9. A paradigm for understanding monetary economies

In: A Primer in Monetary Economics

13 Jul 2011

By: Andrea Terzi

Value transfer systems in contemporary societies

One chief reason why human societies differ from each other is because of the different ways in which they combine diverse means of transferring value.

Contemporary societies are called “monetary” because contractual obligations play the largest part, albeit other means are practiced to a lesser extent.
Gift-with-reciprocity practices are common within circles of family relationships, friendships and with volunteering activities. Organized barter is uncommon and often limited to the exchange of consumer goods or services in local communities. Negotiated bilateral barter, while not absent in interpersonal and international relations, is virtually never employed in the process of value creation.

Hierarchical relationships are ordinarily found within state and private organizations such as households, private associations including business companies (and, to be sure, within criminal organizations) as well as between the politically sovereign nation state and its citizens (e.g., taxation).

In contrast, contractual obligations with monetary settlement are the prevailing means of transferring value in contemporary societies, especially with respect to the provision of labor services and newly produced output. They unquestionably offer a powerful and effective means to organize physical and human resources as well as to deal with rising specialization and complexity of production.

Pervasively monetary production activities create their own distinctive consequences for an economy and also inevitably pose unique challenges.

The tricky features of monetary economies

As Smith claimed, a nation’s real wealth is measured by its capacity to produce output, even in monetary economies. And, as Keynes maintained, because one side of every contract gets denominated in nominal units of account, individuals inevitably deal with flows and stocks measured in nominal values.

Individuals living in a monetary economy thus develop both an interest in spending their money to obtain real values and a concern for seeking to obtain access to nominal flows as well as storing nominal value. An understanding of monetary economies, then, can hardly build on an extension of the barter system and should instead address the specific characteristics of monetary economies along the following lines:

a) In monetary economies, economic relations are contractual. When economic entities enter into contracts, they create real and nominal claims that expire on the execution date.

b) In the process, units of account and real values get transferred. Given that the monetary side of contracts is settled by delivery of a state-issued nonredeemable nominal claim, this should be investigated as a public monopoly.

c) Because contractual obligations generate nominal claims and monetary flows, monetary accounting of contractual relations and their consequences provides economic units with a score-keeping method.

d) The nominal value of financial and real assets (the latter including capital goods) is what one believes their net expected inflow of units of account is worth today. Our views about future outcomes thus influence our perception of current nominal values.

e) Because nominal claims and liabilities produce a highly interdependent and ever-shifting system, any attempt to make forecasts can hardly be based on probabilities extracted from past samples. Thus, the process of expectations formation is subject to ontological (as opposed to epistemic) uncertainty that cannot be permanently reduced.

f) Individuals attempt to contain the consequences of uncertainty by devising institutional arrangements, including wage and other forward contracts. These make nominal flows more predictable.

g) Given that labor services are offered in exchange for a nominal remuneration in a wage contract, failure of individuals to find buyers of their wage contracts is called unemployment. This is a measure of a lack of use of existing labor resources in the process of value creation.

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