Monday, November 14, 2016

A New Monetary System From Scratch, Part 2: Records Schmecords


I'll begin this post by paraphrasing Nick Rowe (see my first post):

You decide to make a new monetary system from scratch. You give everyone a chequing account on your computer, with an initial balance of 0 skilos. If Andy buys bananas from Betty and pays her 100 skilos, Betty now has a positive balance and Andy now has a negative balance.

Accounting is record-keeping. In Nick's example, what are we keeping records of? That's the question. For the answer we must, logically, look outside the records.

In the economy I described in my first post, there was no money, other than in a unit-of-account sense. Money didn't buy goods and goods didn't buy money, but goods did buy goods. If we now told Betty that she will receive money, 100 skilos, for her bananas, she wouldn't have any idea of what we are talking about. If she nevertheless played along with us, she might ask: receive what, and from whom? What: a credit balance of 100 skilos on her account in a ledger residing on an electronic device. From whom: Not from Andy, because he doesn't have any money, or a credit balance, on his account.

We are obviously not keeping records of people's money holdings.

I notice that Nick doesn't agree:

The central bank creates a box for each person, puts their money in that box, and transfers money between those boxes when it gets their consent to make those transfers.

In both worlds, a rumour spreads that the central bank has actually destroyed all the money, and is simply keeping a record on a ledger about how much money is supposed to be in each person's box. But economists say that rumour has no empirical content; it doesn't matter if it is true or false.

Nick imagines that there exists money holdings – bits of paper in boxes – outside the accounting (ledger). He says it doesn't matter if those money holdings really exist or not. Even if it didn't matter, we must be able to find a simpler, more realistic way than an imaginary box system with green and red bits of paper to explain the records on the ledger. One can easily argue – and Nick fully knows this – that those bits of paper are themselves just a record-keeping device ("counters"), and thus Nick is talking about records of records (which sounds, to quote Depeche Mode, very unnecessary). The question remains: What are we recording? (Besides, Nick's explanation would still make no sense to Betty, because there is no green or red money in existence when Betty and Andy meet; all account balances are zero.)

Nick isn't building a new system from scratch. Instead, he carries a lot of baggage with him from the old system.[1] As I explained in my first post, this is what I want to avoid. On Nick's part this seems to be intentional, though. In the end of the post I quoted from, we can hear him say to New Keynesians: "Don't you try to escape from the old ideas!" (By the way: I'm not a NK economist, nor do I agree with their theory in general. I'm an accountant.)

But let us stay outside the accounting, in the "real world", for now. Betty gave bananas to Andy, but Andy didn't give anything to Betty. For all we know, Andy might have arrived at their meeting empty-handed. Was there an exchange between Andy and Betty? Cambridge Dictionary defines 'exchange': "the act of giving something to someone and them giving you something else". There was no exchange – no quid pro quo – between Andy and Betty. Perhaps we could call it a transaction. Betty transferred, or gave, goods to Andy.

This actually sounds a lot like the world (an "Arrow-Debreu world" with trading?) Ostroy & Starr[2] describe:

Even though each person aims to execute an overall net trade with zero market value, the most efficient way to accomplish this in a sequence of pairwise trades is not to constrain the value of each bilateral commodity transfer to be zero. […] An individual who takes more than he gives at some pairwise meeting is simply executing a part of the overall plan to which the members of the economy have submitted themselves. It is as though the participants are agents in a firm carrying out their assigned tasks in front of each other. The lesson we draw is that in a world of complete information the requirements for enforcing overall budget balance are met, so quid pro quo is an avoidable constraint on the transactions process.

If Betty gave bananas to Andy without receiving anything in return (remember: we are still in the "real world" outside accounting), then we can conclude, following Ostroy's and Starr's wording above, that Andy took more than he gave at this particular pairwise meeting.

This makes it sound like a gift from Betty to Andy. Marcel Mauss has taught us – well, at least those of you who are anthropologists – that there exists no such thing as a pure gift[3]. Keeping that in mind, it would be very unfortunate if no one (but Betty) remembered Betty's gift of bananas the following day; say, Andy suffered from anterograde amnesia[4just like the main character in the movie Memento. In the movie, the main character uses Polaroid photos and tattoos to track information he cannot remember. Those photos and tattoos are his record-keeping devices.

Let us for now suppose that Betty gives a gift of bananas to Andy.

Is it a large or a small gift? Betty and Andy agree that the price (nominal value) of those bananas is 100 skilos, so we know something about how they both value the gift.

Now we have a hypothesis: Our new monetary system is about keeping records of gifts given and gifts received by each person. Betty gives a gift and this (transaction) is recorded by making a credit/positive entry – the nominal value of which reflects the value of the gift expressed in terms of the abstract unit-of-account – on her account. Andy receives a gift and this (transaction) is recorded by making a debit/negative entry on his account. Nothing moves from Andy's account to Betty's account, or vice versa. There's only a real-world 'banana flow' from Betty to Andy.

We have found something that takes place outside the accounting, of which it makes sense to keep records. Much remains to be explained, but I will leave it for the coming posts (and the comments section of this post, if you have any questions/critique).

I will end this post by quoting Narayana Kocherlakota[5]. He by no means fully captures the logic of our system, but there is much which resonates with what I've said above (not only the bananas!). He writes (italics in original):

The main result of the paper is that in all of these environments, the set of incentive-feasible allocations generated by adding memory contains the set of incentive-feasible allocations generated by adding money. In this sense, in all of these environments, money is merely a primitive form of memory.  
There is a simple reasoning behind the main proposition. John and Mary meet. John has apples and wants bananas. Mary wants apples but doesn't have bananas. In monetary economies, this problem is solved by Mary's giving John money in exchange for apples. John then uses the money to buy bananas from Paul; if John doesn't give the apples to Mary, John doesn't get the money and can't buy the bananas from Paul. 
But of course the money itself is intrinsically useless. In terms of the reallocation of intrinsically valuable resources, we can think about the situation as being one in which John is considering making Mary a gift of apples. If he makes the gift, Paul will give him bananas in the future; if he doesn't make the gift, Paul won't give him the bananas. The money that John receives from Mary is merely a way of letting Paul know that John has fulfilled his societal obligations and given Mary her apples. 
Thus, if we account for the fact that money itself is useless, monetary allocations are merely large interlocking networks of gifts. The point of this paper is to show that these same reallocations of resources are feasible if agents knew the past history of all actions: Paul could react to different histories of gifts on John's part in the same way that he reacts to John's having different amounts of money. It follows that any function performed by money can be provided by an ability to access the pasts of one's trading partners, their trading partners, and so on.



Part 3: Give and Take



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[1] Keynes touched this problem in the last paragraph of the Preface to his General Theory: "The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful,—a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds." 

[2] Ostroy, Joseph M. & Starr, Ross M. 1990. "The transactions role of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 1, pages 3-62 Elsevier. (p. 10-11) There is a working paper version freely available here. Another good overview of "mainstream" monetary economics is this paper by Meir Kohn. It is noteworthy that Kohn later gave up the attempt to make sense of money ("theory of exchange") within the general equilibrium framework ("theory of value", or "value paradigm").

[3] This explains the title of my blog.

[4] Many of us might be suffering from a mild form of this disease, in the sense that we are unable to let go of our past beliefs about money. Faced with new evidence that contradicts those beliefs, we tend to quickly forget the new evidence. Compare this with what Wikipedia says about anterograde amnesia: "...a partial or complete inability to recall the recent past, while long-term memories from before the event remain intact".

[5] Kocherlakota, Narayana. 1996/1998. "Money Is Memory". Working paper version (p. 2).

40 comments:

  1. Antti: Let me try to lead you down a slippery slope:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/from-gold-standard-to-cpi-standard.html

    (If you like, you can add an additional step 0, where money is physical gold, right at the beginning of the slippery slope.)

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  2. Nick, I'm a simple guy. That means I might miss your point if you're not straight-forward.

    Your CPI standard and "indirect convertibility" are connected to what I said in my first post:

    "A kilogram of salt has ceased to act as a numeraire. If we stretch the concept of a numeraire a bit, we could say that all goods with sticky prices act as numeraires of sorts."

    We could compare gold with salt in my example, although salt is not 'money' in it. But then again, at no time in history has gold, either, been 'money' like Clower defines it. Just to give you an idea how I would approach this in my world (through a "salt standard"):

    The general skilo price level starts to rise due to people actually raising their asking prices, for whatever reason they might have, and this leads to a spiral. (It cannot rise due to too many skilos in circulation, because there are no skilos that circulate.) After a while, the price of salt-kg is again 1 skilo (price has doubled). To stabilize the price level, the central bank decides to buy a substantial amount of salt (partly in secrecy, perhaps through "straw purchases") and then publicly offer it for sale at 1 skilo/kg. It also offers to buy salt at the same price.

    The accounting logic would still be the same, i.e. we are recording gifts given and received. When the CB initially buys the salt, the seller gets credit for his/her gift. Debit goes to the CB itself, as a recipient of the gift (the account name can be "Salt stock" or similar; all real asset accounts belong to the CB, not a customer like Andy in the first example).

    I didn't get your point yet, so I just wanted to tell you what came to my mind reading your post. Just like you, I don't see any big change in the monetary regime (gold standard or no gold standard), but I find it problematic that you seem to assume that the amount of currency is more or less directly linked to the price level. And I don't like calling 'bank' an institution which has only real assets (100%) on its debit side. I also think that the "gold -> fiat currency" story is misleading if not outright false, and that we would understand money better if we didn't always insist on starting from gold. I do understand that people start from gold, because that seems to be the way one can make most sense out of money as it's commonly understood. But I'm trying to offer an alternative here, and it makes even more sense, at least to me.

    So, to save us from further babbling from my side: What are you implying, Nick?

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    1. Sorry Antti, I was a bit cryptic.

      In step 0, where gold is used as medium of exchange, we can clearly say that money exists, and is a good. It's not a "gift economy". Where on my slippery slope does "money" disappear, and get replaced by a mere record-keeping service provided by the central bank?

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    2. As you know, Nick, I don't like the starting point where a good, like gold (bullion), is 'money'. Having said that, I don't think that matters too much here.

      The record-keeping service is actually established when the central bank is established. (I'm actually somewhat surprised by my answer. But that's how it must be. What I say is probably true for all companies, not just banks, so we are really talking about the fundamentals: what is a company?) The unit-of-account could be, for instance, 'skilo' or 'dollar'. If I give/sell my gold to the institution we call 'central bank', it will create a record of this transaction. My account will be credited, or I receive a "portable credit balance" in form of currency. The CB's own account, "Gold stock", will be debited. It has received gold, I have given up gold.

      The law and the custom are very important here. What does the credit balance entitle me to? In the case of central bank ledger, I might not have any recourse; I can't ask back my gold. The same is usually true for individual shareholders in a company. Under earlier gold standard, I might have been able to buy back gold from the central bank, because the CB had declared that it will sell gold at a certain price. Had I bought gold from it, it would have updated its ledger by debiting my account (decrease in credit balance) and crediting its "Gold stock" (decrease in debit balance); it gave gold to me and I didn't give anything in return.

      The gift analogy works quite well if I don't, individually, have a say in what the CB does with the gold, and if the CB can decide, unilaterally, whether it wants to offer gold for sale at a fixed price (that is, it can cancel gold convertibility without asking me).

      How does this sound? We must be very careful now. It seems we have two different "paradigms" here. (I know I shouldn't use that word, but I didn't find a better one. World-view? Theory?)

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    3. Nick, you might want to read my comment to Roger and Oliver. In it I make a connection between my "gift economy" and your "red+green world".

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  3. Hi Antti. I took a quick glance at the papers you mentioned in Nick's post (yes, I'm actually taking on homework assignments from drunk, anonymous Finns on the internet ;-)). I can't say I fully understood the math in detail but I think I got the gist.
    I also see you're building your case in very small steps, which is probably the right thing to do when arguing with someone like Nick (and in preparation for your PhD). I'm afraid I'm not quite as patient. So here's my broad brush commentary:
    I'm not 100% comfortable with the gift analogy. If we're talking about the credit case, that is the one where both accounts start out at 0, it is imo not reasonable to assume that, as in the case of a gift, the giver approaches the receiver in person and offers him some good with the unspoken implication that something of similar value is ecpected in return and in person at some later date. Quite the contrary, while 'givers' may offer their goods at market to make them visible to potential receivers, it is the receivers who will approach the givers and, by entering into the credit contract, will assume a position that puts them at risk. In that respect, I think it is more appropriate to speak of an investment economy than a gift economy, althought the two are obviously related.
    Which leads to the next question, namely whether it is sensible to talk of consumption goods such as apples and bananas as the objects of such a base economy. Imo, if you start with a pure credit economy (and generalising slightly from the standard circuitiste case) you invariably end up with different classes of agents, namely investors (or employers), consumers (or employees) and impartial third party agents, aka banks.
    The above credit case can then also be contrasted with a unilateral 'fiat money' intervention by a bank or central bank. That is, a case where a bank buys (assumes the risk of) a financial asset from a non bank agent in exchange for an entry on both sides of one of its ledgers. Nothing physical changes hands in such an operation. Not even in one direction. And can such an operation be the starting point of a monetary economy? Can there be financial assets before there is money?
    In posing the question of what it is that's being bought and who owes what to whom, I like to ask myself what the OBJECT (and thus what the value) of money is. Which real life things, tangible or otherwise, do the entries in bank ledgers refer to? In a surrealist tradition one might speak of 'la trahison de la monnaie' and conclude, referring to money itself that 'ceci n'est pas une banane'. But, at least in the straight forward credit case, 'la banane' certainly is there (until it's eaten, that is). Standard backing theory, I suppose.
    What the above does not address of course, is how bananas are translated into other goods by ways of a common accounting standard, where relative prices are determined and by what mechanism they're kept stable over time. I like your previous post in that respect and also like the thought of 'money as memory' in the Kocherlakota paper.

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  4. Thanks, Oliver! I'll get back to you later in more detail, but for now, think about this: It is clear to all participants that gifts HAVE TO be returned. There must be a counter-gift. Not from Andy to Betty, but from Andy to SOMEONE. And Betty can receive a gift priced at 100 skilos from someone, without there being any expectation of counter-gift on her part. I agree that the gift analogy doesn't work 100 %, but perhaps it's also because of the connotations 'gift' has in our culture. You can take my gift economy as a very explicit, no-bullshit, no-free-gifts one.

    There ARE financial assets before the new system is created. As I explained, there were bilateral debts. If the central bank bought these assets (that would be an accounting maneuvre... I'll get to these later), perhaps even claimed that all bilateral debts are to be converted to multilateral gift-records, it would translate to "proto-QE" ;-) Does this make any sense to you? As I said, I'll come back later. (I have a 9-month-old son to take care of...)

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    1. Oliver,

      I said: "If the central bank bought these assets (that would be an accounting maneuvre... I'll get to these later), perhaps even claimed that all bilateral debts are to be converted to multilateral gift-records, it would translate to 'proto-QE'"

      There is a typo: claimed -> declared.

      I'll explain in more detail what I meant with this. Let's say that prior to establishing the central bank, Betty had given bananas priced at 100 skilos to Andy against Andy's promise to give her apples priced at 100 skilos (~market price) next week. A bilateral debt.

      Now we establish the central bank. We do this because it will make trading a lot more convenient and efficient. As a first move, our central bank offers to take *onto its ledger* any good (or "real", as in real-bills-doctrine) bilateral debts presented to it. Betty, who holds Andy's IOU, presents it to the CB. The CB recognizes Andy as a trusted citizen. The CB debits Andy's account and credits Betty's account, both for 100 skilos. Later, Betty tells Andy that he doesn't need to give apples to her, as she doesn't really need them at the moment, but that he can give them to someone else and get his account at the CB credited. Andy obviously didn't owe anything to Betty anymore, but neither did he owe something to the CB. He only "owed" it to the community, and the CB as its representative, that he will give apples priced at 100 skilos to SOMEONE. When he does this, he gets rid of his liability which has been recorded in the CB ledger. And the someone who received the apples, say Carol, cannot be seen as Andy's creditor, because she might very well have incurred a liability, a negative balance, herself by buying the apples from Andy.

      Starting to make more sense, or not?

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    2. Hi Antti, sorry for the late reply. I have two of those critters and a full time job...

      You wrote in your previous post: But let us now imagine that one day – well, abruptly anyway – the real cost of procuring salt, due to a technological shock, is reduced by 50 %. The community faces a choice: Should they adjust prices of all goods (except salt) and nominal values of all debts – a formidable task including menu costs and mental costs –, or should they only adjust the price of a kilogram of salt? The majority of our agents are flexible thinkers, so they choose the latter option: the new price of a kilogram of salt is 0.50 skilos.

      I can imagine that bilateral debts could be denominated in 'skilos', as you describe. Repayment would be in kind, but the exact object of repayment would not have to be defined in advance. That is a distinct advantage. But, in such a case, the equivalence in value of the returned good would have to be renegotiated at the time the debt becomes due. The debtor would have to prove that the good returned still lived up to the kilo of salt mentioned in the original contract. For the value of the debt, on the other hand, to follow not the real exchange value of salt but the imagined floating 'skilo', you posit a society wide, real time coordination that leads to the 'choice' to redenominate.

      My position is that it is that such a decoupling of the unit of account from the exchange value of the reference good and the subsequent societal coordination to the new value is necessarily an administered process. One that relies on the trust placed in the administering, impartial agent, aka banks.

      So I think you are faced with a choice hinted at in Nick's comment above, namely of either accepting the referenced good itself as an actual money thing, and thus having to explain the slippery slope from 'thing' to 'thingless accounting' that follows. Chances are you'll never shake off the thinginess if you go down that path. Or you accept the path of true virtue ;-), namely that a money thing is born, and can only then be decoupled from the barter value of a reference good, if it is the product of a trilateral agreement. There is not slippery slope from bilateral to trilateral debt, in my humble opinion.

      And that is also why I say that financial assets, that is assets not denominated in kind, but in an abstract unit of account, cannot exist before the money they reference exists. You either have barter, perhaps advanced barter of some sort or another, or you are looking at a trilateral monetary system.

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    3. I think money deserves to be recognised and studied in its own right rather than being confined to an abstract realm of fluid communal conscience.

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    4. Oliver: Thanks for taking the time to comment -- I understand you must be busy with two of these creatures :-) You find my answer here.

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  5. Antti: Your goal (from your title) is to build a new monetary system. You are building it piece-by-piece, a method I certainly prefer. Your model is logically consistent so-far.

    Like Oliver, I am a little uncomfortable with the analogy emphasis on "gifting". That said, I understand the importance of pre-building the "gift". Betty had to work to acquire bananas that she later gave away. "Gifting", as an English word, emphasizes trade WITHOUT expectation of anything in return. That is not quite the idea I think you want to convey, but it is close.

    I am searching for a better word than "gifting" without success. Perhaps in a new monetary model, a new word is needed. A word that conveys the thought that before trade between two people can occur, each must labor to create a tradeable product.

    "Conditional gifting"? No, too awkward, but I am sure you are getting my idea.

    Money is just a record that an INITIATING event of "Conditional gifting" has transpired. (Not excluding the possibility that a false record can be created.)

    Thanks for the new series of posts.

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    1. Roger, and Oliver:

      This is, as Roger hints, gifting with explicit "strings attached". Even a stranger is allowed to take part, but he has to give (sell) first, take (buy) later. Always. Trusted participants can take first, give later. As I write in the subtitle of the blog, someone has to take first (accrue a debit balance). Otherwise there wouldn't be any credit balances either ("money" as we are used to call it).

      Why the gift analogy? I think we could approach this question by looking at the alternative. You are probably familiar with "loanable funds" (where 'funds' are usually understood as goods)? From a "loanable funds" viewpoint, Andy borrowed (invested in) bananas and Betty lent (saved) bananas. From a gift economy viewpoint, Andy took bananas, without incurring a liability towards Betty or the central bank (his is a liability which is no one's asset; "red money"), and Betty gave up bananas, without earning a claim towards Andy or the central bank (hers is an asset which is no one's liability; "green money"). Which sounds better? I'm of course open to suggestions if you find a better way to put it. Notice that this is a MULTILATERAL gift economy. Each individual balances his/her budget over time, but there is no bilateral balance. In pairwise meetings there is rarely any *exchange* -- that would amount to barter. In the meeting there is only one seller and one buyer; the "commodity money" people, like Nick, say that the goods-buyer is a money-seller, and vice versa. But that's barter.

      When we put red and green world together, there is an "asset without a liability" for every "liability without an asset". Nick doesn't see this, because he thinks that only negative checking account balances are "red money", and that only "red money" is a liability without being an asset at the same time. I believe I'm able to show that ALL debit/negative balances in the CB ledger are "red money". They are not the CBs assets (whatever the law or conventional accounting language says); they are only someone's liabilities (real assets like gold are a CB liability to the parties on the RHS of its balance sheet). The only assets are to be found where there are credit balances in the ledger (usually RHS). You might see that I don't view the CB, the company, itself as something which can have assets or liabilities. It's just a bunch of accounts and contracts. As I said in my comment to Nick, we are dealing with fundamentals here. Pretty deep stuff, I suppose. What is a company, etc. I hope I don't lose you by going too deep? I don't think I really need to do it in order to explain my theory to you, but I can't help thinking out loud :-)

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    2. I said: " I believe I'm able to show that ALL debit/negative balances in the CB ledger are "red money". They are not the CBs assets (whatever the law or conventional accounting language says); they are only someone's liabilities (real assets like gold are a CB liability to the parties on the RHS of its balance sheet). The only assets are to be found where there are credit balances in the ledger (usually RHS)."

      This might beg the question: Are all credit balances "green money" -- even equity? Yes. Modigliani-Miller. We have all heard people suggest that even equity could/should be seen as "money" (which obviously irritates many other people -- Nick, too, I suppose?). What I'm saying is that there's no money as we knew it, and that all credit balances differ -- when they do differ -- from each other in degree, but not in kind.

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  6. Thinking about Nick's comment and how it relates to this post. The comment seems to speak to the difference between a beginning monetary system and a mature monetary system.

    Antti offers conditions for a beginning monetary system where trade, sometimes delayed trade, is of real physical goods passing between two owners. Money is offered as a record of the initial trade; money is canceled when the second trade is completed.

    Nick's comment takes us to a mature economy where money is well established and trusted. In this economy, it makes sense to trade for money as a commodity in it's own right. In a money trusting economy, money could be stored as could wheat or cars should a collector want to work just-for-the-pleasure-of-storing-money.

    Does this make any sense?

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    1. Roger, that didn't make much sense :-) Perhaps I wasn't explicit enough about my system being multilateral? Andy doesn't promise to deliver anything to Betty, but by being a participant in the system Andy knows that he is expected to balance his budget (by giving goods to someone) over time.

      Mine is (going to be) a mature economy as well, and there will never be money in it, but it will nevertheless have a very realistic banking system (all the accounting and contracts are there; just the description of it differs from the conventional one).

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  7. Oliver and Roger:

    In a Kocherlakota & Wallace paper ("Incomplete Record-Keeping and Optimal Payment Arrangements", 1998; related to the Kocherlakota paper I quoted in my post) I found this:

    "Although we have used the term credit as a label for nonmonetary trade, other terms such as insurance or mutual charity (gift-giving) could as well have been used."

    So it seems that it hasn't been too easy to land on a specific term. What they talk about differs from my "gift economy", but there are similarities.

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    1. Like you, I have thinking about the implications of the gift economy.

      Thinking only about the label "gift", it seems like the only "gift" needed is the first gift. After that, there is always a positive record that can be traded an infinite number of times. The positive record only disappears if Andy (the first gift receiver) produces something, earning a positive mark to cancel
      the red mark.

      Here is another way to think about the role of Betty. Consider Betty after she has the positive mark. Now Betty has the same ability as the recorder (without having the ledger). She can give an initial positive mark. Money (if it is used) takes the role of recording the positive event in the gift economy. No need for a ledger.

      I haven't figured out how you will get away from money. Seems like money is just a record of an exchange partially completed.

      Does this make any sense?

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  8. Roger:

    That makes a lot of sense.

    How do I get away from money? Here's how:

    Look at the famous Rabbit-duck illusion. Let's say you had been shown this picture thousands of times, starting when you were a child, and from the start you were always told it's a picture of a rabbit. I can almost guarantee that you would have never seen the duck in it.

    I step in here. I'm telling (the grown-up) you that there's no rabbit in the picture. Instead, there's a duck in the picture, and our task is to study this duck in detail. I ask you to look at the picture and NOT see a rabbit in it. Only see the duck in it. You can't see both at the same time -- you have to choose.

    In the picture I paint of the economy, there's no money, no "rabbit", in it. Only a "duck". If we are to study the economy, understand how it works, we have to choose between two different viewpoints -- we can't merge them.

    You said: "After that, there is always a positive record that can be traded an infinite number of times."

    In the picture you paint here, there's both the rabbit and the duck. The rabbit is a positive record "that can be traded". The duck is "a positive record" which cannot be traded (because from the viewpoint adopted, it would make no sense to talk about it being traded -- it exists only as an account balance, and once an entry is made on the account, the balance disappears and a new balance emerges).

    You said: "Now Betty has the same ability as the recorder (without having the ledger). She can give an initial positive mark. Money (if it is used) takes the role of recording the positive event in the gift economy. No need for a ledger."

    It seems you change the meaning of the word "money" here. You are talking about currency/cash only. (I take this to mean that you don't want to let go of the rabbit.) In my world, currency is not a "rabbit" either (if it looks like it, it's just an illusion). Currency can be -- and must be, if we are to form a coherent whole -- understood in terms of the "duck". The ledger is always behind it. If you receive currency, it translates to a credit entry on your account in the ledger, and if you give up currency, it translates to a debit entry.

    You said: "Thinking only about the label "gift", it seems like the only "gift" needed is the first gift. After that, there is always a positive record that can be traded an infinite number of times. The positive record only disappears if Andy (the first gift receiver) produces something, earning a positive mark to cancel the red mark."

    Here's what happens in the "duck world" (gift economy):

    Betty gives Andy a gift. This is recorded (with, or without, the help of currency). Next, Betty receives from Carol the "counter-gift" she was entitled to, and Carol gives a gift. This is recorded. (Pairwise meetings continue, Carol meets D, and so on, and so on.)

    Finally, Zach receives a gift of apples from Andy. This was the "counter-gift" Andy was liable to give, due to him receiving a gift of bananas from Betty earlier. It was also the "counter-gift" Zach was entitled to receive, after having given a gift of zucchinis to Yelena.

    The "gift circle" is complete. All account balances are back to zero. At no point in the circle were records traded. Only goods were traded -- given and taken.

    How does this sound?

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    1. You see, records are kept, entries are made, and these entries change the balances on accounts. No records, entries or balances are traded.

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  9. @ Oliver "November 17, 2016 at 3:14 AM" (Perhaps we could all start replying to the whole thread, so that it's easier to follow different conversations? In Nick's blog it seems to work well.)

    You said: "Or you accept the path of true virtue ;-), namely that a money thing is born, and can only then be decoupled from the barter value of a reference good, if it is the product of a trilateral agreement."

    I'm not sure if I follow you 100%, but what you say might be connected to the way I originally (in Finnish...) told the story: The central bank, or "gift accountant", was established before s-kilo became skilo (ie. an abstract unit of account). Would you see things differently had I done it here?

    It crossed my mind when writing the first post that perhaps I should first establish the central bank, but I made the choice to use the first post to show the way from a numeraire-UoA to an abstract UoA.

    As I said in the end of my first post, this is an "origin myth" for the abstract unit of account. No one knows how it all really started, but it is quite clear that this kind of "trust system" must have first emerged in a fairly tight-knit community (perhaps in Mesopotamia?). When you talk about "administered process", it is important to remember that the idea about the "right price" emerging spontaneously, without any administration/oversight by the community -- even in a really large community -- is fairly new. Credit money had existed for thousands of years when Thomas Aquinas and others were still talking about the just price.

    That's all about the origin myth. What I'm really interested in is our present system. Do you agree that the 'dollar' is an abstract unit of account? Do you disagree with me if I say that we don't have 'dollars' on our accounts -- that what we have on our accounts act as records of the goods we have cumulatively given and taken? (I say "act as", because they are obviously no proof that we have really given something -- for instance, the entries could have been made before any goods have been delivered, or then someone has agreed to an "entry exchange", crediting an account in exchange for the account-holder's promise to credit his account later on -- the latter we are used to call a "loan" between non-banks.) And if you disagree, is it because you have chosen another viewpoint and find it works OK for you, or is it because you find my viewpoint incoherent? I still stand by my claim that by adopting the viewpoint I offer ww can get rid of the "money problem" in economics. For instance, we could talk about "helicopter money" in an intelligent, straight-forward way, instead of the current mess where no one seems to have a clear idea of what "helicopter money" even means.

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  10. Antti:

    It sounds good.

    The Rabitt-duck illusion is certainly a good example, for several reasons. It is now in my grab-bag of analogy resources.

    As I read your explanation, it was easy to see the contrast/parallels between a money-moderated model and a ledger-moderated model--at least from a recording perspective.

    As we move ahead in model development, the role of Andy will attract attention. More specifically, can Andy be the record keeper and elect to never(?) close the "gift circle"?

    One good thing about the "gift" name: it encourages a focus on the beginning of the recording process. Subsequent events are a simple replication of this basic building block. Very mechanical which suits me well.

    You are off to a good start!

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  11. Thanks, Roger!

    "As we move ahead in model development, the role of Andy will attract attention. More specifically, can Andy be the record keeper and elect to never(?) close the "gift circle"?"

    I thought already yesterday that I should have stressed the fact that the gift circle never needs to be closed -- it's an ongoing process. The completion of it in the example was only for illustration. The whole circle format is only for illustration. In reality there is no circle; instead, Yelena would have traded with Carol before trading with Zach, and Betty might have given bananas to Nick before Andy gave apples to Zach.

    Should all balances return to zero at any point, it would be a pure coincidence, and the next trade would give us non-zero balances again. None of the traders would even know that all the balances were momentarily zero, because they don't see each others' balances.

    But this wasn't what you asked, and you probably knew all this already.

    Yes, "Andy" could be the record-keeper, and he could have a negative balance, forever. There's at least two ways this can be understood (I'm not sure which one you had in mind):

    1. The central bank itself will always -- if not wound up -- have real assets on the LHS (which actually represent its liability; it has taken/bought those assets, credited the account of the one who gave the assets, and debited an account under its own name), and this guarantees that all the balances are never zero (the "circle" is not closed).

    2. The government can maintain a negative/debit balance forever, and that doesn't need to be a problem -- quite the contrary (when we are talking about moderate sums).

    Interest (rates) will, of course, play a crucial role when we are talking about negative balances which are maintained for years/decades/centuries. Many real persons leave a negative balance when they die, and it becomes a negative balance of the estate. But there's no problem with this, if there's been interest charges on this negative balance (or "real" interest charges through outright deflation).

    But now I'm going too far. We have a story to tell, so I'll better concentrate on writing Part 3!

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  12. The central bank, or "gift accountant", was established before s-kilo became skilo (ie. an abstract unit of account). Would you see things differently had I done it here?

    Yes, I would agree with that. The accountant plays a vital role in a monetary economy. Maybe 'administer' is the wrong word, I'll look for a better one. I'm sure we're not far off, merely swimming in the sea of semantics. What I don't like, is your contention that you can do away with money altogether. Or your rabbit-duck metaphor, for that matter. I think we have no choice but to deal with both the rabbit and the duck and the challenge is to find a parsimonious method by which to capture both, both as separate entities but also in their relation to one another. Abstracting away from money after all, is what classical economics and its successors have been doing for centuries. Monetarists, and Keynesians to a certain extent, have a tendency to do the opposite, to disappear down the opposite rabbit hole, as it were. But that is no excuse for focussing only on the duck pond.

    So if you say: Do you disagree with me if I say that we don't have 'dollars' on our accounts -- that what we have on our accounts act as records of the goods we have cumulatively given and taken? Yes, dollars are virtual, they are not goods in their own right. But even as immaterial records, they do have a life of their own. Take the following example:

    Andy gives Betty 10 bananas. That is recorded as +- 20 'skilos'. At the same time somewhere else, Cindy gives Dave 10 bananas which, because Dave has a serious banana addiction and he uses his overdraft facility (as opposed to having to apply for a loan) is recorded as +- 40 skilos. What happens, is that Andy's original record is now worth less in bananas (and other goods) than what he gave to Betty. So you cannot say that the skilo records on Andy and Betty's ledgers at the bank act to keep track of the exchanges between Andy and Betty alone. They are an average of all exchanges. I like to think of money as a homogenising agent between the exchanges that take place in an economy. It is that homogeneity that makes it unique and interchangeable and lends it its value as a general unit of account for the whole economy, as opposed to a specific unit for each bilateral exchange. But, there is also a risk involved which is why it takes a managing agent that plays an active role. Banks are part of the memory. The more discrepancies there are in the relative values of exchanges made over space and time and the longer credit cycles are left open, the more relative winners and losers you produce.

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  13. Roger: "Subsequent events are a simple replication of this basic building block. Very mechanical which suits me well."

    Good to hear! It's actually even simpler than in my description: I could have dropped the "counter-gift", and talked only about gifts. I just wanted to emphasize the balancing of an individual's budget by looking at the situation from the perspective of the one who brings his/her account balance to zero (from negative or from positive).

    By the way, I'd like to hear if you agree with me on this one: Some (intelligent) people seem to have difficulties with telling an account from a balance sheet. More than once I have heard that one doesn't really have a negative balance if one has acquired an asset, and not used the credit for consumption. Yes, the balance sheet MUST always balance, by definition. Neither do I mean that one has negative net worth if one has a "negative balance". It doesn't matter if you have taken from someone, without giving anything in return, a banana to eat or a house to live in -- you nevertheless have taken possession of something that used to belong to someone else, without giving anything in return. Is this something I perhaps should make more clear in my coming posts?

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  14. To get going, I say you need the following:

    (A theory of) consumers / employees
    (A theory of) investors / employers
    (A theory of) banks
    (A theory of) inflation
    (A theory of) profit

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  15. @ Oliver "November 17, 2016 at 3:21 AM"

    "I think money deserves to be recognised and studied in its own right rather than being confined to an abstract realm of fluid communal conscience."

    I understand that I haven't yet made it clear enough that I'm not talking about "fluid communal conscience". I'm studying the real monetary system as a part of the economy as a whole, and in that sense also "money".

    To study money in its own right would be the same as if a 19th century physicist had studied luminiferous aether in its own right. Money is the postulated medium of exchange, while luminiferous aether was the postulated medium for the propagation of light.

    By focusing on money, you risk starting from a false premise (money exists). The best way to understand how our monetary/accounting system works is to focus on the actual system -- not money -- and figure out how it is connected to the "real" economy.

    So, I'm not going to recognize money in its own right. But I will do my best to get you to disown money in its own right ;-)

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  16. Oliver, you will get the theories you want. Step by step.

    But for me it's important to recognize that "investors" and "employers" are either consumers or associations of consumers, or associations of associations of consumers, etc. We must see the natural person behind every juridical (/artificial/fictitious) person.

    As Keynes has said, everything in economics comes back to human effort and human consumption.

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  17. Oliver:

    "So you cannot say that the skilo records on Andy and Betty's ledgers at the bank act to keep track of the exchanges between Andy and Betty alone."

    I'm not saying this. And I'm definitely not abstracting away from money. That would be to say that money exists, but I have left it out of my theory. What I'm saying is that money doesn't have the properties we have attached to it, so money (the concept) doesn't exist, in reality. What exist is the monetary/accounting system.

    I don't think we disagree on much at all. But you don't see it, because I haven't yet touched even all the basic building blocks of the system. The fault lies on my side -- I must write Part 3.

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  18. Antti: You are asking "By the way, I'd like to hear if you agree with me on this one: Some (intelligent) people seem to have difficulties with telling an account from a balance sheet. More than once I have heard that one doesn't really have a negative balance if one has acquired an asset, and not used the credit for consumption. Yes, the balance sheet MUST always balance, by definition. Neither do I mean that one has negative net worth if one has a "negative balance". It doesn't matter if you have taken from someone, without giving anything in return, a banana to eat or a house to live in -- you nevertheless have taken possession of something that used to belong to someone else, without giving anything in return. Is this something I perhaps should make more clear in my coming posts."

    Hmmm. I will use this quote from Investopedia to help formulate my thoughts here:

    "Assets = Liabilities + Shareholders' Equity"

    Hmmm. This is the basic formula for double entry accounting. Here we have a balance, assets equal liabilities when we forget about shareholders' equity. This is basic double entry accounting (Am I right?)

    Now we have the Rabbit-duck illusion--two views of a single situation from different perspectives. (Am I right?)

    Now I ask a question: Does a person effectively "create money" when that person works at the behest of another person?" If money is created, then at what rate per unit of time?

    Hmmm. It seems to me that it is universally true...that human work precedes any exchange. This implies that all exchange is a trade of hours of work.

    Hmmm. If exchange is "hours of work", why do we not record "hours of work"? Well, exchange is more than just "hours of work". Control is also a factor, time interval between gifting events is a factor, and there are other factors such as skill. "Money" (to me) is an averaging, arbitrary mechanical device that links otherwise separate events. Using money, two exchange participants can come to a "barter agreement" that two different "results of labor" have a single value (the value of the exchange).

    Does this answer make any sense?

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  19. I told you I was impatient :-). Does economics not exist because it isn't a natural person? Institutions matter. So do ideas. Both deserve to be recognised and studied in their own right. You're not selling me reductionism or methodological individuslism.

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  20. Sorry, that may have come across unneccessarily harsh.
    You write:
    By focusing on money, you risk starting from a false premise (money exists). The best way to understand how our monetary/accounting system works is to focus on the actual system -- not money -- and figure out how it is connected to the "real" economy.
    I'm all for studying the system as it exists. In that sense 'money' is just an empty shell waiting to be filled with realistic content. But I'm all ears for other terms that carry less baggage.

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  21. Roger: "Assets = Liabilities + Shareholders' Equity"

    I like to skip the equity part (as you did, but probably for other reasons), because to me that's also a liability. There are different types of liabilities and they all differ from each other. To me, to think otherwise on the part of equity would be to mistake the shareholders for the company itself. The same idea is behind what Fama says here ("Banking in the theory of finance", p. 42) (it's related to Modigliani-Miller):

    "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 actually find a mirror image of the "accounting equation" more useful: after all, the "liabilities" (of a bank) are assets of non-banks and the "assets" are liabilities of non-banks (or, of the bank itself in case of real assets). This fits with my view of the bank as a "macro-economic accountant": it is the position of the non-banks which is relevant. This fits also perfectly with Nick's view of "green money" not being the bank's liability -- think of a central bank -- and "red money" not being the bank's asset.

    So, the LHS of bank balance sheet is about LIABILITIES and the RHS is about ASSETS. Liabilities = Assets. Thinking like this helps me to form a clear picture of the macroeconomy, so I feel entitled to think like this. Thinking the other way around would blur the picture.

    Your discussion of money and hours of work reminds me of Marx. I think that is a dead-end. Money is not created by labor. You have yet another meaning of the word "money" in your mind here. Money doesn't link separate events. As a unit-of-account, it helps with bartering goods (as you, too, seem to hint). But this is not something I want to discuss further at this point. I'd rather explain in more detail how my world looks like. Once you get an understanding of it, it makes more sense to talk about this kind of issues. Now I'm afraid we just end up talking past each other.

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  22. Oliver: Don't worry about sounding too harsh. As Nick said when I was worried about offending him: this is frustrating for all of us.

    I think your impatience makes you more likely to misunderstand what I say, and the risk for misunderstandings is high already without the impatience :-)

    Institutions and ideas matter. I said I want to see the natural person behind the juridical person; I didn't say I want to abstract away from the juridical person. I do understand that the former might sound like the latter, but that's not what I meant. I recognize the juridical person, it's in my model, but I recognize it as an association of natural persons (perhaps many steps removed). (I don't recognize the natural person as an association of cells, though. This is where I draw the line. Perhaps the "natural person" is often best understood as a household, but we'll see.)

    The "principal-agent problem" is probably big enough reason to not abstract away from juridical persons?

    "In that sense 'money' is just an empty shell waiting to be filled with realistic content. But I'm all ears for other terms that carry less baggage."

    Good to hear! I'll try to provide some sounds -- if not (non-contemporary) music -- aimed at your ears in my coming posts.

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  23. Antti: In my reply to Jamie , I took great liberty with the definition of the word "barter". I am coming to think that the word needs a new definition.

    Wikipedia defines barter as "Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money."

    This fails as a definition when money itself is not clearly defined.

    You would fairly ask: "What would be a correct definition of "barter"?"

    At this moment in time, I would reply "Barter is trade of items not yet value-related on a standardized scale of value".

    But this definition brings it's own difficulty: How do you establish a value-relationship to a standardized scale of value?

    I solve the difficulty by trading an undesirable-in-it's-own-right but commonly available product (money) for the desired product. If I have appropriately redefined "barter", we can now barter a product for money and establish a value (on the standardized scale) for the traded product.

    As you say, (paraphrased) without a standardized and precise definition of money, we find it hard to avoid talking past one-another.

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  24. Still thinking about the definition of "barter".

    My mind, influenced by the Wiki definition, goes to a black-white distinction of barter. Either it is barter, or, it is not barter trade. That distinction is too harsh.

    In the earlier comment, I painted a gray picture of barter because of the murky relationship to value.

    Perhaps a better solution is to consider every trade as either barter or semi-barter .

    Now we think of barter trade as being trade where neither traded product is money nor is the trade valued in money. On the other hand, a semi-barter exchange is composed of one product that is not valued (on a monetary scale before the exchange) and a second product which is valued on the monetary scale (and could be money).

    I am still searching for a logical connection between money and the value of money. The term "semi-barter" is just another idea to consider.

    Is this making sense?

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  25. Roger:

    I agree that it's good to define 'barter' in a clear way. But I think you complicate things by insisting that the price of the goods bartered shouldn't be expressed in a common unit-of-account. Barter simply means that money is not used in the trade in the medium-of-exchange sense. It does not mean that you and I cannot barter goods by referring to their market price expressed in, say, dollars.

    What I view more relevant here is the question whether barter can involve credit. If I remember correctly, Adam Smith wrote that if money didn't exist, we would rely on barter and credit when we trade. I don't think there are many cases, in the real world, of barter NOT involving credit (what I would call "on-the-spot barter"), so I prefer calling barter anything that doesn't involve use of money as a medium of exchance. That seems to be in line with the most common usage of the word 'barter'.

    Already Jevons used the word 'barter' in a very broad way, as is evident here (from "Money and The Mechanism of Exchange"):

    "Far more important than these considerations is the fact that, where an extensive banking system exists, only a portion of the exchanges are actually effected by money. I do not lay much stress upon the use of bills of exchange as replacing money, because the degree in which they are so used must be comparatively limited, and they are rather articles bought and sold with money than money itself. But we have traced out step by step the way in which the cheque and clearing system enables debts to be balanced off against each other, so that the money is never touched at all, and only intervenes as the unit of value in which sums are expressed. Almost all large exchanges are now effected by a complicated and perfected system of barter."

    When it comes to the "gift interpretation" I'm offering, we could perhaps say it is a system of "gift barter". It is about credit, but not bilateral -- not even trilateral -- credit.

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  26. As you might see, I hark back to Jevons in my interpretation of the monetary system. For Jevons, money meant mainly gold or silver (he talks about notes too, but those are actually, whether he understood it or not, part of his barter system!), and if these weren't used, then exchanges were effect by a complicated and perfected system of BARTER. Jevons might not have been surprised at all if I were to tell him that today we don't use money at all, and instead we have perfected (multilateral) barter.

    As I've said elsewhere, I'm fine with someone calling commodities like gold or silver 'money', like Jevons does, as long as they don't at the same time call certain credit balances in banks' ledgers ("fiat currency" included) 'money'.

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  27. Antti: “Money didn't buy goods and goods didn't buy money, but goods did buy goods. If we now told Betty that she will receive money, 100 skilos, for her bananas, she wouldn't have any idea of what we are talking about”

    Antti,

    I left a comment for you on Nick’s blog yesterday. See also my reply to TMF from today on Nick’s blog about the origins of the banking system.

    I am going to read through your posts again (and skim the comments) and make a few comments of my own. After that we can have a longer discussion on the post you wrote addressed to me if you want.

    I suspect that when people decided to specialise in different trades e.g. clothes making, they would all have realised that they needed to keep track of what was going on, so they would have agreed AS A GROUP, that they needed to invent accounting and that would have led to a further COMMON realisation that they needed to invent a concept to act as a unit of measure to help with this.

    So Betty would have been part of a group of people who addressed the same problems together. For example, if Betty is the clothes maker, she needs to acquire animal skins to use in clothes production throughout the year, but she knows that no-one wants new clothes until winter. Also, if she is the clothes maker, she needs someone else to provide her with food, shelter, jewellery etc as she can no longer provide these things herself due to spending all her time making clothes.

    Everyone else would have seen a similar picture from their own specialist perspective where they were at the centre of a network of product / service exchanges with different people throughout the year, but that the exchanges varied in value, timing and frequency. They would have seen AS A GROUP that barter wouldn’t work.

    So I think that they would have invented money as a solution to this group problem i.e. Betty would have been part of the group decision to adopt money rather than someone who was asked to accept something she didn’t understand.

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  28. Antti: “Nick imagines that there exists money holdings – bits of paper in boxes – outside the accounting (ledger). He says it doesn't matter if those money holdings really exist or not. Even if it didn't matter, we must be able to find a simpler, more realistic way than an imaginary box system with green and red bits of paper to explain the records on the ledger”

    I think that Nick is using the boxes and paper as an analogy. A key problem is all of this is language. The boxes and paper ARE the accounting system in Nick’s analogy. The ledgers that you talk about are just as artificial as Nick’s boxes and paper. What matters are the rules of the system. To discuss the rules, we must first agree common terminology.

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