On Twitter @CreditSurplus asked me what is at stake in the debate over what money is. I decided to take the opportunity to do a test post on Medium.
It isn’t obvious to most people why it matters whether we understand money from a commodity perspective or a credit perspective or from some other perspective (ahem). Clearly I feel there is a lot at stake or else I wouldn’t be doing this.
I have many reasons for wanting to solve the Problem of Money. Some are moral. For example, I have never believed that unemployment was always voluntary, in spite of claims by numerous prominent authority figures to the contrary.
Some of my reasons are political. By creating a new monetary theory which explains how we can have an expansive array of free public services alongside low or no taxes, I believe we will break the impasse that is threatening both capitalism and democracy.
Some of my reasons are emotional. Can I tell you a secret? Having money in the stock market scares the shit out of me.
Some of my reasons are egocentric. I don’t want to be forgotten. I want to leave my own personal mark on capitalism. Oh, and I want to get rich. Really, really rich. But those reasons aren’t quite enough to justify giving my whole career to this problem. Nor is it clear which of the above reasons are incompatible with a credit-based theory of money.
My real reasons are analytical. I want to be better at making financial decisions. And I’m not just talking about the ordinary financial decisions that individuals make, like buying versus renting a house or investing in stocks versus bonds. I want to develop strategies for governments, corporations, and whole markets. I want to know how to operate them myself. I want to figure out what the right policy settings are and then go to war to put those policy settings into practice.
Like you, I was raised on the narrative that capitalism is all about the choices individuals make. But that narrative was nothing but a bold-faced lie. The most important financial decisions are not the ones we make for ourselves, but the ones that our institutions make for us. They decide how much we will be able to earn and how much we will be able to save. They decide whether our investments will yield good returns or not. They decide which communities will prosper and which ones will not.
I insist that virtually all of our present day financial problems are because of poor choices made by institutions, not individuals. However, I am not accusing anyone with institutional power of making poor moral choices. The poor choices made by our institutions are, always and everywhere, rooted in flawed accounting logic. That is, they are rooted in a flawed understanding of money itself.
But it isn’t even enough to get our public and private institutions to follow coherent financial strategies. We need institutions we can trust. In order to trust them we have to understand them. And the best way to understand them is to visualize them. When I talk about having a new vision of capitalism, I mean it in the most literal possible way.
The market is a massively parallel system involving millions of people simultaneously producing and consuming value in many different forms, on many different balance sheets, under many different financial arrangements. I believe that until we learn about the fundamental building blocks that comprise this universe, we will not have the ability to make good decisions when operating as institutions nor as individuals. This is the real reason why I want to solve the Problem of Money.
It’s just the first step towards a future of competent capitalism. One where we know what to expect from our institutions, and when they fail to meet those expectations, we fix the institutions until they do. It is a future where we never need to descend into moralistic finger-pointing against the bad guys. If someone is manipulating our system in a way that is inconsistent with our values, we should fix the system, not the someone. And if we don’t know how to fix the system? The onus should be on us to figure out exactly what is wrong and to fix it.
In capitalism we own our institutions, public and private. And like all of the things we own, it is our responsibility to maintain them. When they become obsolete, we must replace them with newer, better institutions that reflect our current values. Our values may evolve in time, but the one thing that I believe will never change is the fundamental logic by which we account for those values.
The logic of accounting.
My new vision of capitalism is something that has to work logically. Like a computer or a motor. This logic simply doesn’t work if you don’t have all of the necessary parts. Just like you can’t understand chemistry until you understand protons, neutrons and electrons, you can’t understand money until you understand real assets, credit assets, and finally, most importantly:
EQUITY ASSETS.
I just can’t see any way to build a realistic model of the accounting relationships in our capitalist system with only two types of assets. I need three. I need real assets, credit assets, and equity assets.
So that is what is at stake in the quest to define what money is: our ability to accurately represent our financial problems, and our ability to create institutions which truly help us to solve those problems.
If you ask me, those are pretty high stakes.
