Against money

From the blog post, which is a transcript from a speech with ideas from their book, also called Against Money:

Interestingly, one suggestion that Hamilton made for increasing the supply of “monied Capital” was for the federal government to permanently maintain a large debt. Anticipating contemporary heterodox economists, he argued that rather than crowding out private investment, federal borrowing would in effect crowd it in, because government debt was a close substitute for money — a source rather than a use of liquidity, as we might say.

[...]

From our point of view, first, they all see money not as a distinct object existing in a definite quantity, but as one end of a continuum of financial instruments or arrangements. They see money as a subset of credit. Schumpeter says that when thinking about money we “should not start from the coin,” we should not start from the discrete object that we call money. Rather we should, as all of these thinkers did to one degree or another, imagine a whole system of credit arrangements, some of which can be classified for various purposes as money. He distinguishes a “money theory of credit,” which most economists hold, from a “credit theory of money,” which is what he prefers. The starting point, the atomic unit, is the promise, not the exchange.

Second, and this is a central theme of our book, these thinkers all saw the interest rate as the price of money, rather than the price of savings. An important part of John Law’s argument for his financial reforms was that it would allow a lower rate of interest by making money more abundant. Walter Bagehot insisted that interest was the price of money, not of saving as orthodoxy has it.

[...]

In this monetary-production paradigm, the fundamental constraint is not scarcity; the economic problem is not allocation. The fundamental constraint is coordination. When we stop imagining the world in terms of discrete commodities being combined in different ways, and start imagining it in terms of human beings cooperating (or not) to do things together, the problem becomes: How do we coordinate the activity of all these different people? What does it take to allow cooperation on a larger scale, between people who don’t have pre-existing relationships?

[...]

In general, when people talk about rising household debt they attribute it to rising household borrowing. Much of the time, people don’t even realize that those are two different things. There are articles where the title of the article is something like “explaining the rise in U.S. household debt” and then the first sentence of the article is, “why are U.S. households borrowing more than before?” Or even, “why are households saving less than before?” But these are different questions!

[...]

The difference is that the interest rates facing households were much lower in the 1960s and 1970s than they were after the Volcker shock. The Volcker shock raised interest rates for households, and they stayed high for longer than the policy rate did. And during the 60s and 70s compared with the 1980 to 2007 period as a whole, inflation was significantly higher. (Real income growth was also a bit higher in the earlier period but that plays a smaller role.)

So what we have here is not a story about real behavior. It’s not a story about borrowing, about income and expenditure. All of these stories that we heard from both the left and the right about why household debt had risen — it’s because people have grown impatient, their time preferences shifted or they are competing over status or it’s inequality — none of this is relevant, because people were not in fact borrowing more.

[...]

Of course anybody can write an IOU. You and I could sit down and write promises to each other, just as you and the bank do when you get a loan. The key thing about the bank, here, is that its promise is more credible than yours. If I ask for your bicycle and promise to give you something of equal value down the road, you probably won’t agree. But I can make that same promise to bank, and the bank can then make that promise to you. And that’s fine.

This is why Hyman Minsky, the great theorist of finance, said that the defining function of banks is not intermediation, but acceptance. You can’t get a claim on labor, on real resources, simply by promising you’ll do something useful with them. But a bank might accept your promise, and then the promise that it makes to you in return can can be transferred on to other people in return for a claim on real resources, which you can use to create new forms of production that otherwise wouldn’t exist. And this is the other side of the Keynesian vision — the fact that banks can create money by lending allows for the reorganization of productive activity in new ways that wouldn’t be possible otherwise.

[...]

We can find this same principle down through the history of the corporation. When in the beginning of the 20th century we see the generalization of the corporate form, it’s not a process where large-scale investment required raising more funds. The problem that the corporation is solving is that you have large-scale enterprises with long-lived specialized fixed assets, on the one hand, and wealth owners, on the other hand, with claims on those enterprises — often the owners of smaller enterprises that merge into one larger one, or the heirs of the founder — who don’t want an interest in this particular company. They want money. And so the function of the corporate form is to allow the conversion of ownership rights into money — to enable payments that will satisfy these claimants, so that their authority over the production process can be pooled, their smaller interests can be assembled into a larger whole.

This is not a system for raising funds for investment. It’s a system for consolidating authority. It’s a system for reconciling the need for large-scale, long-lived organizational production, on the one hand, with the desire of the wealthy to hold their wealth in a more money-like form, on the other. As William Lazonick says, the corporation is not a vehicle for raising funds for investment, it’s a vehicle for distributing money to the wealthy. The origin of the corporation as we know it is as a vehicle for moving funds out of productive enterprises to asset-owners.

[...]

Where money is necessary — this is important — is where something new is being done, where there’s a need to organize production in some new way, for coordination between strangers who don’t have a relationship with each other. Money is genuinely productive insofar as the development of our productive capacity requires breaking up existing ways of organizing production, dissolving existing relationships, extinguishing obligations, and starting from square one.

Money should be seen as a specific kind of technology of social coordination. It’s a way of organizing human activity in new ways that it hasn’t been organized before.