Schmitt...).

    Today you've given me some hope that we might get somewhere with all this. Thanks! It means a lot to me.

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  109. Antti writes "......how much I (what I had in mind was a modern white-collar worker) contributed to it."

    You are right, I was still considering the two party trade model originally described by an Andy-Betty exchange.

    You are moving into a multiparty trade model that could be described as a Andy-Betty-Cleo exchange.

    Here we have one product, one buyer and one exchange. We also have only one seller but this seller is composed of two persons--Betty and Cleo.

    Your comment seems to reveal that you are looking into the Betty-Cleo relationship. Exactly what is the role of Cleo in the system (making a product) that Betty and Cleo have built? Is Cleo a full partner who would fully participate in setting a digitized value for the product as agreement with Andy is reached?

    I have no problem in moving the discussion to this three-party exchange system. :-)

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  110. “…distinguish between records of macroeconomic significance and records that have no such macroeconomic significance (shuffling around / lending existing 'income')"

    Could you elaborate this? Especially the "lending existing 'income'" part.

    If there are credit balances (on checking accounts) in the bank's books, how are they differentiated? I'm now thinking of one credit balance being created when a company uses its overdraft to get an employee's account credited (bank deposit as income?) and another credit balance being created, say, when the government uses its overdraft to get some benefit-receiver's account credited ("transfer payment"; not income linked to production?).


    First of all, I’ll have to admit this is all my interpretation of what they’re saying. Schmitt may well be turning in his grave.

    Lending existing income is not the way they put it, those are my words, and they may not be very accurate.

    As far as I have understood, they distinguish between 3 different types of markets (+ the labour market). Theses cannot be distinguished in the current system. But their reform proposal for national accounting system says they should be.

    There is a market for final output, a market for capital goods and a financial market. Which ‚department‘, as they call them, a transfer payment would fall into, I’m not quite sure. My guess would be that such credits remain in the goods market until the purchase of a fixed capital good or a further financial ‚good‘. I’ll try and find some English literature on that particular subject for you.

    between economic and non-economic events (e.g. home production)"

    Is this their language? I think 'economic' is usually replaced by 'market' in this context. Home production is non-market production, etc.


    Again, that’s my language and you may be right.

    They share their basic model with the circuitists. You need 3 entities: firms, banks and workers. Firms borrow from banks to pay workers for their output. The credits (income) on worker’s accounts are considered the numerical equivalent of the output they produce (income = output) (circuitists would not go down that path, I think). Upon purchase of a consumption good on the goods market, the output is economically ‚consumed‘ and so are the credit entries in that they are used towards paying back firm’s debt to banks.

    It is when credits are used of other things, namely the accumulation of fixed capital or to generate a further expansion of balance sheets (the financial markets, my words), that they say the credits that still exist in the banking system, should no longer be open for use on the goods market because they have no corresponding output. I’m least confident about my interpretation of the ‚financial market‘. On this subject, I still find myself wading through the thicket of their language.

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  111. Roger, I like Cleo! That's the name of my younger daughter :-).

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  112. A quote from Sergio Rossi's contribution on the 'theory of money emissions' (as quantum economics is also known) in the 'Handbook of Alternative Monetary Economics':

    In the words of Baranzini and Cencini (2001, p. xvi), this means that although invested by firms, profits are still available in the form of loanable bank deposits. Logically, the part of profits invested in the production of fixed capital goods should no longer be available on the financial market. Invested profits – which define a macroeconomic saving – are transformed into fixed capital, and it is in this form that they should be registered by banks. What is definitively saved by society as a whole should not be lent to anybody. Yet, contrary to logic, this is what happens today, since invested profits reappear as renewed income deposits. We are thus confronted with a duplication, the same income – the profit spent in the production of means of production – being still available to feed another expenditure on the commodity market.

    There isn't that much English literature around for free on the subject, as far as I can tell. Have you got access to any academic networks? If so, you can look up publications on the university homepages of Sergio Rossi or Alvaro Cencini. They publish in English. Schmitt wrote in French, the translation of which I think has contributed to the thick language of QE. French tends not to be as concise and simple as English can be.

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  113. Found a link:

    https://onedrive.live.com/?authkey=%21ALUkV%5F7aLorn%5FQQ&cid=EBFAFD82D6649339&id=EBFAFD82D6649339%21460&parId=EBFAFD82D6649339%21115&o=OneUp

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  114. Oliver: Your quote of Sergio Rossi's work contains the nugget that brought me to considering 'money' as a 'gift certificate'. Rossi's words

    "We are thus confronted with a duplication, the same income – the profit spent in the production of means of production – being still available to feed another expenditure on the commodity market."

    are neatly explained when 'money' is considered as being a physical 'gift certificate', valid until canceled and accepted nationwide.

    For me, Antti's 'gift economy' is a logical first-step, linking the creation-of-money to the general acceptance by society of money-as-a-store-of-value = 'gift certificate'. The fact that 'value' is somehow antithetic to his complete theory is perplexing.

    For me, Antti's concept that 'money is only a record of a gift event' (which again Antti finds antithetic, I think) is a very acceptable first step. The evolution from abstract-record to personal-account-containing-value to certificate-in-hand has already been traced in Antti's posts 1-8. It think his is great work but the core theory is not-yet-recognized, even by the author.

    Isn't this a strange sounding situation?
    :-)

    What a coincidence that your daughter's name is Cleo! I was looking for a short female name beginning with C, and I remembered a pretty girl from my high school class--Cleo. You are lucky to have a daughter. Congratulations.




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  115. Oliver: I must say they arrive at strange conclusions. It might mean they stay true to their logic (not afraid of where it takes them), which I think is a good thing. So it's probably their starting point which is strange, too, and which I don't agree with.

    Rossi says: "...profits are still available in the form of loanable bank deposits"

    I think it's a mistake to think of bank deposits as being, or representing, profits, or more generally income.

    It's very bold to state, for instance: "Yet, contrary to logic, this is what happens today, since invested profits reappear as renewed income deposits."

    Too bold, I think. But I for one don't want to say that bold statements couldn't be true statements. So it's not that. I just don't share their premises.

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  116. Let's now have a look at the example Oliver gave:

    -------------------------------------------------------

    Firms borrow from banks to pay workers for their output. The credits (income) on worker’s accounts are considered the numerical equivalent of the output they produce (income = output)... Upon purchase of a consumption good on the goods market, the output is economically ‚consumed‘ and so are the credit entries in that they are used towards paying back firm’s debt to banks.

    -----------------------------------------------------

    My translation:

    Firms receive labor services from workers. Workers give, firms take. (These firms are creditworthy, so their accounts can have negative balances.) It is recorded by the bank that firms have received services priced at, say, SK10,000. This leads to a debit balance of SK10,000. Likewise, it is recorded that workers have given up services priced at SK10,000, which leads to a credit balance of SK10,000.

    Next, workers buy goods from firms. Firms give, workers take. This is recorded, and should the goods total SK10,000 in price -- which is by no means necessary, although I admit that Say's Law provides a nice and clean way to think about this --, then all balances disappear.

    This translation sounds like something you could have provided yourself, having got already familiar with my thinking. So it must be that there is something I am missing, something that makes you think it must be more complicated than this?

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  117. Thinking about Oliver's example:


    "Firms borrow from banks to pay workers for their output. The credits (income) on worker’s accounts are considered the numerical equivalent of the output they produce (income = output)... Upon purchase of a consumption good on the goods market, the output is economically ‚consumed‘ and so are the credit entries in that they are used towards paying back firm’s debt to banks."


    You would think that credit entries should balance but, in the real economy, they do not. Why not?

    Three of many possibilities:
    1. Loans to workers to buy goods, resulting in uneven distribution of past production (timing has become dependent upon the loan event).

    2. Loans to government for government defined distribution of past production.

    3. 'loans-to-employers' are disguised 'loans-to-employees'.

    Any of these three actions may disrupt the time sequence of worker production entirely consumed by the workers who produced.

    The enduring nature of a credit record vs the transitory nature of results-of-labor may be the base-issue.

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  118. It's very bold to state, for instance: "Yet, contrary to logic, this is what happens today, since invested profits reappear as renewed income deposits."

    Too bold, I think. But I for one don't want to say that bold statements couldn't be true statements. So it's not that. I just don't share their premises.


    I share some of your concern about the conclusions. I find them interesting, nontheless, from an analytical perspective. And I think the whole structure has to be understood as normative, not purely descriptive. It's also quite apparent that the theory has its roots in the 1960s & 1970s in which bank loans to the cover production cost of firms actually outweighed other types of credit. So the descriptive elements and (their) normative premises were more in synch.

    This translation sounds like something you could have provided yourself, having got already familiar with my thinking. So it must be that there is something I am missing, something that makes you think it must be more complicated than this?

    No, it's as simple as that. I was thinking more about a translation of what follows. The 'bold' stuff...

    I'm not trying to convince you of anything. I just thought it might be interesting in comparison to what you're up to. And at least at the very basic level, I still think there is a large overlap. I'll allow myself one more quote (from Modern Monetary Macroeconomics: A New Paradigm for Economic Policy, P.2) to make my point:

    Clearly, as the so-called monetary circuit theory explains (see for instance Graziani, 1990, 2003), the opening of a bank's credit line to a firm allows the latter to pay out wages to its collaborators, as a result of which the firm becomes a debtor to the bank and wage earners are creditors of the same bank in so far as they have a claim on the bank deposits that have been created in the payment of wages. Contrary to monetary circuit theorists, who claim that deposits with banks have a purchasing power per se (to wit, because of banks' creditworthiness), however, the Schmitt School argues that the purchasing power of bank deposits stems from their association with production on the factor market, notably when wages are paid out for a given, and finite, period of time (say, a month). There is, indeed, an integration between money and output on the labour market: money measures production numerically, and output defines the purchasing power of money. The resulting bank deposits are a sort of memory item recorded in banks' book-keeping to testify the firm's debt and depositors' credit with the banking system - which is therefore an intermediary, in the sense that it neither sells nor buys anything when it issues money in payment of a transaction. When this purely instrumental role blurs the distinction between money and credit, however, it becomes possible for the bank involved to exploit its credit-purveying capacity in order for it to give rise to a bank deposit that is new for the banking system, although no new output has been produced in the economy as a whole. This emission of 'empty money', as Schmitt (1996, p. 120) labels it, is the mark of a monetary-structural disorder, even if it remains unnoticed, as the price index targeted by the central bank is unaffected by banks' book-keeping. In fact, banks have been exploiting their capacity to issue money via credit on the interbank market, in order for them to increase their businees (and ensuing profits) in a variety of purely peculative tinancial transactions that have inflated an asset bubble (see Rossi, 2010, for elaboration on this point).

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  119. So, to recap, money is the credit/debit item that has a corresponding output which gives the creditor 'purchasing power'. Credit, on the other hand, is a speculative item, in that it has no corresponding output (yet). Money = good, credit = baaad :-).
    That may be very moralistic and downright 'Austrian' in its logical consequences, but we all agree that it is output, and not some super power of the bank, that lends money its purchasing power.

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  120. Uhm, I think my previous comment was swallowed by the filter. Maybe it was too long.

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    1. Yes, I retrieved it from the spam folder now!

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  121. Roger, I'm afraid you've lost me completely.

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  122. Thanks, Oliver! I think this is an interesting and very useful discussion, and in no way do I feel you're trying to convince me of something.

    I don't know how familiar you are with Richard Werner's work ("Quantity Theory of Credit"), but he seems to be suggesting something similar when he distinguishes between

    "Money used for GDP transactions, used for the ‘real economy’ (‘real circulation’)"

    and

    "Money used for non-GDP transactions (‘financial circulation’)"

    I believe he includes in the latter mortgages ("money creation") for buying already existing homes.

    Yes, there's something "Austrian" in this. I'm actually quite sympathetic to many of their concerns regarding credit growth and "bubbles" (as I said, I find myself often on the BIS side of the argument). You don't need to be Austrian to think like that, of course.

    Yes, household debt used to play a lot smaller role in the economy. It is a traditional approach in economics -- and still quite common despite the enormous growth in household debt -- to depict firms as "bank debtors" and households as "bank creditors".

    I see the current high levels (and rising) of household debt around the world as our problem #1. It is a very unfortunate trend which started in the 1980s. It was my attempt to prove that this is so which more or less lead me to my current thinking/theory.

    (High debt generally is a problem, but I focus on household debt. For instance, I have a reason to believe that growth in it can lead to, and not just be a consequence of, inequality.)

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  123. Oliver said: "we all agree that it is output, and not some super power of the bank, that lends money its purchasing power"

    I'm not sure if I agree here. Let's see.

    I tend to think that money is not something which has 'purchasing power' -- people or firms have. Neither do I see output (newly produced goods?) as something that makes money "not empty". A simple example:

    An economy decides on an experiment where they will not produce any goods for market exchange for 6 months. Each person has a large -- but not of great variety -- endowment of goods (pickled food, etc) at the start of the experiment.

    All balances are at zero at the start of the experiment. During the experiment, people trade goods with each other to achieve greater variety of consumption. As they trade, they use the monetary system, so new credits and debits arise -- and are eventually settled.

    Does Quantum Econ see money (good) or credit (bad) in this example?

    I think that we are dealing here with issues which economists have always wrestled with. It almost sounds like QuE is saying that there is "too much money chasing too few goods" if money is created without there being corresponding increase in output? Behind this is the assumption that the money created will actually "chase goods", which has a connection to Say's law (I suggest you read that extensive Wikipedia article) and the assumption that it is irrational to "hoard" money, so that the only use for money is to buy goods, and mostly newly produced goods.

    So, I both agree and disagree with QuE. I agree that "credit created" for speculative purposes is often a problem, but I don't see it as something working against the logic of the monetary system.

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  124. Oliver: I am trying to make a story very similar to the theory described in your quote

    "I'll allow myself one more quote (from Modern Monetary Macroeconomics: A New Paradigm for Economic Policy, P.2) to make my point:"

    I find it a difficult argument to articulate. There seems to be a logical gap between 'arbitrary value for the marks on a record (credits)' and the much-more-tangible value of the product finally produced.

    I think your quote attempts to articulate the same logical gap.

    Please try to follow another allegorical attempt which follows:

    Think of managers and owners of a company to be employees identically as if they were hourly workers. Keep this assumption in mind.

    The managers wish to build a product but are against Antti's credit/debit limit and find themselves unable to proceed. They go to the bank (record keeper) and request credit, pledging the expected product (and more) as collateral. They use this credit to pay hourly workers and eventually have a product to sell.

    (continuing the allegorical attempt) Now we ask "What is the value of the worker's output?"

    We can find two answers: First the easy answer; the value is what they were paid.

    Second, the hard answer: All of the workers includes management employees. White-collar workers and owners will receive pay and perhaps dividends from this same borrowing event that allows production to continue. Yet, no product (as described to the Record Keeper) has been produced. We cannot yet value the worker's output.

    (still continuing the allegorical attempt) Finally, the product is complete and can be sold. Unfortunately, the product does not sell well and the final recovery of value measured in credits is less than what was paid to the combined worker group.

    Now, in hindsight, what was the value of the worker's output? It was less than what was paid over time. The bank may be unable to recover it's loan. The workers were paid more than they were worth.

    And that completes my allegorical attempt.

    We can see [in the story] that, over time, there developed a gap between price and value.

    We can also see that the credits advanced by the bank, being nothing but records, will endure over time. We now have no theoretical mechanism that would cause their eventual destruction.

    I apologize for presenting such a long story. The concept is not easy to present. :-)

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  125. Roger said: "Now, in hindsight, what was the value of the worker's output? It was less than what was paid over time. The bank may be unable to recover it's loan. The workers were paid more than they were worth."

    I think we need to distinguish between worker's output -- which really is a labor service -- and firm's (final) output, the product to be sold. It is wrong to say the worker got paid more than he was worth. Yes, we could say the firm paid more for labor than it was able to get out of it (the firm's responsibility, not the worker's!), but it says nothing about any general "worth" or "value" of the worker. If I don't know how to use an expensive machine, it might be worthless (as in "use value") to me but generally worth its price because others are able to use it.

    Roger said: "We can also see that the credits advanced by the bank, being nothing but records, will endure over time. We now have no theoretical mechanism that would cause their eventual destruction."

    There are no particular credits that should be destroyed. Like I said, the workers "earned" their credits. If the firm is able to pay its debt (say, by selling its machinery), then some credits, somewhere, will be destroyed. If the firm defaults on its debt, again some credits somewhere (in this case, equity of the bank) are going to be destroyed.

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  126. I don't know how familiar you are with Richard Werner's work ("Quantity Theory of Credit"), ...

    In case you haven't noticed, the reading I've done has been pretty one dimensional. So no, I haven't heard of Richard Werner. But judging from the above quote, that sounds about right. And I'll have a look at that link.

    I'm not sure if I agree here. Let's see.

    Darn!

    An economy decides on an experiment where they will not produce any goods for market exchange for 6 months. Each person has a large -- but not of great variety -- endowment of goods (pickled food, etc) at the start of the experiment.

    All balances are at zero at the start of the experiment. During the experiment, people trade goods with each other to achieve greater variety of consumption. As they trade, they use the monetary system, so new credits and debits arise -- and are eventually settled.


    Yes, that difference arises because of the different setup of the model. Your world of one person firms trading home produce is at odds with the starting premise of all circuit models that there must be a hierarchy of firms, workers and banks to constitute a 'monetary economy'. Only then can you arrive at the conclusion that workers get paid in the 'numerical equivalent' of their own produce. Your trading setup, otoh, is much simpler. The records are only related to past flows of goods and have no stock measure of goods to lend credits their purchasing power. But, for your money not to be empty, although not 'filled' with current output at the time of trade, there must be output in the future. You start out with a weaker assumption (no hierarchies) but rely on a stronger contingent assumption (reciprocal output will be forthcoming) going forward. The circuit model works with only one good, your's needs at least two to be settled.

    I tend to think that money is not something which has 'purchasing power' -- people or firms have.

    OK, but you agree that you need credit(worthiness) to prove your purchasing power plus there must be something to purchase?

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  127. Oliver said: "OK, but you agree that you need credit(worthiness) to prove your purchasing power plus there must be something to purchase?"

    The latter part, there being something to purchase, is what I already suspected might be behind this idea which links output and purchasing power. Is this correct?

    Your sentence needs small modifications: You need to be creditworthy, or you need to sell first, to have purchasing power.

    It seems that often what really is meant with "purchasing power of money" is actually "value of money", which to me means "prices of goods". So yes, if there is a shortage of goods for sale, their prices will rise and this will make it harder to buy them (unless you happen to be someone who is at the same time selling goods which are in short supply). Is this how the thinking goes?

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  128. Behind this is the assumption that the money created will actually "chase goods", which has a connection to Say's law (I suggest you read that extensive Wikipedia article) and the assumption that it is irrational to "hoard" money, so that the only use for money is to buy goods, and mostly newly produced goods.

    From Wikipedia:
    Since output finds its economic measure in the payment of wages and since income is initially formed by this same payment, quantum economists hold that global supply and demand are jointly determined as the two aspects of one and the same reality. They maintain that global or macroeconomic demand is defined, irrespective of economic agents’ behaviour, by the amount of income available within a given economy, and that global or macroeconomic supply is determined by the economic measure of produced output. Both terms of the equation D = S being measured by the same amount of wages, quantum economists conclude that their relationship is necessarily that of an identity and that the present economic disequilibria have to be explained starting from and consistently with this identity.

    So, demand and supply are stock measures (not flows, as the term 'chasing goods' would imply), the identity of which relates back to the starting model where workers are paid the numerical equivalent of their output. I.e. it's in the starting assumption.

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  129. You write in your reply to Roger:

    the workers "earned" their credits. If the firm is able to pay its debt (say, by selling its machinery), then some credits, somewhere, will be destroyed. If the firm defaults on its debt, again some credits somewhere (in this case, equity of the bank) are going to be destroyed.

    If bank equity takes a hit / loses market value, can one say that credit balances are destroyed?

    Roger writes:

    We can see [in the story] that, over time, there developed a gap between price and value.

    I think the attempt by QuE is to make a purely macroeconomic statement. The credits that are not spent on one firm's output can then be spent on another's, influencing the relative value of on product over the other, but not overall value. Of course, credits don't have to be spent, which is what Antti is getting at with the 'chasing goods' argument. QuE then argues that rolling over firms' debt is tantamount to a new credit / debt event. But yes, all money circuit theories and all reciprocal gifting theories rely on some kind of budget balancing assumption over time.

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  130. Maybe what's at stake here is the status of corporate equity vs. credit balances? And, in extention, possibly ltd. liability entities vs. natural persons? Do natural persons have euqity they can write down? Do banks need an equity position (logically, I mean)? Is your benevolent, non-profit record keeper a natural person?

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  131. As you read this comment, please remember that I have a goal of mechanical continuity. All the parts need to fit together seamlessly.

    Antti writes "There are no particular credits that should be destroyed. Like I said, the workers "earned" their credits."

    In Antti's post, part 8, Andy finds himself with two paper credit notes, each worth 100 SK. He decides to take them to the bank. Then we are tasked with two questions: Paraphrasing, would Andy be making a deposit, and, would Andy be paying down his loan?

    It seems to me that the credits earned by workers are the same credits [credits of the same nature] that Andy got (from the bank) to accommodate trade with the villagers.

    Now where can we find some tie to value of product? Yes, workers worked for credits. Yes, credits exist. Yes, credits are mechanical devices that can be tracked. Yes, credits can be traded as done by the bookkeeper (to Andy).

    We still have no tie to produced product. We only have a tie of labor to credits.

    Now I return to my "allegorical attempt" to illustrate a price-to-value gap. I suggested two answers: no gap when worker wages were EXACTLY the value of the labor output; a gap when price of the product was not the exact (all included) cost of production. [The second point is stated here in a more general way.]

    If we argue the first -- no gap -- then we are arguing that each worker (including hourly, management, and owner) is ALWAYS receiving EXACTLY (no more and no less) the value of his contribution (without the possibility of error). I would argue that this is an assumption, not an observation of reality.

    OTOH, if the argue the second --a gap between price and value -- then we are conforming to reality. A profit will exist if the sale price is more than the value of credits expended to create product; a loss will exist if the sale price is less.

    IMO, a gap between price and value is what macroeconomics should expect. Price is an decision; value is a subjective decision; recorded price is a two-person decision.

    The gap between price and value is certainly hard to articulate! :-)



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  132. Maybe my last comment is lost to the spam filter? :-(

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  133. Roger, if materials and machines used up in production = 4, and the total wages = 6, then total cost of producing output Y = 10. If you sell Y for 10 you could say there's no profit made.

    However, the problem here is that you have not defined what those wages mean in the larger scheme of reproduction. So for instance, a total wages of 6 can still be large enough to be more than what is required to produce Y (i.e., relative to other producers).

    Are you defining "values" in 'necessary labor quantities' or in some other unit of account like 'SK'?

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  134. Johan writes "Are you defining "values" in 'necessary labor quantities' or in some other unit of account like 'SK'?"

    The mechanical problem is that we can't find a reliable link between "values", "price", and product. Perhaps there is NEVER such a link. Perhaps ALL links between ""values", "price", and product" are the result of human judgement.

    Here is an extreme example. Take the LIGO project (which looks for gravity waves) wherein labor is employed for many years. The final salable product will be knowledge. Each employee will be paid based on an instant judgement of labor value (narrowly defined) but the product being built is unpriceable.

    In the LIGO example, a credit (SK?) record is made which will endure until the sponsor assigns the balancing debit record to some person. Should the debit record never be assigned, it will exist to infinity. The value of the credit will never be ascertained in terms of other products.

    [OTOH, if we think of a credit as if it were a gift certificate, then we can deduct that LIGO employees are given national-gift- certificates in exchange for their labor.]



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  135. Roger, for analytical purposes, here's how you make a labor theory of value hold exactly:

    When the profit rate is zero prices are *proportional* to labor values, where labor values are defined as a vector defined as the quantities of labor directly and indirectly "embodied" in each physical unit of the commodities which make up the net product of the economic system. In short: the vector = 'values' in the classical theory (vertically integrated labor coefficients). Furthermore, set the wage rate as a numéraire (w = 1) and we also get by implication that not only are prices proportional to values, but they are then also *precisely equal* to values.

    Obviously profits are not systematically zero in a real system, thus there's a distributional element involved which makes prices deviate from values. That's for any structure at some particular time. The other cause of deviation is structural change in production (technical change measured as an index of capital intensity).

    That is to be expected and hence price—the numéraire also being a monetary unit and distribution of the net product a political manifestation—now functions as a signaling mechanism of the system. Commodities selling at prices much above values signal structural deviations which tend to be smoothed out in a competitive environment (the same goes for market vs. production prices). So prices deviate from values, sometimes wildly in individual industries, but at the same time they can still be regulated by values (which empirical research shows; the structure of production being the dominant factor). Informationally that leads to the notion that 'profits over the norm tend to attract capital wherever it happens'.

    LIGO is not necessarily to be considered a problem here because it is at the margin of the whole input-output matrix of industries making up the necessary reproduction and net product of the whole system.

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  136. Roger said: "It seems to me that the credits earned by workers are the same credits [credits of the same nature] that Andy got (from the bank) to accommodate trade with the villagers."

    Why not the same type of credits Betty got when she sold bananas to Andy? The workers sold their services, Betty sold bananas. If Andy had a business where he used bananas as raw material, and he screwed up in the process so that the final product was not usable/edible, then were the bananas he bought from Betty not worth their price?

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  137. Hmmm. Credits are never more than just a number. They do not identify the trigger event that caused the record.

    It is not 'work' that causes credits to be recorded (1). We have two distinct event-types that trigger recording:

    1. Andy trades with Betty.

    2. Andy trades with Recorder, securing a recording and paper certificate.

    When Andy trades with Betty, it is easy to assign price to a numerical value code. When Andy trades with Recorder, there is no corresponding price; there is only a numerical value code being created as a stand-alone product.

    1. 'Work' is a time commitment, not a single event. If work was the trigger for record creation, then self-employed people would contact the recorder requesting credit entries every hour on the hour.

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  138. Roger said: "...self-employed people would contact the recorder requesting credit entries every hour on the hour."

    Whose account would be debited? This is about recording trades, not about recording work. A firm buys labor services from its employees. An employee gives something (his time, if not always effort) to the employer and that leads to entries on both accounts.

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  139. Oliver: Sorry for not getting back earlier. I've been babysitting most of the last three days, so I haven't had time to get deeper into our conversation (it requires deep thinking).

    Generally speaking, I believe one possible source of confusion is the fact that the (macro)economy (or "economic life" of a community) is an on-going process, while we often would like to present it as a process with both a beginning and an end.

    I'm not 100 % sure about this, but I feel I'm describing the on-going process when I don't equate the income/wage/deposit with the output -- if I did, I'd need to define which period's income and output I'm talking about? -- but keep them separate.

    The QuE approach, on the other hand, suggests a circle that closes when, at aggregate level, goods are bought by those who manufactured them. Yet, in reality goods are bought by many who didn't manufacture anything (yet), or by those who manufactured the goods that were sold, say, 5-10 years ago.

    How does this sound?

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  140. Oliver: I haven't yet given much details about my record-keeper. For simplicity's sake, I didn't want to go through explaining how the banker is an employee of the bank and how his services are bought by the community -- represented by Town Council, government... or through direct representation where everyone's account gets charged, i.e. debited, a monthly fee so that the banker's, not bank's, account can be credited in form of a salary -- which is the "owner" of the bank, etc.

    There's no equity, either. But there could be. Generally, equity would be a credit balance. There's some Modigliani-Miller in this, and as Fama says in "Banking in the theory of finance", 1980, p. 42:

    "Or a bank may issue both riskfree and risky deposits against a given portfolio of assets, with any capital gains or losses in the portfolio absorbed by those holding the risky deposits. The latter scenario would look more familiar if we assumed instead that the risk in the portfolio is borne by stockholders. However, our risky deposits are common stock with the additional benefits provided by access to the bank’s transactions services."

    I'm talking now specifically about bank equity. Any profit would show up first as equity, but it could be transformed to "normal credits" through dividends. So if we debit the credit loss on an equity account (through profit&loss), it does affect "credits". Do you see what I mean?

    One way to think of this: We start a bank. We, as shareholders, put in some bonds and perhaps some tangible goods as well and get our account (equity) credited. We gave something and didn't get anything in return. Of course, other rules apply to our "credits" than to checking accounts, as ours are risky credits. But that's another story :-)

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  141. Antti: I think we are grappling with different problems.

    We need a link between product, price, and value. I claim that Andy/Recorder trades distort any link established by a Andy/Betty trade.

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  142. Roger, there wasn't any Andy/Recorder trade. The credit notes were nothing but a technical solution to a connectivity problem.

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  143. Antti writes "Roger, there wasn't any Andy/Recorder trade. The credit notes were nothing but a technical solution to a connectivity problem."

    The "technical solution" changes event timing. That is very important in the real economy.

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  144. What do you mean, Roger? I'm not saying it isn't important. I'm just saying that we should not view it as a trade where Andy receives "credits".

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  145. Antti: Oh, OK.

    In the real economy, when a loan is secured from a bank, the bank usually extracts payment of some kind. That is why I was referring to the Record Keeper (giving Andy paper certificates) as participating in a trade.

    [I remember that the Record Keeper did not want the certificates returned, but a real bank WILL want the certificates returned. There is a difference there.]

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  146. Antti, I'll get back to you. I'm on a so called vacation, i.e. I'm carrying children around a ski resort. No time to think...

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    1. No worries, Oliver! Thanks for letting me know.

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  147. Roger said: "...a real bank WILL want the certificates returned"

    Will it? If I have an account with an overdraft facility, with zero balance, and I go to the bank and ask for some cash (the bank debits my account and gives me the cash), do I need to return the cash? Or can I as well sell something to someone and get my account thus credited?

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  148. Antti: Re: Feb. 20, 2017 at 1:34 AM

    Well, do your questions each relate to a different theory?

    In the real world, an overdraft can be considered as an prearranged loan. A loan is a "loan"; the property 'on loan' is expected to be returned eventually.

    In the gift theory world, you could sell something and it would be recorded if you communicated with the Recorder.

    In both worlds, you interact with the entity-maintaining-the-account, who is the decision-maker about account entries.


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  149. On another topic, over the last couple of days, I wondered about a variation of the Townsmen/Villager story:

    The Villagers, as a group, have long been subject to a positive credit rule. (Mechanically thinking, they must sell to Townsmen before they can open an account.) The Town Council considers changing that rule, thinking that Villagers might trade more if they could also have debit balances. Would a rule change create more work for Townsmen?

    My answer would be "yes". However, the increase in work would be transient, lasting only until Villagers realized that they must give back to the Townsmen. The enduring size of the work increase would depend upon the Villagers tolerance of carrying a continuous debit account, feeling continuously guilty and working harder as a consequence.

    The Town Council, after watching the effects of the rule change for a while, might consider reversing the debit-allowing decision. This change should result in a flood of gifts into Townsville as Villagers bring their accounts back to a zero minimum. Work in town should permanently dip as guilt-driven villagers revert to a slower way of life.

    I couldn't help but think of Greece as I wrote this.

    Does this variation of the story make sense? :-)

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  150. Chosing a basic module upon which to build a theory is somewhat arbitrary in either case. Your module also suggests a circle, one which is closed when gifts are reciprocated. Without the assumption of reciprocity it would fall apart. Of course reality is an ongoing process, but neither model stands in contradiction to that fact. It is just that the QuE model contains more statements / assumptions and thus is more vulnerable to critique. But it also takes you further, at least for the moment.
    My interpretation of the QuE approach is that it argues in terms of a moral right to consume one's own output. That right can of course be waivered (lent out) to someone who has not yet produced anything. It is when neither the initial right holder nor the subsequent right receiver have produced anything yet that the claims, in aggregate, become void of material substance, they become 'empty'.
    It also builds on monetary theories that contend that monetary economies are an artefact of the division of labour. It is when final produce cannot be traced exactly to the inputs of individual contributing labourers that an abstract monetary scale and the introduction of the institutions of firms, wage earners and banks become necessary. All that is captured in the QuE basic module. Your module, otoh, is 'yeoman farmer' compatible.

    Does that make sense?

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  151. I'm trying to think of different ways to construct a loss. Maybe this goes into Miller-Modigliani.

    A producer sells you 100 apples for SK50. 50 apples turn out to be rotten. To my mind, and ruling out that the transaction is considered void for legal reasons, that means that the price of apples in this particular transaction actually turns out to be SK 1.0 / apple, instead of SK 0.5 as originally expected. In real terms, that is a loss vs. the expected. Or it can be constructed as a loss vs. others, say if your competitor managed to get 100 healthy apples for the same price. But in terms of nominal value, nothing has changed. You now owe SK 50, which, if that were the only transaction ever made, is now the equivalent of 50 eadible apples (not 100) to the community.

    If you take the QuE approach, that is, you have only one, apple producing firm and say 25 employees who only eat apples, then all the 50 rotten apples mean is that those employees get to eat 1 apple each instead of 2. You don't have to introduce bankruptcy, equity, default etc..

    Adding those things comprises a further complication that, in a world of legal entities, limited liability, division of labour etc., lets us deal with who loses how much / who eats less apples because of the event. Maybe management, the banker and the firm owners still get to eat 2 while the interns and janitors have to share their apples. They are vehicles that offer us solutions to distributional problems. But they aren't necessary for constructing our model in its most basic form.

    Again, does that make sense? Or have I just lost track of our discussion :-)?

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    1. Sorry, the employees get to eat 2 apples instead of 4.

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  152. Talking about division of labor and production, have a look at how fishing looks like today.

    That factory is inside a trawler (Gadus Poseidon) which is active around the clock, 360 days a year. Last year's catch was 8,400,000 kg. As far as I know, all the people working on the boat are called fishermen :-)

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  153. Yeah, pretty cool.

    I actually love fish and these kinds of floating factories make sure it comes to us nice and fresh! Otoh, that's also part of the problem. Overfishing Poseidon style is killing our seas (among other things), so I try to keep my intake of wild or non-organically farmed fish to a minimum.

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  154. Oliver, I don't think you've lost track of our discussion. (And what you say about over-fishing sounds right.)

    I'll start from somewhere (I have a lot to say)...

    One thing that is unclear to me is what we understand by someone's output. Is an employee's labor/service an output when seen from the perspective of the employee and an input when seen from the perspective of the firm? What if the employee is replaced by a self-employed contractor?

    If we talk about moral rights (which we perhaps shouldn't do), I would say that in a system based on division of labor and exchange, there's a moral right to consume others' output. And you earn that right by letting others consume your output; that is, by producing (goods or services) for others.

    At best, we could think of a moral right to consume part of the common output which you have (hopefully) contributed to. One example of this would be a hunting group. But there the aim is usually to provide food for the group (and families of group members). That logic doesn't work if I work in a pharmaceutical company. It doesn't make much sense to talk about my moral right to consume the drugs I, along hundreds of colleagues, produce -- or, more likely, market and sell.

    How does this sound?

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  155. OK, forget morals. And forget about consuming your own output. Instead think in terms of perishable current output. Output being that which is available on the market and which, according to the QuE model, those who put labour in to producing, have been credited for. It is only output at the time it is available to be bought. Before that, it's just economically non existant stuff. That should work for a self-employed producer, too.

    Say there are five teams that each produce a common good from home made ressources, say an hors d'ouevre, a salad, a starter, a main course and a dessert. Each dish is divisible and worth the same in monetary terms.

    What does it mean if one of the participants in the process goes on a diet and leaves out a dish or a whole meal? Has he/she saved that meal? What happens, economically speaking, if someone else eats 'his/her' portion(s) instead? What changes if instead of cooking one dish, one of the groups decides to put down the recipes of all dishes in writing instead, so that the cooking process is optimised for meals to come?

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  156. Oliver said: "Output being that which is available on the market and which, according to the QuE model, those who put labour in to producing, have been credited for."

    This is where I don't agree. A fisherman-employee working in the floating factory gets credited for his work. He doesn't get credited for the final output. The firm gets credited for the final output when, and if, it is sold. The output might never even reach the market but perish on the way to the harbor. Nevertheless, the fisherman has been credited for his work, and rightly so: he gave something and didn't get anything in return (other than a record testifying just that).

    Oliver said: "What does it mean if one of the participants in the process goes on a diet and leaves out a dish or a whole meal? Has he/she saved that meal? What happens, economically speaking, if someone else eats 'his/her' portion(s) instead?"

    If someone goes on a diet, his portion will never be produced. Economics 101? :-) Instead, they produce a portion for someone else who is willing to consume it. The one on a diet has given something (labor time?) but hasn't yet taken anything. Therefore, there must be someone else who has taken more than he has given. Nothing bad in that.

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  157. Oliver said: "It is when final produce cannot be traced exactly to the inputs of individual contributing labourers that an abstract monetary scale and the introduction of the institutions of firms, wage earners and banks become necessary. All that is captured in the QuE basic module. Your module, otoh, is 'yeoman farmer' compatible."

    But shouldn't we always start from the yeoman farmer (or even hunter-gatherer)? The abstract unit of account and banks have a place in a world without firms. Exchange -- and money is about exchange, isn't it? -- exists independently from any particular "mode of production".

    QuE links money with production, final output. I view a producing firm through the lens of exchange. The firm buys goods and services (incl. labor services) and sells goods, or services. The final output is the firm's output, not the individual employees' output. You might have a hairdresser working for the firm, and his output is a hairstyle (he gets credited for it), not any product the firm produces.

    I'm not saying we should always view production or the firm in this way. But when we try to model exchange -- and the monetary system is all about exchange -- then it makes sense to view production as I suggest. Doesn't it?

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  158. Oliver said: "If you take the QuE approach, that is, you have only one, apple producing firm and say 25 employees who only eat apples"

    By now I'm probably just repeating myself, but anyway:

    If we want to have (what looks like) money in our model, we must have a system where people produce for others and consume others' produce (if we don't abstract from production). We also need what Nick calls "non-synchronisation", that is, some must consume (buy) before they have produced (sold), and necessarily vice versa for others.

    I think QuE strays too far from reality by focusing on the top aggregate level (what is produced by people will be consumed by people), and especially by trying to introduce money at that level.

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  159. Roger said: "In the real world, an overdraft can be considered as an prearranged loan. A loan is a "loan"; the property 'on loan' is expected to be returned eventually."

    Yes, that's how it is usually described. But aren't we talking about the same record entries in both cases? The "property on loan" is imaginary?

    I think your extension of the story was interesting! You said:

    "This change should result in a flood of gifts into Townsville as Villagers bring their accounts back to a zero minimum. Work in town should permanently dip as guilt-driven villagers revert to a slower way of life."

    Replace Town with France (or Allied Powers) and Village with Germany, both after the First World War. Germany was supposed to pay huge war reparations, but many of the goods (for instance, coal) it would have liked to give as "gifts" to France, Britain, etc, were turned down by the recipients, as that would have meant less jobs in those countries -- and, after a great war, employing the people who worked in the "war machine" is a formidable task for any nation.

    It has been said that Germany paid war debts by way of new loans (mainly from the US), but that I find a weird use of the word 'payment' -- a reason why I don't use it in that sense in my theory. Germany didn't pay, but some countries got nevertheless paid.

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  160. This is where I don't agree. A fisherman-employee working in the floating factory gets credited for his work. He doesn't get credited for the final output. The firm gets credited for the final output when, and if, it is sold. The output might never even reach the market but perish on the way to the harbor. Nevertheless, the fisherman has been credited for his work, and rightly so: he gave something and didn't get anything in return (other than a record testifying just that).

    That's right. But, in aggregate, the records cannot be worth more than that which the firms bring to market. Indeed, assuming a balanced budget over a lifetime, the two must logically be equal. To take your example, if all produce always perihed before it reached the market, the fishermen could be credited as much as they liked. Those credits would be worth exactly 0 in terms of any good. It seems you're liable to get lost in a fallacy of composition if you do not put that which is available for sale into logical connection with that which people are credited with.

    Exchange -- and money is about exchange, isn't it? -- exists independently from any particular "mode of production".

    Well, they speak of the monetary theory of production, in reference to Keynes. So, they at least, would disagree that money is only about exchange. And their focus is strictly macro, which I, personally would say is the right place to start.

    I forgot to mention a third possibility in my previous comment. The cooks could also borrow beyond their current income and spend that borrowing on current produce (their own or others', doesn't really matter).

    So there are three possibilities, assuming no investment. Everyone spends their own income on current output. Or some spend less and lend their income on the market for loanable funds to others who spend more (non-synchronisation?). Or there is an aggregate deficit / surplus of spending that causes the price level to fall / rise.

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  161. Oliver: I should add that I have some understanding for the QuE approach as some kind of normative ideal (I think you earlier suggested it should be viewed as such). But I'd keep "money's essence" out of it. Instead, I view it as an argument concerning short-term debt vs. long-term debt, and different uses of debt (household vs. firm vs. government; consumption vs. investment).

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  162. Oliver said: "But, in aggregate, the records cannot be worth more than that which the firms bring to market. Indeed, assuming a balanced budget over a lifetime, the two must logically be equal."

    Yes, but this is where QuE's insistence on squeezing a time span into an 'instant' becomes problematic. A lifetime is often not that short.

    This catch might be lost to the waves, but the next one not. The fisherman-employees get to consume the same amount of fish, no matter if the particular catch is lost or not. Their wages weren't directly linked to any particular catch. It is the owners of the firm who bore the risk of loss and will get to consume less than they would have consumed had there been no loss of a catch.

    This is what I meant when I said that QuE tries to, unrealistically, close the circle. The circle never closes. For an individual, yes, but not for the community as a whole.

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  163. Antti writes "But when we try to model exchange -- and the monetary system is all about exchange -- then it makes sense to view production as I suggest. Doesn't it?"

    and continues in another (later) comment

    "Yes, that's how it is usually described. But aren't we talking about the same record entries in both cases? The "property on loan" is imaginary?"

    I am focusing on the ideas of "exchange" and "property".

    I wonder if rather than being "property" (meaning physical property) that is being exchanged, it is more appropriately 'mostly labor' that is traded.

    My mechanical logic is that (for example) apples are grown naturally on trees. The apple tree will produce apples whether human intervention is present or not.

    OTOH, apples can only be exchanged if someone finds an apple tree, gathers the apples, and moves them to find a second person who wants apples. Here we see Mother Nature providing the apples, accompanied by a human who introduces human features.

    The "human features" introduced are (I know I am repeating) finding the apples, moving the apples, and exchanging the apples. To my way of thinking, these are all labor intensive activities. Thus we could say that any record-of-gift or any money-received-in-exchange is appropriately described as a record of labor expended. (I recognize that the apple tree could have been located on privately owned property, irrigated, and subject to additional human activity or legal control.)

    I think it is easier to understand the growth of recorded exchanges if we consider simple labor exchanges. Another simple example is where an able-bodied person repeatedly cares for a disabled person, each act of caring carefully recorded by the Recorder. The disabled person may NEVER repay either the giver or society. I expect the record-of-care-given will be enduring.

    [Would the record of care giving ever become "property" in the sense that taxes might be collected?]

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  164. Antti wrote: "But shouldn't we always start from the yeoman farmer (or even hunter-gatherer)? The abstract unit of account and banks have a place in a world without firms. Exchange -- and money is about exchange, isn't it? -- exists independently from any particular "mode of production".

    Bluntly: No. The problem with that approach is that it's already tried without much success. It's easy, even tempting, to ignore the reality of production in favor of convenient symmetries achieved in the modelling task. That's why it's so bellowed by neoclassicals/marginalists for whom commodities magically appear (as endowments) on the market and exchange as a function of a rational choice process.

    But if we're going to question the meaningfulness of standard monetary models for their predilection of assuming people somehow just being endowed (often randomly) with "money", we must also question the meaningfulness of a people somehow just endowed with commodities which they exchange on the market.

    One of the fundamental questions you must ask with respect to your model is, for example, the following: When agent A asks agent B to go down the mining shaft to dig out some coal for the benefit of A, and where credits are recordings of gifts given, then why on earth should B be the one going down the shaft and not A… for B could likewise be asking the same from A (yet such inverted positions seldom occur in the real world)?

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  165. Finally, some disagreement!

    A lifetime is often not that short.

    No, and all sorts of things are possible within one. OTOH, there are a lot of lifetimes going on in parallel, some just beginning, some in the middle, some near the end. So, if you cut through the middle of all of them, you get something like a representative lifetime in an instant. That's the macro picture.

    This catch might be lost to the waves, but the next one not. The fisherman-employees get to consume the same amount of fish, no matter if the particular catch is lost or not. Their wages weren't directly linked to any particular catch. It is the owners of the firm who bore the risk of loss and will get to consume less than they would have consumed had there been no loss of a catch.

    The fact that, in your example, the owners are designated to take the (first) loss, is a distributional feature - one that has proven useful to deal with normal variance in sales, and works well to keep price levels stable, and works well if there is enough fish to go round. But it is in no way a necessary feature, nor is it relevant in aggregate. It doesn't matter whether there is one owner and 50 wage earners or if all the wage earners are co-owners. Nor does it matter, at least for the moment, whether all wages and dividends are fixed at 100 in perpetuity, or if they are set to rise and fall with output. Less fish is less fish. More fish is more fish. Income = Output is a tautology.

    This is what I meant when I said that QuE tries to, unrealistically, close the circle. The circle never closes. For an individual, yes, but not for the community as a whole. It don't think it tries that any more than you try to enforce reciprocity. It's an aggregate assumption that useful for analytical purposes and for creating a normative setting.

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  166. But if we're going to question the meaningfulness of standard monetary models for their predilection of assuming people somehow just being endowed (often randomly) with "money", we must also question the meaningfulness of a people somehow just endowed with commodities which they exchange on the market.

    One of the fundamental questions you must ask with respect to your model is, for example, the following: When agent A asks agent B to go down the mining shaft to dig out some coal for the benefit of A, and where credits are recordings of gifts given, then why on earth should B be the one going down the shaft and not A… for B could likewise be asking the same from A (yet such inverted positions seldom occur in the real world)?


    Very much agreed.

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  167. But I'd keep "money's essence" out of it. Instead, I view it as an argument concerning short-term debt vs. long-term debt, and different uses of debt (household vs. firm vs. government; consumption vs. investment).

    If we want to have (what looks like) money in our model, we must have a system where people produce for others and consume others' produce (if we don't abstract from production). We also need what Nick calls "non-synchronisation", that is, some must consume (buy) before they have produced (sold), and necessarily vice versa for others.

    I'm not sure those are necessary features (money's essence, as you say), although I agree they certainly add spice to the soup. I think one can just as well argue that it takes a numeraire unit of account for the hierarchies within a capitalist production system to argue about who gets which portion of final output. And it is at that point that the yeoman farmer is misleading. In that world, inhabited by atomistic individuals, it is always clear, who contribute how much. As soon as there are hierarchies, management and produce with labour input from various people, that is no longer clear at all. That in itself, is a reason to come up with something nice and divisible like a linear monetary scale.

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  168. Johan: I talked about starting with the farmer or hunter-gatherer. I didn't mean we should stop there. I start with the simplest model of buying and selling, and then I expand it to include firms which also buy (for instance, labor services from employees) and sell (final products).

    You said: "One of the fundamental questions you must ask with respect to your model is, for example, the following: When agent A asks agent B to go down the mining shaft to dig out some coal for the benefit of A, and where credits are recordings of gifts given, then why on earth should B be the one going down the shaft and not A… for B could likewise be asking the same from A (yet such inverted positions seldom occur in the real world)?"

    I do not intend to write Das Kapital or anything like that. So I'm probably not going to answer your question in a way that would satisfy you. But let me think out loud for a moment.

    Why did Betty give up bananas for the benefit of Andy? So that she could take something for her own benefit from others. Why was it Betty who gave and Andy who took, not vice versa? Well, B had what A needed -- be it bananas or digging skills/muscles --, not vice versa.

    It is up to A to use the bananas or labor services he buys from B in a beneficial way.

    Where are you getting at? Clearly not here?

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  169. Oliver: You and I cannot disagree. So it must be that we are talking past each other.

    So, questions like "Which period's income?" and "Which period's output?" are not relevant questions from the QuE perspective?

    How do you deal with the fact that a lot of production today takes place with the explicit assumption that the output is going to be sold to people who don't have current, or previous, income to match the purchase? Say, most of automakers with their own financing arms.

    You said: "That in itself, is a reason to come up with something nice and divisible like a linear monetary scale."

    I assume this is not meant as a historical argument? Instead, I take this to be connected to showing that money is somehow essential. That it is not enough to have a model of an economy which is essentially a barter economy. Yes, people could be bartering goods while pricing them in terms of a numeraire good, but for "capitalist mode of production" you need money. Or something like that?

    I, instead, try to show that the monetary system, and the abstract unit of account, is there even in a simple economy without "capitalist mode of production". When we introduce firms and wage labor, the monetary system, or its logic, doesn't change. Sure, we can find a link between current credit balances (deposits) and goods that have been, or will be, produced, sold and bought. I think Keynes stressed the role of money as bridging the gap between the present and the future. To me, the model has to be dynamic. And focusing on an instant doesn't sound dynamic?

    I have to admit that I struggle to see the "big picture". I don't know what kind of problems QuE wants to solve, what kind of questions it tries to answer. I can only assume that they are not the problems or questions I work on.

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  170. Antti wrote: << Why did Betty give up bananas for the benefit of Andy? So that she could take something for her own benefit from others. Why was it Betty who gave and Andy who took, not vice versa? Well, B had what A needed -- be it bananas or digging skills/muscles --, not vice versa. >>

    Well, again, Betty already has a commodity so there's a nice symmetrical picture being drawn from the start; implying that at some later stage Andy, in turn, happens to possess a commodity which he then gives away. We are, so to speak, always at the market place sorting through things to take and give. The commodities are always somehow there to be given or taken, where reciprocity (alone?) is indicated as the underlying analytical tool confirming reproduction of the system.

    In the mining example the situation is slightly different. It takes place before any undertaking has started and before any commodity is exchangeable. If B has the "digging skills/muscles", as you say, he does not need A in order to dig and sell. So how can A incentivize B to go down the shaft and then hand over the coal to A so that A is the one who sells the coal (probably for more than what was payed for labor) and not B? What does A do in order to put himself in such a position vis-à-vis B? It's not like purchasing capacity in terms of buying labor, mining equipment etc. is the dividing factor or constraint here… or is it?

    I'm simply trying to find if there's a sensible way to expand the gift-metaphor into a rudimentary a production setting. I suspect the standard 'Betty-Andy-treatment' might be insufficient when the framework is expanded in this direction.

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  171. So, questions like "Which period's income?" and "Which period's output?" are not relevant questions from the QuE perspective?

    Well, I think instead of treating investment as a mere residual to carry that which hasn't been consumed in one period over to the next, the (overly bold?) attempt is to triage the goods into their prosepective use as consumption or investment goods before hand and book them accordingly. At least that's what I think they're doing. I don't know whether it's even possible, let alone a good idea.

    How do you deal with the fact that a lot of production today takes place with the explicit assumption that the output is going to be sold to people who don't have current, or previous, income to match the purchase? Say, most of automakers with their own financing arms.

    I think that's then treated as speculative borrowing which should (normative) be the purview of firms, not households. I think... At least that would blend in with your previous distinction between wage earners and equity holders. Let risk be taken where it can be absorbed.

    Yes, people could be bartering goods while pricing them in terms of a numeraire good, but for "capitalist mode of production" you need money. Or something like that?

    Yes, in that the labour market is logically prior to and separate from other markets and is subject to its own, political economy (Johan's point).

    I, instead, try to show that the monetary system, and the abstract unit of account, is there even in a simple economy without "capitalist mode of production". When we introduce firms and wage labor, the monetary system, or its logic, doesn't change. Sure, we can find a link between current credit balances (deposits) and goods that have been, or will be, produced, sold and bought. I think Keynes stressed the role of money as bridging the gap between the present and the future. To me, the model has to be dynamic. And focusing on an instant doesn't sound dynamic?

    I think that's fine. But, in again agreement with Johan, I think the Andy - Betty world has its dangers in that it ignores the political economy of income and property distribution. But as long as one doesn't scale up to the macro economy or make unwarranted inferences about exchanges being purely voluntary, I don't see much of a problem. I was just wondering how far it would take you.

    I have to admit that I struggle to see the "big picture". I don't know what kind of problems QuE wants to solve, what kind of questions it tries to answer. I can only assume that they are not the problems or questions I work on.

    Yes, I think you're trying to stick to more basic questions. Their focus is on classic macroeconomic issues such as inflation, unemployment and international (im)balances. And their contention is that these issues are of monetary / book keeping nature, are purely macroeconomic and are not based on behavioural or real business cycle etc. issues. But in defending a standpoint I'm not even sure I hold, I think I'm keeping you from telling your story, which is what this space is really for, I suppose.

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  172. Johan: Instead of bananas, Betty could have given Andy a haircut. Or we could talk about Betty growing, picking and carrying bananas, only to give them to Andy. That wouldn't change my message. So it's not that the "commodities are always somehow there to be given or taken".

    You said: "If B has the "digging skills/muscles", as you say, he does not need A in order to dig and sell."

    Digging skills/muscles don't ensure that one can (a) locate the coal, (b) get the relevant permissions for mining, (c) create safe working environment, (d) get the coal out of the ground, and to end-users, effectively, etc, etc.

    I could tell B, paraphrasing Obama, that "You didn't produce the coal." What B is selling to A is his labor services, not coal. It's not that B hands over coal to A and gets credited for a gift of coal. It would be like that if B had been responsible for the whole process; that would make A a buyer of coal.

    So, we must recognize that the object of the trade between B and A is not coal but labor services. That's what B gives to A. That trade is recorded. I fail to see any problem with extending the gift-metaphor in this way to production.

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  173. Antti wrote: << Digging skills/muscles don't ensure that one can (a) locate the coal, (b) get the relevant permissions for mining, (c) create safe working environment, (d) get the coal out of the ground, and to end-users, effectively, etc, etc. >>

    True. Yet all that may be true for A as well. In fact, A may not be able to do any such things and yet remain the employer of B who digs, C who locates, D who handles the bureaucracy and E who deals with safety, etc., etc. There might even be an F who sells the coal (but does not own it).

    Sure, the starting point is, of course, that it is labor services A desires (before having the coal which he desires to sell). But we still have not made sense of the incentive structure in the model for this rudimentary production scenario. What can A offer B, C, D, E and F which makes them do all that? We have an answer to that incentive with respect to the real world, i.e., "money". But I'm curious as to what *it* is in this particular model?

    In short: is there anything A must/can offer in terms of incentive for the others that makes them give up their labor for this particular undertaking?

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  174. Johan: A can, or must, offer B (and C, D...) a price on his labor services, and by extension -- as that price gets recorded in the system -- a possibility to exchange his labor services for goods and services from others. That 'exchange' is to be viewed through the lens of reciprocity. B might, for instance, have already received goods from others, and now needs to provide labor services in exchange for those.

    So, a 'price' is not enough. A has to be in a position where he is allowed to receive those labor services at the offered/agreed price. If he is, the transaction gets recorded.

    Again, I don't fully see how this differs from Betty having an incentive to give the bananas to Andy? Andy agrees on a price that suits Betty (not that Betty is necessarily happy with the price, but that's another discussion), and Andy is in a position to get that transaction recorded.

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  175. Johan said: "Yet all that may be true for A as well. In fact, A may not be able to do any such things and yet remain the employer of B who digs, C who locates, D who handles the bureaucracy and E who deals with safety, etc., etc. There might even be an F who sells the coal (but does not own it)."

    True. And nothing guarantees that A will not make a loss in the project.

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  176. Antti, I'm mostly trying to figure out what the incentives exactly add up to when we have A^1, A^2 and A^3 bidding for labor servces. Basically competing with who offers laborers contract where laborers are giving more gifts without recompense (rather than less)... in a situation with an uncertain future both in regards to output, vertical relative prices, output prices and the general price level.

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  177. In the gift model, Andy enters in an inferior position to Betty. Betty has property; Andy has nothing but a connection to the Recorder.

    I think Johan wonders why Betty would give the property away. What is so special about a recording entry that might drive Betty to repeatedly 'gift' away her property?

    In the real economy, Betty would be trading property for property.

    In the gift economy, Andy trades future labor (which is not yet property) for real property. His commitment is to the recorder, not to Betty. This observation may be the basis for Betty wondering who will help her create more apples (or, is she strictly on her own in solving the future apple production riddle).

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  178. Roger, I'm thinking more in terms of what kind of discrete and continuous data determine model outcomes. So, for example, A^1, A^2 and A^3 offer different contracts so that the wage offers are 100, 105, 110 a month (or any other time frame). Obviously 100 < 105 < 110 so there's discrete data from which we determine which offers are better than the other. A^3 "pays" the best, meaning: the laborers are thought to give the highest priced gift (labor) to A^3 and the lowest to A^1.

    Here's only one example in a complex web of interrelations: So why is 110 better or worse than 100 (or 105)? The difference being found on a continuous scale: if it's too high it's not "worth" it for A^3,2,1, and if too low it's not "worth" it for laborers. What exactly are they calculating? They are obviously comparing prices (value of gifts about to be given and taken but not yet performed). Yet they also compare it to something else: to the direction and magnitude of each debit-range affected or thought to be affected. All these calculation are performed before any gift are given or taken and such calculations might very well determine if any gift are actually given or taken, i.e., if any production takes off or not (…with overall macroeconomic consequences; for the value of gifts already given and about to be given—i.e., other production sectors directly and indirectly affected by the quantity and price of coal).

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  179. Johan, I apologize for not correctly capturing the meaning of your query.

    After pondering for a while, my thoughts are in order but not so ordered that I can venture a comprehensive, inclusive theory of labor-thinking. Instead, I see two distinct micro-economic perspectives, one as individual and one as productive-entity.

    The individual perspective begins with an existing apple. Betty owns the apple; Andy owns nothing. Both Betty and Andy have access to the Recorder who will record apple ownership changes.

    From the individual perspective, the entry made by the recorder may be 'money' or not, it makes no difference.

    OTOH, if the apple is the result of long production process that operates over considerable time and involves multiple people, the exchange should be considered as a productive-unit event. In this case, the record of transaction, while acknowledged as an isolated event, is but one step in a continuum of sustained production. In this case, the record takes on a physical meaning as representing actual labor performed. Betty can safely assume that Andy COULD have helped her grow apples and now deserves a portion of the apple harvest. [This description is consistent with the analogy of money as a national-gift-certificate.]

    In the gift-theory-model, Betty gets credits. The importance and meaning of credits seems to depend upon whether the perspective is from the individual case or the productive-unit case.

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  180. Johan: Thanks for trying to use my language ;-) Looks good.

    You said: "Yet they also compare it to something else: to the direction and magnitude of each debit-range affected or thought to be affected."

    Do they? I'd think they compare this one price (wage) to all kinds of other prices. First probably to other wages, if wage-labor is widespread. Then there are comparisons to prices of consumption goods, or more broadly "cost of living" (workers) and to price of final product (employer). Only in that way does this one price have any meaning.

    Perhaps you meant something else?

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  181. Antti, I meant the directly affected parties, i.e. laborers and A^1,2,3. The outcome of the bargaining will indirectly affect other sectors in the production matrix but that's another issue.

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  182. Johan: What was your "it" ("...compare it to something else")? I can't see how "direction and magnitude of each debit-range affected" would differ from 'price' (wage in this case). I mean, if I'm offered a salary of SK10,000, it is clear that that will be the magnitude -- no question about direction -- of the effect on my "debit-range" as my sale of labor services gets recorded.

    Do you see what I mean? If not, then I have no idea of what you are talking about :-)

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  183. Antti, we can look at the direction of the debit range as a tendency for expansion vs. retraction. That's obviously what A^1,2,3 looks for; whether they (will) make systematic "profits" or "losses". That's also what laborers want to calculate; whether their wage is enough to keep their debit range from systematically being reduced with respect to some basic expenditure.

    In short: Δ+ or Δ- regarding the (calculated) debit ranges for each affected party becomes important. Such ratios or vectors could as well become treated as "numbers in their own right"… i.e., A^1 being curious about how much a profit he makes and how much profits everyone else makes. What seem "lucrative" and what does not?

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  184. Johan: I have to admit I'm a bit lost. I think we have drifted very far from my main message, which, if I simplify a lot, is that there is no 'money' which the buyer transfers to the seller / which acts as a 'medium of exchange', or is a "property on loan from the bank" (to follow Roger's language).

    It is clear to me that any business, as well as any household, makes "monetary calculations". But these calculations are based on estimates of sales and purchases (prices) of goods and services (incl. labor services). From the narrow perspective of the business (firm), the profit is just a number, not directly connected to any goods or services to be bought. But for the shareholder, it is ultimately about goods and services.

    So, I don't see any of this as a challenge to my theory. It might be that there is some very fundamental difference in our thinking? I want to keep things very simple when I proceed from the premises (multilateral credit) I have identified, while you think in a much more complicated way because you follow Sraffa and others who shared more traditional premises (didn't question the existence of money).

    Sometimes it feels that you (and probably Oliver's QuE) are after some grand, "logico-mathematical" Big Picture the existence/attainability of which I have come to doubt. (I know it would be strange to blame you of "physics envy", as you seem to detest the "mainstream" :-)...)

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  185. So, I think it might be best that I try to proceed with my story. As Oliver said:

    "Yes, I think you're trying to stick to more basic questions. Their focus is on classic macroeconomic issues such as inflation, unemployment and international (im)balances. And their contention is that these issues are of monetary / book keeping nature, are purely macroeconomic and are not based on behavioural or real business cycle etc. issues. But in defending a standpoint I'm not even sure I hold, I think I'm keeping you from telling your story, which is what this space is really for, I suppose."

    I'm going to get to inflation and unemployment, eventually. From a new angle, I suppose. And it is that "angle" I'm trying to establish. I'm definitely not a follower of real business cycle thinking or anything like that, and as I've said, I don't think money is neutral. To say that money doesn't exist is not to say it's neutral :-) Neither do I think I'm that far from Keynes when he talks about monetary theory of production. I'm just trying to provide a new angle on all this. For instance, we don't need to talk about money being created, nor about inflation being somehow connected to money being created without corresponding output ("empty money"?). That doesn't mean that I think those ideas are totally wrong. I just wouldn't put things like that :-)

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  186. Ok, I'll let you continue undisturbed.

    Just one more quibble: it's not about "not having questioned the existence of money". In fact, Sraffa, and many others, have explicitly theorized about the restrictions and conditions that must be established for not having money in a model. The whole edifice of Arrow-Debreu is, for example, in many ways, about that… although Sraffa though about a similar model many years before Arrow-Debreu but only in passing as a pencil remark: "If money did not exist, all effects would be identical as if there were perfect forward markets for all commodities. In this case, money would not be [standard of deferred payments], because everybody would hedge".

    But of course, Sraffa and the Classical writers were interested in the distributional aspect of (net) national income and saw that as the principal problem for the study of political economy so they discarded macro models which we now categorize as standard neoclassical ones (for which distribution is basically irrelevant).

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  187. Johan: No, please continue disturbing me :-) I didn't mean that.

    I don't talk about a model without money, as in Arrow-Debreu (btw, Ken Arrow just died at 95 yrs -- theory advances?). That doesn't count as "questioning the existence of money". "Existential questions" are, of course, about the real world. That which cannot be defined (in an agreeable way) might not exist.

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  188. How do we in general agree on definitions when talking about social relationships; i.e., that which happens between physical bodies interacting? Disagreement in definitions about them can't be the standard by which we evaluate the existence of such phenomena. Are a quantic-scales objects particles or waves? ;)

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  189. Johan: If you call certain (existing) phenomena "money", then I obviously cannot question its existence. I question the existence of money (other than currency) which a buyer transfers to a seller, or which flows.

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  190. Antti, would it be more accurate to say that you're presenting/building a framework wherein such "flows" aren't relevant as descriptions?

    Btw., JP Koning over at Moneyness just posted his version of "Money as layers". I thought you might be interested. http://jpkoning.blogspot.fi/2017/02/money-as-layers.html

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  191. JP Koning still relies on an asset (gold, in this case) being a layer of itself, rather than the measuring stick for a layer, as for example in Antti's first post. And it is that step from a positive thing, a piece of gold, to a relationship (a debit / credit) that is illogical, imo. And yet they all seem to go there, not only the monetarists.

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  192. Oliver, but if the intention is to describe something which have empirical backing, e.g., that at some point it was indeed possible to pay with gold, it seems therefore strange to leave gold out from the description.

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  193. I'm not contesting the historical fact that some physical objects acted as medium of account and medium of exchange simultaneously. I'm questioning both the contention that either (MOA or MOE) are the defining feature of the social relationship we call money and the fact that he seems to be using the same language to describe either the social phenomenon or the physical property interchangeably.

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