I can't escape the feeling that you have left out one element of liquidity that is important in market design. Maybe I have misunderstood, but a big part of liquidity is the assurance that you will actually be able to move an asset quickly. "Noise traders" at Goldman probably aren't going to be encouraged by what you are calling "genuine" liquidity. If I understand correctly, variance actually gives them a larger opening to make a buck. Lots of money sloshing around doesn't seem to quite explain this part of the liquidity puzzle either, or at least it explains it in a very circular way. Obviously *some* things you won't buy just because you can... ripe mangos, for example. Ripe mangos have a certain value, but it declines so quickly that money isn't just going to slosh itself into the market for ripe mangos. Why isn't the same thing true of the stocks that noise traders take? "Genuine liquidity" is out, and the noise traders *are* the sloshing money, so I think we need a third aspect of liquidity to explain why sloshing money is willing (or unwilling) to slosh its way into securities markets.

The biggest areas for speculation (surely) are not long lived assets like equities but shorter lived assets like futures contracts and options. And I've always presumed that the main trade (and gain from it) is not between fools and privileged parties, but between those who are betting to hedge (in which case they're after insurance and are prepared to pay for it) and those who speculate to pick up the money the hedgers leave lying around on the pavement.

(Though I agree there is also the transfer of money from fools to the privileged - particularly in equities - by way of insider trading (of various degrees of legality and ethics)

Thanks Randy,

I'm not really disagreeing with you. I am sympathetic to the argument, but that's why I think it needs to be put very scrupulously. I agree that too many traders can destabilise and threaten the efficiency of a capital market. But I'm sceptical of the language you use. You speak of deliberate 'manipulation' of the markets and of 'noise traders' somehow introducing a volatility to exploit it. Doesn't that call for awfully big traders or collusion between them? My impression is that there are a whole lot of noise trading programs out there all betting against each other and against the hedgers. This can be destabilising and so can reduce efficiency, but the picture of the privileged and the fools I think could be quite misleading.

Yeah, "the privileged and the fools" is overstatement and exaggeration, and perhaps unwise, since it invites marginalization.

The main article, before the comments, tries to make a much more technical argument, that easy money may cause the appearance of liquidity (reduced spreads, less price impact to large trades) without actually serving the one of the main purposes of liquidity — more accurate pricing of assets, and the ability to actually trade at fair prices. To the degree that easy money induces volatility not related to a fair valuation of underlying assets, easy money increases the likelihood of misallocations of real-economy capital. "Noise-traders" in the main article are not necessarily manipulators or fools, just anyone who transacts in an asset market without valuing the underlying asset, on the (self-fulfilling) expectation that price fluctuations are loosely if at all coupled to any "fundamental value" of an asset. This is a less loaded, although still very controversial, sort of argument to make.

That said, I think people underestimate the degree to which even very large capital markets are manipulable for short periods of time. Games really are played. Capital markets have never been and are not now the efficient calculators of academic theory. Those theories shold be regarded as prescriptive rather than descriptive — we should strive to modify market institutions to make them efficient, not simply presume that they naturally are efficient. The usual stories, that any mispricing will be quickly arbitraged away, have been very well debunked by an entire literature on "limits to arbitrage", and by any practical investor's experience. Lots of short tech investors were 100% correct on fundamentals in the late 1990s. It didn't prevent any of them from going bankrupt.

Capital market manipulation is not a conspiracy theory. A single hedge fund manager can purposefully alter security and index prices for a short period of time, if she is willing to risk direct costs on the hope of indirect gains. (The famous screaming Cramer recently admitted to having done so as a fund manager, and argued that managers who refuse to do so when it is arguably legal aren't really doing their jobs.) "Momentum trading" amounts to a kind of collective, loosely coordinated form of market manipulation, in which traders rely on one another to contribute to the mispricing of an asset, while they compete with one another in a game of chicken to profit as much as possible from the mounting distortion but escape the inevitable but unpredictable correction. And in this game, there are more and less privileged players. Ones ability to be wrong in timing and still eventually profit is directly related to ones level of capitalization and ability to take on leverage with minimal risk. Some entities that make markets, provide credit, and trade on their own account have access to a lot of information that other players do not have and may, despite firewalls and whatnot, improve their timing in these games by virtue of that information.

One can easily overstate this sort of case. But most mainstream writing and financial theory very much understates the real-world liability of markets to mispricing and manipulation. Near absolute faith in markets that frequently generate erroneous signals invites consequential errors in the organization of the real economy. (That invitation has already been accepted, in my opinion.)

To Nick -- the reason I made my original point to Steve is that I have a relative who was indirectly involved in, well, let's call it market design. I took Steve's basic position; noise traders (or to use our preferred metonym, Goldman) were not actually adding a great deal to the market. My relative defended a position that he couldn't really deviate from, because it was his employer's position; even if Goldman does zero research on fundamentals, introduces unnecessary volatility to the market, and diminishes the gains to research into fundamentals, they still are essential to the market because they provide liquidity for the people who do trade on fundamentals.

So in short, Nick, if Steve and I are correct, the fact that markets are intentionally designed to attract noise traders is a serious problem. If my relative and his employer are correct, noise traders are adding a great deal of value to the market via a mechanism that is difficult to theorize articulately, and markets are designed quite well.

Let me be slightly clearer about relating my definition to yours:

You relate the folk definition of "liquidity" (an increasing money supply, largely in claims of nonzero maturity) to the "genuine" or classical "liquidness" of an asset or asset claim, that is, the clarity of its price. Then you suggest that an increase in "folk liquidity" may in fact simulate "genuine liquidity" - do I have this right?

My little response above is attempting to pin down the "folk liquidity" side a little better. It says nothing about "genuine liquidity."

However, it's worth noting that the activities of a lender of last resort introduce an enormous amount of gamable uncertainty into the market. Consider the change in dollar asset prices if the Fed "broke its plates." Consider the change if it ran the printers full out. The power of this political signal is essentially infinite.

Moldbug — Okay. I find very little in your comments to disagree with, so that might leave this a bit of a dull response. The headline essay here is a rough draft of a rough draft. I'd like to spell out more mathematically what I mean by "genuine" liquidity. If I were to do so, as you say, it would not be a simple scalar, like "the money supply is 10-gazillion dollars". As both you and Nicholas have pointed out, liquidity needs to have a time dimension. But I think we are emphasizing different things. The most "liquid money" is zero maturity money, but to me it is a definitional question, "liquid in terms of what currency or commodity?", and I'd be willing to consider liquidity in terms of some "broad money", to the degree that can be defined. But the notion of nonzero maturity money, as you suggest, implies credit risk. And fiat money implies dilution risk. One way of thinking about "pseudoliquidity", a false appearance of liquidity (low spreads at high volumes that suggest a degree of certainty in valuation that is inaccurate), is that it represents a market failure whereby agents underestimate the endogenous volatility of a currency, where despite increasing expected future volatility due to overprinting or extension of credit, agents value assets as though the "plates" had been broken already. MZM has dilution risk, but not credit risk. Liquidity defined in terms of broad money, which has both risks, is more likely to be compromised by currency volatility. But, paradoxically, since there is always many times more broad money than base money, to the degree market participants consider the two both interchangable and stable, broad money-based liquidity will seem greater than cash money liquidity. If broad money is not stable, this apparent liquidity is an illusion.

I like your B <-> A <-> Fed picture, and agree with your point that A would be insolvent by definition without the Fed behind them. I also agree that what people mean by "folk liquidity" is that certain kinds of claims or financial assets are being generated, though I don't think that maturity is the only criteria that matters. Sure, a 6 month note is always more money-like than a 30yr T-Bond, but I think it's the depth, spread, and speed of the market between an asset and cash, rather than simple maturity, that defines how money-like, or "folk-liquidity-producing" a new claim is. I agree that there's a stark qualitative difference between true cash and future claims on money, and that this difference creates the danger that much apparent liquidity will simply disappear someday, but still, the folk consider their eurodollar deposits to be liquidity, and will do so until those deposits can no longer be redeemed.

Our confusions here are a good example of why I dislike the word "liquidity."

Liquidity in the "genuine" sense of the word - "low bid-ask spreads at high volumes" - has more or less been abandoned to the "pseudoliquidity" sense of the supply of credit. This is very analogous to the way "inflation" has come to mean "aggregate quality-adjusted consumer price appreciation" instead of "monetary dilution."

I fundamentally do not think these words are rescuable. I think they have become tref and need to be buried in the dirt for at least a few years. It is some effort to invent new words, but I think it is easier than fixing "liquidity" and "inflation."

There definitely needs to be a word for the cost, defined in terms of Y, of exchanging X for Y and back to X again. Would you agree that this is what you are trying to get at with your definition of "liquidity"?

If so, perhaps a metaphor can be drawn from physics, in terms of friction, thermodynamic efficiency, electrical resistance, etc, etc. The concept is more or less the same as Menger's "saleability" or Mises' "marketability," but neither of these words sounds right to me now.

Back to the money supply sense: yes, MZM is broad money, not base money. But in practice, which is after all what counts, the difference between broad and base money is not a matter of credit risk. It is an implementation detail of our bank regulatory system, it is not related to any fundamental concept at all. (Mutual exclusion is a fundamental concept - lock files are an implementation detail.)

To anyone who is not a bank, broad money is the same as base money, because the Fed says so. Fiat bux. Anything the Fed is willing to exchange for one of their pretty little notes is a dollar.

What Austrians who define money supply as MZM miss is that the power of fiat applies not only to money of zero maturity. If you redefined checking accounts, for example, as time deposits that were rolled over every day, every hour, or nanosecond, or whatever, their economics would change only by this epsilon. Imposing a qualitative distinction at zero is bad praxeology.

In other words, it is the power of fiat itself that has a time dimension. The Fed can "print" money not only at t=0, but at t=whatever.

And it does this in the same way for t=0 and t=whatever: by implicitly insuring nominally private liabilities. Checking deposits - broad money - are actually supposedly "insured," in the actual actuarial sense of the word, by the FDIC. But of course a bank run is not an insurable risk, so the real insurer is the Fed. (I'm really not sure what the people at the FDIC do, though I'm sure if you tried to take away their staplers they would have some kind of a story.)

By implicitly insuring claims of nontrivial maturity - the canonical example, of course, is T-bills, but agency bonds apply as well - the Fed's fiat power is responsible for a significant fraction of the market price of these instruments. If you imagine the price of any of these assets if "the plates were broken" - of course, this cannot actually be measured without actually doing it - you see how much of it is fiat. This is dilution without printing - a sort of quantum tunneling, if you will. And none, or at least hardly any, of it appears in MZM.

Not even when it reaches maturity. Because it never needs to reach maturity. Claims on Fed-insured entities can be, and typically are, rolled over and exchanged for new debt. This is another fiat-world practice that would not exist in a hard-money economy. A disinterested creditor in an efficiently enforced free market should never roll over a loan. If the loan cannot be paid, liquidation is his best option. If it can be paid, and he wants to lend the money again, he should claim it and lend it to someone else.

This phenomenon - fiat dilution in the market for immature claims to fiat money - is of crucial importance when we look at monetary reconstruction. If you are willing to look in any serious way at reconstructing the monetary system, the language that has to be used is the language of liquidation, which is fundamentally an exchange of claims for equity. My assertion is that many claims which are not, legally, claims against the Fed, have fiat dilution introduced by Fed insurance as a substantial part of their market price. If you disregard this form of fiat when you reconstruct, you introduce considerable disparities in the treatment of creditors, which obviously is to be avoided. Rothbard, for example, makes this mistake in his plan for returning to gold.

Another way to say what I'm saying is that if you have a plan for monetary reconstruction, the first step in that plan needs to be nationalization of all banks, futures exchanges, and agencies, because in practice the market treats their liabilities as Federal liabilities, which makes them de facto parts of the state. Nationalizing them, and including their monetary liabilities in the book of fiat notes, is simply a formalization of reality.

The reason I say this is that you seem to hint above that you have some kind of idea of what a stable monetary system might look like, and you seem to hint that your plan is not based on the usual tawdry metals. Hm. As it happens I also have some ideas in this department. I'll show you mine if you'll show me yours...

Re liquidity, yes. It is interesting to observe the economic path by which the surface of exchange you describe is affected by dilution of the money supply, and the linguistic path by which the two became confused. But I still wish you luck in disentangling them!

I think our main distinction on dilution is that I don't think of the dilution as risk at all. I think of it as something that has already happened, a fait accompli.

These are two equally valid ways of looking at the same problem. I just think that mine is simpler.

The question is: why is a "broad dollar" worth exactly as much (to non-banks) as a "base dollar"?

The answer in your sense is that the probability of a bank run and the probability of a dilution event (ie, the dilution risk - but "risk" is a slightly curious word, as this event of course is positive for the holder of said broad dollar, though it may not be desired by others who are using their dollars to compete for the same goods and services) are exactly, or almost exactly, equal.

The answer in my sense is that the fact that these probabilities balance is not a coincidence, but a matter of policy. A political decision, enforced by the power of the state.

Which is exactly the same power that stands behind the dollar. The US government creates considerable demand for dollars by demanding said instruments from us every April 15. It is just as happy to accept a broad dollar as a base dollar.

My views may occasionally sound libertarian, but I am not a libertarian at all. I think of law as a practical rather than an ethical instrument. Property rights, to me, are just a way to keep people from fighting over property. If a better way could be devised - some drug, for example, that we could take, that would all make us love each other, and wouldn't wear off the way MDMA does - I'd be first in line for the injection.

The problem with a system in which a large part of the value of assets is provided by "winks and nods" - informal promises, such the Greenspan put - is that, in the terminology of de Jouvenel, it represents a step away from Law and toward Power. Goldman Sachs can make $20 billion a year or whatever off FICC because it is in the business of translating its informal proximity to this informal information into trading advantage. This is plunder.

In my view, the way to fix such a system is not to dismantle the Greenspan put, but to formalize it. Confiscating the proceeds of crime is an ineffective and counterproductive way to restore law. All the real estate on earth, for example, has been alienated by violence many times over. You have to look at who has what now and give them a formal title to it.

To me this equals formal dilution: replacing the informal value created by the Greenspan put with formal and accountable currency. Every claim on an implicitly insured financial institution (bank, agency, futures exchange) has two components of value: the value of the instrument and the value of the insurance. Since these cannot be separated without actually precipitating a market collapse, the correct formalist way to rectify the situation is to cancel them all and replace them with new dollars at the present market price.

If you want to take the money that is returned to you in this flag-day closeout and buy a derivative from an uninsured actor, of course you should be free to do so. But my guess is that this business would be much smaller. Ideally it would involve the matching of equal and opposite risks, as in the purchase of a future by an industrial commodity user from an industrial producer.

Back to money. Your views are actually in some ways more Austrian than mine. (The best Austrian primer, in my opinion, is the original - Mises' _Theory of Money and Credit_. Full text is online.)

I believe a star topology, as you put it, is unavoidable in monetary systems. Let me explain why. (This is all in this paper I'm writing, in my, um, copious spare time. NB: if you ever decide to design a new programming language and a revised theory of money, try not to do them in parallel. The only thing that saves me is that I have neither a job nor a blog.)

Menger and Mises, like you, emphasize transaction efficiency (your "liquidity") in the appearance of a monetary standard. Their view is that the most efficiently exchangeable good ("saleable" in Menger's terms, "marketable" in Mises') tends to become more efficiently exchangeable, creating, as you say, a star topology.

This view appears very reasonable in the historical context in which money arose, which was hardly marked by sophisticated markets. In fact, today's markets, as you point out, are lousy. (We don't have a computerized financial system - we have a paper financial system that's been ported to computers. Most people who do computerized finance seem to learn this system in much the way one might learn, say, VMS, or the Win32 API - in a practical context, that is, in which its lousiness is utterly irrelevant to their own personal objectives, and therefore need not be understood as such.)

One way to forget this is to imagine the problem not in the context of real markets today, but in the context of a virtual world (MMORPG) such as Second Life or World of Warcraft. As you probably know, many of these systems have thriving economies which seem to obey all the same principles as the real ones. And they should, because they are also based on the axioms of human action in an environment of scarce resources.

Of course, these worlds have implementation details of their own. But it somehow feels more grounded to construct an abstract virtual world than to construct an abstract real world. The planet has seen enough of the latter.

So our gedankenexperiment will be to construct a premonetary equilibrium - your mesh topology, in which no asset has a central position in exchange valuation - in such an abstract world. Then, we will try and break the equilibrium in various interesting ways, and see what happens.

My belief is that the following system is a premonetary equilibrium: a virtual world in which there are a fixed number of assets of every class (magic swords, etc), in which an asset can be teleported from any player to any other player at any time, in which there is no storage cost for inventory, and in which a central Walrasian auctioneer, limit-order book, bot, etc, provides automated exchange services.

As an owner of assets, you could simply declare the goods that you were willing to exchange any of your goods for, set them as object annotations so to speak, and the exchange would happen automatically at any point at which it was demanded. (You might want to mark up your sword for a few minutes if you happen to be in the middle of fighting some orcs or whatever.)

This design eliminates, I believe, the issue of "saleability," "marketability," "liquidity," etc. The central auctioneer can discover and execute multipoint exchanges of arbitrary complexity. No numeraire is demanded. Clearly, this is a silly and impractical design not only in the real world, but in any reasonable virtual world. But this is beside the point.

So what would break this equilibrium and create a monetary standard?

The reason I have tried to eliminate transaction efficiency from this gedankenexperiment is that I do not believe transaction efficiency is the main cause of monetary standardization. In the presence of asymmetrical transaction inefficiency and self-reinforcing efficiency, and the absence of all other causes, the logic of Menger and Mises is correct - the cause is sufficient. But I don't think it is necessary, and I think other causes are much more powerful.

Recall the problem we are trying to solve. The problem is the superficially anomalous appearance of the demand for money. Whether it is little pieces of paper or discs of shiny, attractively colored metal, money would appear to command far more in exchange than its actual practical usefulness to anyone. Why do we trade real goods and services for this apparently useless junk? What's up with that? What is the source of demand for money?

Now review the nature of a monetary transaction. You have some good A which you exchange, in exchange E1 at time t1, for some good X. Then in exchange E2 at time t2, you exchange X for some other good B.

This is a monetary transaction because you have a direct use for B, but no direct use for X. Therefore you have no concern for the quantity or nature of X. Your goal is only to maximize the quantity (or quality, or whatever), of B that you receive for your A.

The interesting question is: what is the duration (t2 - t1)? Of course it is a continuum. But if this duration is short, we can characterize the purpose of the exchange as "trade." If it is long, we can call it "hoarding." (Some would say "saving," but this word has the same kind of problem as "liquidity.")

If we look at the aggregate societal demand for goods of exchange (X), it is fairly easy to see that, in any normal human society where the world is not likely to end tomorrow, most of this demand will come from hoarders.

From the perspective of the prospective hoarder, the choice of X is less likely to be controlled by the overhead of the exchanges E1 and E2. It is more likely to be controlled by the cost of storing X over a hoarding (eg, multiyear) timeframe, combined with the expected change over that timeframe of the exchange rate X:B.

Back to our virtual world. Let's introduce some reality.

Consider Sven, a fisherman. He sails the virtual sea, he fishes the virtual fish. These fish are goods - perhaps you feed them to your pet orcs or whatever. But they are fish, so they do not keep. Sven cannot store his virtual fish in a pile in his virtual backyard.

Therefore, if Sven wishes to hoard for his virtual retirement, the trivial option of X = A is not available to him.

Here is our source of anomalous demand. Sven must choose some X to hoard, which is not a good that he would ordinarily demand. He has to sell his fish and exchange them for something. How does he choose that something? What is his strategy?

Remember, he wants to maximize the exchange rate A:X:B, where A is fish. And - more crucially - he is not operating in a vacuum. He is not the only fisherman, or the only producer of nonstorable goods. He is operating in a world of many Svens. This must factor into his price projections.

This is getting long. But my view is that if you look at this problem, you see four things.

One is that Sven's goal is best served by choosing the same X as everyone else. Otherwise, he is bidding up the price of an asset that is already fairly priced. If Sven and a few other Svens choose some X1, but the rest of the world chooses X2, X1 will appear to be an overpriced asset and its increase in price will not be sustainable. The mass exodus from X1 will become a self-fulfilling prophecy. There can be only one. (Bimetallic standards, for instance, are inherently unstable.)

Two is that if society has not already made a clear choice of X, Sven should look for a storable good whose supply is rigid, or whose cost of production at least increases with the quantity already produced - because it is these goods whose buying power is most likely to be increased by an influx of hoarders, and thus will be favored in the Highlander-style competition.

Three is that once X is chosen, it naturally becomes the basis for all monetary computation in this world. For example, the natural interest rate is defined in X.

Four is that if some upstart Y intends to dethrone X, it can do so only by being a harder currency than X - by projecting a scenario in which the exchange rate X:Y will move sustainably over time in favor of Y. Once this consensus reaches a critical point, Y will become the new monetary standard and X will be valued solely on the basis of its utility. This transition is self-reinforcing and may be extremely turbulent.

I'm making unsubstantiated assertions here, so I should stop. But I'd be curious to hear what your first reaction to this hypothesis might be - especially since it directly contradicts your assertion that the problem of preventing a star topology is manageable.

Steve,

It is a pleasure to see the perspective of 20th-century economics so elegantly and fairly stated.

My feeling, however, is that this particular period of history was the most destructive since the aforementioned entactogenesis, and the fondness it still enjoys in our minds is a product of personal reminiscence and political propaganda, both of which can produce intense emotion but are not noted for secular constancy. And of course the impressive economic successes that occurred on this century's watch can be attributed entirely to its technical prosperity, which did much to compensate for its monstrous crimes, but can scarcely be counted as an argument for or against it. 20th-century science and engineering was simply a continuation of the 19th century's work, and there is very little factual basis for anyone to estimate how well this work would have proceeded had the aristocratic legal, political, and economic structures of the 19th century remained intact. Their destruction at the hands of an alliance of Gracchist politicians and moralizing intellectuals cannot be measured as either gain or loss by any objective method, though it is perhaps illustrative that the most successful states of the early 21st century, at least measured by standard indicators of government customer-service quality such as tax and crime rates, such as Dubai, Hong Kong, Switzerland, Andorra, Singapore, and so on, look a bit like "living fossils" of the 19th.

In other words, I am not sure you have applied adequate consideration to the possibility that, contrary to the consensus perspective imparted I'm sure in your education, that the grass actually was greener.

Because of my heterodox opinion of this period, I don't consider the 20th century a good source of historical analogies, especially for anyone who means to praise some design feature that changed from the 19th to the 20th. It's like saying that segmented addressing is great, because it worked so well on the 80286.

Of course, there are certainly nontechnological aspects of 20th-century society that I think any reasonable person would conclude were improvements on the 19th. But to regard the general course of legal, economic, and political change over the last century as one of advance, even nonmonotonic advance, is a proposition with which it would be almost impossible to find any intellectual figure of 1907 to concur.

Or suppose an alien mothership somehow could introduce 20th-century science and engineering into 1907. Pick up the contents of a university library and send them back in time. What do you think the result would be? Sure, there would be some dislocation, but I think it would be very difficult to argue for any result but an enormous economic boom.

Now suppose 2007 society was reduced by some disaster to 1907 technology. Not only would we see a tremendous adjustment shock, there is simply no way that the world of 1907 could create and support the official-sector structures of 2007. Any political system in the world today, perhaps excluding the "living fossils" mentioned earlier, would be too heavyweight to function. Kind of like running Windows XP on a 286, in fact.

I realize that this is not a point of view one hears a lot. Nor do I feel that this fact is entirely coincidental, although this is not by anyone's direct or personal design. I think it is just a consequence of evolutionary selection in an extremely successful system.

Three books I have read that have helped clarify my views on this subject are _Three New Deals_ by Wolfgang Schivelbusch, _As We Go Marching_ by John T. Flynn, and _On Power_ by Bertrand de Jouvenel - especially the last.

So I think the large-picture perspective that it is difficult to see in the current political order of the world is that it is, as so many people with unfashionable prejudices have said, a system in secular decline.

In other words, I am tempted to say, in a surely politically incorrect phrase, "who is this we?"

I recently read a rather interesting book, Theodore H. White's _Making of the President 1960_. This as it happens was written, in fact, in 1961, in other words before JFK's assassination. It tells a story of the New Frontier that is the same in some ways as the one I grew up with, but not in others. And one thing that struck me in it, particularly, was White's description of the Kennedy men as - I forget the exact words - basically, jaded and worn-out.

Wow! I mean, this is the New Frontier we're talking about, this according to NPR is the golden age of youthful brilliant energy. The Harvard faculty is seemingly descending en masse on the city by the river. Or at least this is what I was taught. But, when you read a contemporary description, it is actually cynical and disillusioned. What up wid dat?

What's up with it is that the real zenith of the American mandarin class - which is simply my definition of the kind of people who went to Brown with me - was actually around 1937. If that. The really essential documents are Bellamy's _Looking Backward_ (1888) and House's _Philip Dru_ (1912). But, since the window of personal memory only goes back so far, the aureate glow advances. Right now it is the civil rights movement and the resistance to Vietnam, a war which looks like it can be refought on an indefinite periodic basis with only minor variation.

So here is my answer: at this point in the cycle, I do not believe that designing new solutions which are not stable is a useful exercise. Deck chairs, Titanic, etc. Since you know your approach is unstable I feel no need to elaborate on it.

Another way to say this is that your answer sounds like an answer to the problem posed by John Rawls, of which I'm sure you are aware. This exercise is very useful in principle, but Rawls himself makes the mistake, which as one might expect has been generally copied by his disciples, of omitting that the most important and difficult aspect of the veil-of-ignorance problem is that of selecting, not from all possible organizations of society, but all possible organizations that can be formed and maintain themselves indefinitely without divine intervention.

In other words, Rawls' problem frequently serves as a surreptitious mechanism by which to reinject a God, and a strangely Christian God at that, into the problem of constituting legal systems. Which is no surprise, because the tradition which gave us Rawls, John Dewey, and similar thinkers, is a thoroughly Christian tradition. It traces back to the Unitarianism of John Adams and William Ellery Channing, forward from them to Emerson and the transcendentalist statism of Lincoln and the Bellamies, and of course earlier back to Jonathan Edwards, Oliver Cromwell, and Jean Calvin, and it is today epitomized by such influential and well-established institutions as Harvard, the United Church of Christ, Greenpeace, National Public Radio, etc, etc, etc.

(Not that we didn't already have a constitution. But strangely, I don't recall it mentioning Mr. Rawls. Or the Federal Reserve, for that matter.)

The fact that, on the basis of what any nontheistic person can only consider a minor doctrinal detail, this tradition no longer calls itself Christian, is most simply explained as a parasitic mutation strategy in order to evade the separation of church and state, and establish itself as the official creed of a monotonically expanding civil service and educational system. Historical precedents for such a strategy are nothing if not abundant.

Hopefully all of this won't someday leave me wondering what, exactly, I'm doing in an adult education facility in Alaska. But if you're wondering why I start from different premises than you, well, this is why.

And to be even still more pragmatic:

You mention civil strife as a consequence of "unfairly" distributed resources.

The case is exactly the converse. Civil strife is the consequence of the inability of a legal system in which property rights are defined as a function of "fairness," rather than as formalized artifacts of history, to prevent violent disputes. This is ensured by the fact that there is no way to construct any standardized definition of "fair" property rights, on which all can agree and none can, cloaking himself in apparent and usually quite real sincerity, adopt the tools of physical or political violence to dispute. Or at least no such definition has been seen in the wild as far as I am aware, and it has not been for lack of attempts. This is especially compelling considering as exactly this concept of egalitarian distribution has been readily apparent in the religion which the West has followed for most of the last two millennia.

Gracchism has always been, and always will be, presented as the cure for civil strife. Pay off the mob and it will quiet itself. If you apply this approach to the problem of impecunious and underprivileged youth at one's adolescent educational institution, who at least in my experience can be quite insistent on the injustice of the structure of wealth in society, you will find yourself embarked on a course of consistent prandial asceticism, not to mention daily humiliation, that can be quite difficult to reverse. Or indeed so it proved for Rome, and it is hard to see how any different lesson should apply for us.

In other words, civil strife is not the result of the rich denying their goods to the poor. It is the result of some of the rich offering some of their goods to some of the poor, in order to shape them into a political weapon. Gracchism, or Caesarism, or welfare economics, or whatever you want to call it, is a perfect iatrogenic therapy. It may not be necessary, but it is quite sufficient, to cause the disease it purports to cure. This keeps the doctor coming back, though of course he cannot and will never put it to himself in this way.

Am I getting through here, or am I just belaboring a point which you have already considered and rejected? The effort does seem worthwhile to me, but perhaps I'd better stop here.

MB — Oops! Just posted after seeing only the first of your series of comments! I guess I'll read the rest now...

Steve,

While it is always a pleasure to assault on a broad front and meet with determined resistance along its full length, rather than the typical complaint that any system of thought which is both unconventional and general violates some intellectual Geneva Convention which requires us all to be either pragmatists, specialists, or preferably both, please be assured that any damage to either your keyboard or your marriage is the farthest thing from my mind. I speak as one who has actually worn holes into more than one keycap, and as for the tolerance of my girlfriend, sometimes it simply passeth understanding.

I am afraid I have probably mischaracterized some of your opinions by identifying them with the closest conventional equivalent, a tactic that drives me into a white-hot rage of keyboard-destroying fury when it's used on me, and I apologize for this as well. Please be assured that any such offense is unintended. You have clarified a bit and I will try to fill in the gaps.

To start with, let's look at your "quasimarxist" claim that something about the legal, social, or political nature of 19th-century Manchester liberalism was inherently unstable. An instability which you compare to the point, on which we agree, that the moneyless economy you propose is unstable.

Well, clearly something about the system of the 19th century was unstable, because it did, in fact, collapse. Moreover, its collapse was predicted by numerous 19th-century writers whose worst fears were realized to an almost eerie precision, including Tocqueville, Burckhardt, Spencer, Acton, etc. So historical determinism aside, there is clearly some pattern in these events.

This is not in any sense a scientific question. It cannot be settled by the presentation of evidence. It is a matter of perspective. You see one pattern, I see another.

My interpretation of these events generally follows, as I've said, Bertrand de Jouvenel, though you can get much the same story from Erik von Kuehnelt-Leddihn, Albert Jay Nock, (later) James Burnham, etc. But Jouvenel attacks the problem in an extremely systematic and effective way without a trace of romanticism or Hegelian mystery, and I like his presentation the best.

The tragedy of the 20th century, per Jouvenel, is a fragment of a trend that is continuous and almost, if not entirely, monotonic: the decline of law and the rise of Power. (Jouvenel generally capitalizes the word "Power," which is a little Continental for my taste, but can be clarifying, so I will follow his usage.)

All the centralist and demotist tendencies of the 20th can be seen, if you adjust your spectacles along the law-Power axis, not only in the 19th century, but also in the preceding four or five.

To Jouvenel, for instance, the French Revolution was not the overthrow of the absolutist state created by Louis XIV, but its natural culmination. The First Empire was not a perverse and ironic reversal of the ideals of 1789, but their logical consequence.

Huh? How does this make any sense at all? What is the difference between law and Power? Surely law, after all, is not self-enforcing? Surely it depends on Power? Aren't they just the same thing?

This is probably not the way Jouvenel would put it, but you can think of law as a special case of Power. Law is the subset of Power which is simple and well-defined. When law becomes ambiguous, it becomes indistinguishable from Power. And beyond a certain threshold, complexity is ambiguity.

Simplicity is the cure for violence. For example, if we postulate an imaginary oracle that could predict the outcome of any battle, we could eliminate war. The predicted loser would have no incentive but to concede to the demands of the predicted winner. But since there is no such oracle, the only way to avert violence is to define an algorithm simple enough for both sides and an independent third party to execute with minimal chance of disagreement, and endow that third party with whatever Power it needs to enforce that result - and, ideally, no more.

The word "violence" demands clarification. Violence does not always involve bloodshed. The point of violence is for side A to use "any means necessary" to convince side B that resisting some outcome is counterproductive. Thus we consider robbery a violent crime, even if no one is hurt.

Similarly, a battle may be resolved by agreeing to fight not with real guns but with paintball guns, and respecting the outcome. Or by setting rules that reduce but do not eliminate the physical damage of battle, and have no significant effect on the result. Symbolic and restricted violence of this sort is common in primitive humans, and indeed is the general rule in the animal kingdom. In general the goal of symbolic violence is to figure out who would win in an unrestricted fight to the death. As long as the results of these processes are identical, there is no incentive for either party to deviate from the symbolic convention. And even if they are not quite identical, the parallel may be good enough.

Another symbolic way to resolve a battle, for instance, might be to simply count the number of soldiers who show up on each side. We see here the roots of democracy, which once factions emerge - as, the Federalists notwithstanding, they always do - is a sort of regularized, symbolic civil war. It is no surprise that when you try to impose democracy on a country in which some faction believes that a real civil war will produce better results, the symbolic restraints tend to evaporate.

Therefore, when we define Power as ambiguity and ambiguity as complexity, we can consider the decline from the elaborate precision of medieval law, with its principle of rex sub lege, to 20th-century democracy and Holmesian "legal realism," as a self-reinforcing complexity collapse - a process surely not unfamiliar to any programmer.

The interesting question, the "quasimarxist" claim you raise, is: what was the cause of this collapse? And did it have anything to do with hard money, laissez-faire, etc, etc?

We can certainly identify the currents of demotist faith behind the disaster. I have done a little of this above. I would argue that demotism (ie, leftism) is an essential part of Christianity, maybe even its most important element. To me leftists seem if anything much more Christian than the traditionalists who call themselves by that name today.

But this doesn't really answer the question, because it doesn't tell us why this ideology became so popular at this time. Certainly, as the history of Catholicism shows, Christian fervor is also quite compatible with extremely aristocratic and hieratic institutions.

I have spent far too much time around leftists to doubt their sincerity. However, human psychology is very good at rationalizing its interests. It cannot be denied, for example, that the giant flocks of young aristocrats who have decided that NGO work is the capstone of their pyramid of needs tend to be deeply sincere about the causes they have chosen. But it also cannot be denied that these institutions of public service are the most obvious path to status and Power in today's world, much as the Jesuits or Dominicans might have been in another century, and the pattern of a society in which young aristocrats put most of their non-hedonic energies not into producing goods and services, but into scheming for Power, is quite familiar from history.

In other words, Gracchism attracted ambitious aristos because this strategy seemed likely to succeed, as indeed it did. If it had been clear that the assault on law would not succeed, it might not have happened at all. Certainly the Roman Republic had seen many a year before the Gracchi.

This is a classic description of a feedback loop. Power, in my view, behaves much the way that bad code behaves in a software system. The "Big Ball of Mud" pattern is always out there. There are many ways to the top of this mountain. And the only way to prevent it is to be absolutely vigilant, even paranoid, in rooting out complexity - Power - wherever it is found.

For an example, let's look at leftism a little more closely. As I have said, once you replace "justice" with "social justice," Power's nose is in the tent. There is no precise definition of "fairness" or "equality," and that is what kills you.

My contention is that once private charity becomes official policy, the battle is lost. There is no point of principle on which the decay of law into Power can be resisted, because you have already accepted the principle that whatever the People can extract, they will come to feel they deserve. (Spencer in _The Man Versus The State_ is particularly good on this.)

Can this process be reversed? Let's imagine restoring law to a welfare state.

My position, as I've said, is Jouvenel's: that the natural course of power is growth. When we aim to not only check but actually reverse this growth, we are trying to solve a very difficult problem. And beggars cannot be choosers - no pun intended.

Therefore, when we try to formalize ambiguous power dynamics and return to a state of law, it is a very bad idea to try at the same time to redistribute scarce goods in a way that strikes us as superior for some abstract reason. Rather, we should take the approach that is most likely to succeed. Which is clearly an approach that confirms the ownership of everyone to whatever goods he or she has, in the period of violence, managed to lay his hands on.

So the way to reformalize a welfare state is not to end welfare, and not to end the taxation that funds it. It is to consider that the welfare recipient has, by the use of power, acquired a claim on the state. If we try to cancel that claim, said recipient, and (more importantly) his or her political patrons, become our enemies, and we make the establishment of law more difficult. Which is not a problem we need to have.

The state, freed of its mystical trappings, be they theistic, demotistic, or whatever, is simply a large corporation. So the welfare recipient gets a share in that corporation, or possibly a bond issued by it.

What assets does the corporation own in order to make this claim valuable? Well, national forests, gold reserves, and so on, of course. But its most valuable assets are its claims on its citizens, who are simply corporate serfs. (You are a serf if someone else has a permanent lien on your income. For example, in the 19th century before the liberation, an effective enforcement apparatus allowed Russian landlords to let their serfs move to the cities, while still receiving a predefined fraction of the proceeds of their labor.)

From this we see my own personal preferred path for the dissolution of the post-1945 system of government, which is not to destroy the existing states, but to demystify them, and migrate their ownership and management toward well-understood models of agent-principal separation. They can then be expected to dismantle and decentralize themselves simply for efficiency.

I think the most efficient size of a government is a single city, and I think a global system of privately owned cities, competing on the basis of the usual customer service criteria, would be extremely stable and provide very good service.

Especially if your citizens are mobile and can skedaddle, aggressive violence is unlikely to be profitable for any firm as a whole. My view is that aggression is common in state actors because states historically have not enjoyed a clean separation between agent and principal. Instead, they have been run for the benefit of their employees, invariably resulting on competition between employees for the unformalized distribution of the profits (something you can see all the time on "The Sopranos"), and aggressive war certainly brings glory and power to those employees who specialize in it. For the state as profit-making company, in theory there may be some paths by which aggression could increase the dividend rate, but in practice this is likely to be a very dubious business plan. (This is also why Europe in the age of monarchy, in which the state was to some extent a family-owned corporation, tended to be less violent - Hans-Hermann Hoppe is very good on this point.)

Defensive and deterrent violence, however, is a necessity for corporate survival. And preventing either the corporation's employees or its customers from seizing its assets and redirecting their profits away from the legitimate owners is a sine qua non, and hence a core competence, of the profitable state. The sort of salami tactics that we saw in the democratic degringolade are unlikely to be tolerated - Power will not gain its deadly foothold.

I hope this answers your question as to why the 19th-century system of government was unstable and collapsed, and how a restoration of law can be made stable and effective.

(I can't tell whether or not you are expressing agreement with the conventional view that hard-money finance collapsed - ie, in 1929 - as a result of its own intrinsic instabilities. If so, I recommend Rothbard's _America's Great Depression_. Short summary: it didn't jump, it was pushed. 1920s economics were an intermediate point between prewar economics and what we have today, and the failure to restore the Victorian financial system was exactly that, a failure. Indeed, 19th century American and British finance was itself constantly battling with fractional-reserve dilution, and this period should by no means be regarded as a paradise of hard money. If you want a hard target to practice on, the Bank of Amsterdam is the most recent clearing system with zero dilution.)

Now when we turn to your monetary proposal, we see, I think, an entirely different form of instability.

As I've explained, even completely eliminating transaction costs does not by any means eliminate the pressure for a star topology, which is primarily the result of the fact that humans want to save and not all goods are saveable.

Intuitively, especially if you know something about investment, you would expect this "monetary energy" to distribute itself evenly across all assets, increasing the price of each by the same percentage. But when you look at the game theory of it, this is simply not how it works. Instead, the only equilibrium strategy is for all savers to pile into a single scarce good.

Preventing this involves an enormous game of Whack-A-Mole. This game is being played as we speak, and it involves financial tricks, legal discrimination, and the management of public opinion. My view is that the first and the third are not very sustainable, and probably reliance on the second will have to increase. But in any case, here is Power aplenty and in all directions. Lower the bar and throw your citizens in the slammer if they keep gold, and watch them stock up on, say, palladium. (Or, more to the point, real estate.)

Even today financial authorities are constantly trying to suppress asset bubbles. And this is with an existing fiat monetary system, that even though it happens to be diluting at 10 or 15% a year, still basically kind of works. It strikes me as very implausible that money - that is, a single overvalued asset - can be prevented from emerging in a moneyless society. Even with all the Power you are ready to apply to the task.

And what is the end of this? The reason I assumed you favor dilution is that you seem so clearly opposed to saving. This is how the 20th century state funded itself - by confiscating savings, typically through dilution. If your goal is not to do so, what is the source of your opposition?

"Distorts rather than contributes to the efficiency of production." This is perhaps the center of your argument, if I may be so bold, and it is certainly familiar from the logic of many who have found money to be the root of evil.

If there is anything I've learned from Austrian economics, it is that here, perhaps, is one place that the hackneyed analogy of Einsteinian relativity is actually useful. I believe that the central fallacy of 20th-century economics, really most due to Fisher, is that since monetary effects on pricing are unpredictable, since the aggregate demand for savings affects all prices, there must be some other scale that is more reliable (eg, Fisher's price indexes).

The history of 20th-century fiat economics is the history of the search for this fixed reference frame, this luminiferous ether. It simply does not exist. The only way to compute profitability is in terms of money itself. Any system that attempts to compensate for changes in the demand for savings, which is the demand for money, has no objective basis for calculation, and simply introduces additional sources of distortion into the signal. The composition of price indexes, for example, is arbitrary and meaningless information. It is little wonder that there was never any significant demand for price-indexed contracts.

Money can always be priced precisely in terms of itself, and it does not appreciate. Defining a holder of money as a receiver of rents is a distortion of the concept of rent. Nor are declining prices, a normal phenomenon in the presence of increasing productivity, any impediment to moneylending. Money will be lent if it can be used to generate a positive risk-adjusted return. If it can't, society clearly has no use for capital, which is surely not impossible in theory - maybe we really all can become Zen monks.

So if you conclude that money is necessary, and that it must be restricted, you are left with two choices. You can use a commodity that is restricted by natural forces, or you can use one that is restricted by political forces - that is, Power.

I favor the former because of my belief in the tendency of Power to expand itself. Because it can do so, and so easily, by shirking its duty to prevent creation of new money, it cannot be trusted with this duty.

It is remarkable that there is a book which almost every Western intellectual has read - Tolkien's _Lord of the Rings_ - whose core theme is precisely this. What is the Ring, but the Power of monetary dilution? Of course, I'm sure Tolkien had no such specific analogy in mind, but that is the greatness of great fiction. Or at least it is supposed to be. Yet the lesson of Boromir strikes me as if anything less understood than ever. (Maybe it's just because the movies sucked so much.)

Anyway. You ask: if not precious metals, then what?

Well, in practice, I do think it will be precious metals. But, as I said, I do have some other ideas in this direction. However, I would like to keep them off port 80 for at least the present time. If you're still interested, we can take this to port 25...

Steve,

I hope you'll excuse the delay in responding. I am actually trying to write some code here, occasionally, and my girlfriend's ability to suppress the fact that she thinks I've spent too long on this project cannot be tested too much longer.

And of course your responses do actually call for some thought - they often seem clearer and more coherent than mine. Hopefully this is not because you are right and I am wrong, but just because you're a better writer.

Definitions, as you say, are often critical. This is why I like to make up my own, and avoid associations that others have. When I borrowed Jouvenal's terms "law" and "Power," I broke this rule. This was perhaps useful at the time, but now you are discussing these words based on the associations that you, and the other 99.999% of humanity who I assume haven't read Jouvenal, ascribe to them. Obviously it is impossible to consider this foul play. So I would rather withdraw the words and start all over.

I consider myself a logical pacifist and a formalist. Let me define these words as precisely as I can, so you know where I'm coming from. To reach my reference point:

Start with John Rawls' veil of ignorance. No abstract judgment of a society should be based on assumptions that can be expected to favor any one segment of a society over another. This does not mean that everyone will do as well as everyone else, but that any quality metric we define must be judged over its effect on the average citizen of the society with simple equal weighting. (This is not a consequence of logic - just an ethical assumption that I happen to share.)

Do not confuse this algorithm with any kind of reification of the group, a la Filmer, Rousseau, Hegel, etc, into an individual. Linguistic tropes such as the "democratic we," the word "society" without any article, etc, are extremely dangerous and confusing. The temptation to apply thoughts and motives to these constructs, which can exist neither physically nor ethically, is great, and the resemblance to theistic anthropomorphism is troubling.

Remove the progressive fallacy implicit in Rawls' actual solution to this problem, which passively postulates a "Rawlsian god" who can instantiate any social design and use his superpowers to make it actually work.

Instead, judge designs by how well they maintain their intentions over time without any kind of divine enforcement, and how easy they are to migrate from present conditions to their intended steady state.

To judge a steady state you need an ethical metric. This can be anything you want. If your ethical metric says that the best society is that which sacrifices the most prisoners to Huitzilopochtli, so be it. Since no system of ethics can contradict reason, reason works whatever your ethics may be.

For example, let's look at one design pattern for government: anticolonialism. If your ethical metric asserts that states should be judged morally by whether they are administered by genetic relatives of their citizens, decolonialization was a smashing success. If it asserts that states should be judged morally by their adherence to traditional European precepts of natural law, it was an appalling disaster.

Note that the intentions of the people involved in the actions that resulted in decolonialization have nothing to do with this. With this approach, it is generally easiest just to assume that all political actors are sincere and have benign motives, or to be precise motives that they themselves consider benign.

The simpler an ethical metric is, the easier it is to apply. And this is important, because social systems can often be very complex. A good evaluator is, like any good standard, as simple as possible - you want everyone in a society to perform the same computation and produce the same result. Evaluating a political design in terms of both quality and feasibility is an O(n*m) problem in terms of complexity. Ideally in practice it should feel like O(n).

My ethical metric is that I prefer to evaluate societies by the level of predictability in their allocation of scarce resources. This of course includes the assignment of onerous tasks, which can be thought of as negative resources.

Since, as I've explained, predictability is the converse of conflict, another way to state this goal is that it consists of minimizing violence. Basically, I feel that violence is the cause of such a large percentage of human ahedonia that all other criteria are effectively negligible. However, I am a logical pacifist, rather than a romantic pacifist, because I am concerned not with intentions but with results.

Obviously, "violence" is a continuous scale which cannot always be simplified into a single dimension. A few vague discrete categories can, nonetheless, be discerned, and hopefully elaborating them will help define how I use the term.

I'll use the analogy of grades. Since these are blurry, we can speak of A-, D+, etc, etc.

A "class A" society distributes and assigns resources on the basis of need and burden - as some might say, fairness. If you are the person to whom some burden is lightest, you will carry the burden. If you need something more than anyone else, you will probably be the one who gets it.

A "class B" society distributes and assigns resources and burdens on the basis of formal rights. A right is "formal" to the extent that it can be computed by an algorithm that, when executed by any two reasonable people, will produce the same result. A class B society maintains Pareto-optimality, allowing any of its members to transfer any of their rights, and does not create artificial scarcity in resources which could otherwise be shared by all. Also, a class B society does not attempt to manage the psychology of its citizens.

A "class C" society is like a class B society, but it does create artificial scarcities, limit transferability of rights, and enforce other non-Pareto-optimal constraints. It may also have some rights that are poorly formalized or enforced, resulting in unpredictability and hence conflict. And it may impose some level of psychological training on its citizens.

A "class D" society is one in which conflict is widespread and its outcome is often unpredictable. However, this conflict does not result in widespread unlimited violence. For most disputes, a single monopoly of power still enforces a single outcome which no party has any incentive to challenge. For example, illegal executions do not violate class D, as long as they are ordered by a single coherent authority, and are the result of some considered process which prospective victims can understand and evade.

A "class E" society is one which includes widespread unlimited violence (war), but parties to that violence agree on contexts in which their actions are constrained - for example, if they do not permit their soldiers to burn villages and bayonet children.

A "class F" society is one in which members can and do use any effective tactic in any context to achieve their goals.

Obviously, the most desirable level is class A. I would rather live in an A+ society. I think most people would.

Any non-dysfunctional family, for example, is a class A society. Many extended families are as well. Possibly a kibbutz, even, is an A or A- system. We can call class A "fraternalism."

I personally do not believe that class A scales, at least not if your citizens are humans as defined by any common contemporary gene pool. You certainly could breed a line of bipedal pongids for which a large class A society would be viable, but I'm not sure "human" would be the right term for this animal.

A class B society corresponds to the usual ideals of classical liberalism. I like the word "formalism." Since I believe that class B is the highest grade achievable - any attempt, I think, to produce even B+ will only give you B-, at best - I consider myself a formalist.

The US and Europe today are probably a solid C. Some of the best Communist countries might have gotten to C-. As long as you were an Aryan, the Third Reich before the war was a C- (if you were a Jew it was a D or D-). Hong Kong, Dubai, etc, might be C+ or even B-. We can call class C "nationalism," "demotism," or "statism."

A class D society is Stalin, Saddam Hussein, etc. A class E society is WW1, WW2 on the Western front, etc. Class F gets you into genocide, terrorism, bombing of cities from the air, etc, etc. Minor distinctions here are increasingly unimportant, as you just don't want to go there.

So to backtrack to Jouvenel: while his thinking is quite complex and I'm sure I'm trivializing it, I would define "law" as class B, and Power as C through F.

Following Jouvenel, the pattern we notice in history is that the farther a society is below B, the more it is more likely to decline than rise on this spectrum. This tends to support the hypothesis of complexity collapse, which behaves exactly in the same way.

(It is an ugly and disturbing fact that all societies in history that reached or at least approached class B evolved as survivals of some continuous tradition with preliterate roots. We do not really know the source of the Greek, Roman, Hebraic, Germanic, Chinese, etc, legal systems. Their designers, if such there were, left few if any notes, and their histories show a general and monotonic decline in simplicity.)

In the context of programming, I like to use the analogy of semiconductor fabrication. If you set up a fab in a stable, there's no reason to make the stableboy wear a bunny suit. Complexity breeds itself, like dirt, and the way to eliminate it is to focus on the biggest sources first and readjust your priorities as your results improve. In other words, get rid of the horse before you try to get rid of the horseshit. Then work on the hay, the oats, and so on down to submicron particles.

So you invoke Einstein: "But there is a rejoinder, that a system ought be described in the simplest manner possible, but no simpler than is possible, given the complexity domain."

Perhaps. Although it's not clear that Einstein's views on political or economic subjects were exceptionally perspicacious.

But my point here is that simplicity is - for me - not simply one quality of a good solution, subject to tradeoffs against other goals. For me, simplicity is the only nonnegligible measure of quality, because I equate complexity with violence, and I believe that all social problems are negligible compared to violence.

(Obviously, this depends on a large number of ethical assumptions which I hope I have made explicit. If your assumptions differ, your mileage will vary. I am not trying to set myself up as the Pope here. I am just trying to explain where I'm coming from.)

For me, therefore, one showstopper in a political design is any source of unbounded complexity. I believe in taking an extremely conservative approach - not in the political sense, but in the engineering sense - to any such object.

One analogy for this task is bridge design, not in its present CAD-enhanced form, but in the traditional rule-of-thumb practice, entirely unenlightened by mathematics, that created so many of Europe's beautiful old bridges. In fact even the earliest suspension bridges were built by rule of thumb. The way you work when you do not have math to guide you is that your margins of safety become very wide. I don't really think of myself as a Burkean, but this attitude is surely an aspect of Burke, and it is present in much of the best conservative thought.

Okay. Enough about this. Hopefully you now understand the style of design I'm trying to apply.

Let me explain where, from this perspective, I see your approach going wrong. I will start with the problems I see that I think are largest and hardest to fix.

My first problem is that you seem to be designing a monolithic solution, not a distributed one.

One simple design pattern for class B systems is hierarchical symmetry. That is, if we can design a class B system that works for a limited number of actors, but does not scale to billions, or has problems with culturally heterogeneous populations, we can define each actor in the high-level system as a class B system itself, and customize or use a less scalable design within it. This keeps us from having to define one system of law that binds all 6 billion or whatever people on earth.

Therefore, one very desirable property for a design that claims to implement class B is that it can coexist peacefully and openly with other class B systems which it does not control. We can call this property "compatibility."

For example, if a purportedly class B design has to resort to aggressive violence, exit restrictions, etc, etc, to prevent its citizens from jumping ship and moving to these other external class B systems, the design clearly violates class B in the context of compatibility. Even if it achieves class B as a monolithic system, it is less useful than compatible B designs.

If your approach is designed to achieve compatibility, this is not obvious to me. You seem to be designing for a single world state. An interesting problem, certainly, but not I think as useful as the same problem plus the compatibility constraint.

My second problem is, as you expect, with our differing definitions of rent-seeking. I say:

Defining a holder of money as a receiver of rents is a distortion of the concept of rent. Nor are declining prices, a normal phenomenon in the presence of increasing productivity, any impediment to moneylending.

You respond with:

Rent-seeking is called rent-seeking not because rent-seekers are without skill. Rent-seekers can be very clever: witness structured finance! What defines rent-seeking is not stupidity or laziness, but skimming the fruits of the real economy without contributing to their production.

Rent-seeking is consequential. Genuinely productive economic activity that would otherwise occur will fail to occur if producers will find it unprofitable after rents are extracted from them.

This is precisely the root of our difference. I am working with a class B definition and you are working with a class A definition. My belief is that empirical observation indicates that the probable, if not certain, result of imposing class A rules on a large society will be a class C system.

My "rent" - call it rent_B - is defined in a way that forces it to violate the rules of the class B system - to attract, as it were, the attentions of anything like a working immune system.

Generally what I mean by rent_B, and what I think most public choice economists mean when they talk about "rent-seeking," is the creation of artificial scarcities in order to create and extract scarcity rents. For example, a modern union or a medieval guild creates and appropriates an artificially scarce item of capital, a union card or mastership respectively, that is a superfluous ingredient in the productive process.

The concept of rent_B has nothing at all to do with any change in the current market exchange rate of some good or right I own. It does not say that such changes are good or bad. It is quite independent of any such thing.

Your "rent" - rent_A - is very different. "Skimming the fruits of the real economy without contributing to their production." This is unfairness in a nutshell. It is eating, you might say, without taking out the trash or doing the dishes.

Anyone in any kind of domestic relationship is very experienced at solving these problems in a way that all involved conclude is fair. Thus it would certainly be an exaggeration to claim that the idea of a class A rule that works in a class A society is intrinsically paradoxical or otherwise ill-defined. There are billions of class A societies functioning in the world today with these kinds of rules. The problem is just that none of them is anywhere near as large as the political problem space.

And what you will find, I believe, if you try to formalize this concept, is that it cannot be done. There is no way to promote it into class B or to identify an analogous rule there. In a class B design process, I believe, the idea of rent_A is at best a source of distraction and error.

This is Mises' calculation result in a nutshell. There is no precise way of calculating any concept of "value" intrinsic to any object. Since basically forever, economists had been looking for the absolute definition of value, just as physicists had been looking for the absolute frame of reference. What they both learned - or should have - is that no such thing exists.

In economics this is the marginal revolution - more mentioned than understood. (I used to be a big fan of Tabarrok, Caplan, Kling, etc, but this was before I read Mises. And decided that what I was getting from the econ bloggers in this general group was an extremely contaminated and highly diluted low-grade counterfeit of the original Austrian marching powder, made to be smoked by giggling undergrads, as it were, and entirely unsuited to the serious praxeology junkie.)

The only computable number that corresponds to the value of an object is the marginal rate it can be exchanged for in terms of some other commodity. Furthermore, this number has specific, and different, units in its numerator and denominator. It cannot be magically morphed into some kind of pi-like unitless constant. And it has a nasty habit of varying over time, and depending on any other variable in the world that may affect the individuals who buy and sell it.

Of course, one can certainly come up with other numbers. You can invent any number you want and try to force people to obey it. But there is a fundamental and qualitative difference between administrative calculation and market calculation, and once your policies depend on the former, you are out of class B territory. Or to put it differently, if you can design a stable mechanism for price control, you have a political perpetual motion machine, and every stationary bandit in history would give his eyeteeth for a glimpse at your secret formula.

I think a number of your points are affected by this difference in our reasoning, if often in ways that may not be obvious.

For one example, anywhere you use the word "real," you are using an invented number. Comparing the purchasing power of present money to that of past money is an entirely incalculable problem. Again, numbers derived in this way are administrative figures, and any calculations that use them are subject to GIGO. It is in fact only "nominal" numbers that can be used in calculation.

For another example, in the case of your tree-land-owners, they have formed a cartel and they sell at a monopoly price. The bastards. But you have the Maxim-gun and they have not, so you can force them to sell at any price you want.

So how should that price be calculated? Should you establish an equal and opposite artificial scarcity of tree-wood buyers, a monopsony with yourself (I mean "you" here in the official second person plural, a tense that violates, I concede, my rules, but which I do so prefer to the official first person) as sole buyer? And how is that any fairer?

My answer in this case is that, in a free market, you will see that the tree-land-owners will earn an obscene windfall, but not an obscene profit. The yield on their land will converge with the natural rate of interest, which is the expected risk-adjusted yield on any asset. If they genuinely own a natural monopoly, this is how it is priced, and any attempt to second-guess this price runs into the computational fallacy.

Of course, in practice, most cases like this are the result of artificial monopolies - such as patents. In the most commonly cited example of this case, such as a privately owned bridge, I think people just have the wrong scale. A city and its public services are a perfectly coherent natural monopoly, and you'll notice that one case in which state-owned companies seem to provide perfectly decent, if not wonderful, service, is the case of urban-scale utilities, mass transportation, etc.

(What is the difference between a "natural" and an "artificial" monopoly? I would just say a natural monopoly is a right to a real resource that is scarce, ie, cannot be shared without conflict, and an artificial one is anything else. It doesn't seem to me that we disagree on this.)

Let me briefly also explain my view of the loan and capital markets, one on which we do seem to disagree.

The reason I used the term "hoarding" is that I wanted to avoid the value judgments that are conventionally applied in the case of "savings" and "investment." Like many 20C economists, you want to differentiate productive investment from unproductive squirreling away of shiny metal disks.

The belief that there is any sense in which lending money is an act of some net benefit to society, or that hoarding it is somehow antisocial, or that the first is somehow better than the second, is, I believe, entirely without foundation.

We can attack this belief with a reductio ad absurdum. Suppose, in the extreme case, your miserly hoarder saves all his money and never spends it at all. He buries it, and when he dies it is never found.

Clearly, an antisocial gentleman! Except that what he has done is precisely the opposite of the work of his neighbor two doors down, who is a counterfeiter, and who has printed exactly the same amount of money. It is curious indeed that the antisocial work of both these fellows adds up to a precisely neutral effect on the rest of the world - which it does, because due to an odd coincidence, they have exactly the same demand patterns.

In my opinion, the hoarder is not antisocial at all. He is "giving back" by not using his money, at the present moment, to compete for goods and services. This increases the purchasing power of everyone else's.

Of course, another way to resolve this contradiction is to decide that it is actually the counterfeiter who is the social actor. This is the path of the inflationist, and I believe you have already rejected it.

But the line of reasoning that distinguishes lenders over hoarders is exactly this. It presents a "shortage of money" as a social evil. This is simply a cry for subsidy via dilution.

The right supply of loans, at any risk-adjusted interest rate, is simply determined by the set of people who know they will not need that amount of money for that period of time. If you have a lot of money saved but you fear that you could need to spend it all tomorrow, you shouldn't exchange it for future money.

Granted, the loan may be liquid - in your original sense. You may be able to exchange it back for present money in a pinch. But this just means you have changed places with another lender, and if there is no other lender who wants to assume your original deal, the price of the bond should go down - and it will. Again, if a comet is scheduled to destroy the earth in 20 years, the right price of a 30-year bond is zero.

Most important, loans are priced in terms of money, not in terms of "purchasing power." That is, they must be stated in calculable numbers that both parties can agree on. Since there is no other way to calculate profitability, the natural interest rate, the equalized yield on all assets, is simply a function of marginal supply and marginal demand.

For the natural interest rate to go to zero, resulting naturally in zero lending, there would have to be no form of capital that was - again, in money terms, the only way that any sort of profit can be calculated - profitable.

Profitable investment and falling prices go together like bacon and a cheeseburger. They are absolutely normal in the presence of rising productivity. The prices that matter to a borrower, in terms of his ability to achieve a certain return on capital, are not aggregate prices in the usual sense of "deflation." The prices that determine return are the prices of the products his capital produces. And you'll note that Moore's Law has not yet put Intel out of business, despite the fact that it has to lower its prices every quarter or so.

Okay, I too think I have written enough here. I hope this helps you figure out where our specific differences are - it has certainly been informative to structure my views as a response to yours. And I do hope the same is true for you. Again, I apologize for my slowness, which I believe is congenital, and henceforth not my fault.

I'll drop you a line about the unmold thing shortly, though my fingers do, I'm afraid, need a short rest...

MB — So, I think we are both trying to wind this down, though I can assure you that it has indeed been, for me as well, "informative to structure my views as a response to yours."

Overall I'd say that, although this exchange has been a debate, I am more struck with our similarities than our differences. I find your categorizations of different levels or grades of societies interesting. It's not precisely how I've thought of things, but I don't object. I don't see my proposals as going for an "A", but as messing around in B-space hoping to patch a what I see as a B- and falling fast societies (the US and traditional West broadly) to bring them to a stable B or B+. We are both, unfortunately, in rule-of-thumb land, which as you are right to suggest, implies broad margins of error. We talk past one another often, as our rules of thumb are very different. A rule of "conservatism" is insufficient. It might be conservative to build an airplane out of bricks rather than thin sheets of aluminum. But the damned thing just won't fly. Medieval bridges are, I'm afraid, are too easy a case, just build them thicker and stringer when in doubt. We are neither of us let off so easy. Most real-world problems involve trade-offs, where being too conservative in one dimension implies taking too many risks in another.

Given that we are in rule-of-thumb land, it's clear that our rules are calibrated very differently. We would both agree that complexity increases the likelihood of devolution from "Class B". I think we would both agree that there are possible systems, which while simple and unambiguous, would predictably devolve in the context of any real human society. My intuition, and it is only that, is that given the current level of technology and absent certain forms of brutality and suppression that I consider verboten (a priori, as a matter of ethical taste), the solution space of stable class B societies may both require and enable a greater degree of complexity than would have been necessary or stable in the past. Further, I'll admit (and here you have me a bit on the accusation of utopianism) that within the universe of possible stable, law-governed societies, I do have preferences (notions of fairness, justice, and productivity), and I am willing to take some chances (in terms of complexity and transitional hazards), to go from worse to better. You probably have ready at hand a catalog of good situations turned to blood porridge by precisely this improving impulse. I could go all cliché and liberal on you, and talk about MLK and the civil rights movement and we-shall-overcome, or some other hippie crap. In finance-y terms, expectations of risk and return, plus degree of risk aversion, are exogenous and cannot be normatively computed. I think I'm less risk-averse than you are, and my sense of the degree that one achievable class B solution might be better than some other (as I define it, but I think my definitions are fairly conventional) is larger than yours. I say MLK, you say Robespierre, things only get interesting when we start talking specifics.

Generally what I mean by rent_B, and what I think most public choice economists mean when they talk about "rent-seeking," is the creation of artificial scarcities in order to create and extract scarcity rents. For example, a modern union or a medieval guild creates and appropriates an artificially scarce item of capital, a union card or mastership respectively, that is a superfluous ingredient in the productive process.

The concept of rent_B has nothing at all to do with any change in the current market exchange rate of some good or right I own. It does not say that such changes are good or bad. It is quite independent of any such thing.

Here we see more how our disagreements are largely definitional. You see the price of a thing as inherently its price, neither right nor wrong, but you are willing to acknowledge the idea of artificial scarcities. Your use of the word artificial is like my use of the word real — which you are quite right to call me on. Both economists' mystical but conventional price indices, and any notion that an occurrence is artificial, try to impose an arbitrary viewpoint on a reality that, in the end, just is. If we are willing to talk about artificial scarcities, I'll say that the speculative dynamic that occurs inevitably under nonfractional commodity money is an artificial scarcity, just as much as the rules imposed by a guild, union, or cartel. (These would be cartels controlling human labor or other rivalrous commodities; we are very far from the entirely manufactured scarcity you describe w.r.t. patents.) Let's not argue about that though. Let's leave aside notions of artificial, conventional ideas of real growth, and let everything have its price within a certain historical, institutional, and technological context. Because there is no price, no meaning or value to anything, without such a context. We oughtn't argue about whether a price is wrong or right, whether gold is artificially scarce or fiat artificially abundant (and unfairly distributed). We should just talk about potential institutional and technological contexts, avoiding the Rawlsian fallacy that you dislike and limiting our discussion to what is at least arguably achievable. By a principal of conservatism, we might start with the present state of affairs, and ask whether, with no effort on our part (or on the part of others like us), the current state of affairs is okay, will work out well enough. I think we both agree that no, there will be a discontinuity or at least a transition, perhaps people like us are not entirely impotent to prevent a terrible devolution, or, more optimistically, to move things towards a location that is both more stable and qualitatively better. Then, the same principal of conservatism might move us to propose changes as incremental and plausible as we can muster to move us towards this, um, better place.

Then to the engineering without math. You have a proposal that is thus far undisclosed, and a mold-based fallback involving I think a "flag day", where, by fiat, all fiat currency claims are converted to nonfractional claims on an allocated stock of shiny penicillin. I propose increasing the "multilingualism" of exchange-institutions by technological and normative means (promoting multicurrency payment systems, plus broadening the range of electable currencies from government-sponsored fiats to claims on other commodities and services people might choose to trade), and more controversially relying on states to artificially introduce volatility into the market for claims that threaten to become universal and exclusive scrip. I'll concede that my proposal is not ideal. I'd prefer that second part to be unnecessary, and I am optimistic in a way I suspect you would not be, that with sufficient ease-of-use and variety in multiple money-like claims, the emergence of hegemonic money might be prevented merely by people preferring to save in terms of claims of their own very different patterns of future consumption. If this is not enough, I'm still willing to rely on the imperfect institution of the state for help, but I'd like to engineer around it. You are pessimistic about my proposal (with and without the help of the state). I am pessimistic about a money-as-allocated-gold system, both out of my latent utopianism (that's not fair!), but also because I believe that it is likely to collapse badly. We have different technical intuitions, and no good science within whose equations we could find a mutually persuasive answer. Alas!

I think we should mostly leave it at that. I'd taunt you a bit about your hoarder / printer tale, and ask you to think about the case where our miser is a baker, and instead of hoarding "money", whatever that is, he bakes more cakes than he eats, and hoards those. If we are telling intuitive tales about productivity, and "what's worse", we can't credit any productivity to the baker unless he has directed his resource to an ill-defined good use. If he sells his cakes for money to the counterfeiter, who does not eat them, but prints money to pay for them, still nothing good has happened. I see too much focus on the horders (low-risk savers) and the counterfeiters (governments and financiers), and not enough focus on ensuring that real good and services serve real purposes. I'd also taunt you about your notion of an interest rate. The notion of a "natural interest" is as fraudulent as the notion of "real growth". There can be a market interest rate in terms of some commodity (paper dollars, gold, or fresh cakes), but no "natural interest rate" associated with "rising productivity". It is easy to make the natural interest rate in terms of fiat go large and positive, and perhaps even encourage saving: have the issuer stand ready to borrow, and pay interest with freshly printed chit. It's a complicated set of facts and institutions (e.g. positive technological change and sticky prices) that sometimes makes this kind of scam seem like a good deal.

Under gold, I see the market borrowing costs in gold on gold as growing without bound until transactions are sufficiently reduced that people lie, cheat, or steal, or start exchanging something else. "Fractional reserve" schemes are how private entrepreneurs solve this problem (a form of lie, cheat, and steal that is the best way out of a bad situation). Fractional reserve, of course (with a hidden and variable fraction), is just private fiat. Modern fiat is private fiat with a built-in "flag-day". The banks do the money printing they have always done, the state ensures that those who have accepted their funny money are better off than those who have not when the crisis inevitably comes, so that no one wants to lynch the bankers. It's a great system, for the bankers and their quantum-mechanical-structured-credit-engineer successors.

There's lots more to talk about. There always is with your posts, which are dense and insightful. Again, I think we more agree than disagree — we both seem to dislike the conventional arrogance of economists, who "magically morph[] into some kind of pi-like unitless constant" the output of product of endless tentative conjectures and poorly measurable data, defining the "natural rate" of this or that, and declaring nature to have changed when they deem it convenient. We disagree primarily on whether the speculative gains that accrue to mere holders of a fixed-quantity currency are normatively a good thing, whether that dynamic ought to be a part of a next-attempt at organizing convenient exchange (presuming, as I think we both do, that a next attempt will be required), or whether we should try to avoid that (presuming, arrogantly and improbably, that we have anything to say about what will be).

Non sequitur, I do want to congratulate you on this, among your many insights: "... the assignment of onerous tasks, which can be thought of as negative resources." That's a delightfully elegant idea, and one I've not encountered before.

[p.s. I've received your mail, but haven't read it, wanting to finish this first. Sorry about the whitelist crap.]

MB — It is endearing to be termed someone willing to defend the precepts of the status quo. You, my friend, and I as well, are both money cranks to the rest of the world, our differences notwithstanding. (We have also both been trying to gracefully wind down this exchange, but alas, we have no grace.)

First, I must object and disown, because again, words have been put into my mouth that I have not said. I dislike price indices of any sort. I think they are dumb, and to the degree they are relied upon they represent single points of failure and magnets for corruption. Nor do I believe in any kind of administrative price controls or price setting. I have (though I would prefer I had not because I don't think heterogenous money is inherently as unstable as you think) argued for the threat of government action to prevent monetary monopoly. But this does not imply any sort of price setting. On the contrary, my suggestion was about price unsetting, about introducing volatilty into markets to prevent a scenario where a monotonic increase becomes a self-fulfilling one-way bet. Again, I want to back of from this a bit, though, both because I don't think it's likely to be so necessary, and because I think better market institutions could make it possible for nascent medium-of-exchange monopolies to be arbitraged away. I do not think governments ever know the "right" price of anything. In fact, I do not think there ever is a single price for anything. That is my whole point. Homogenous money is economics' original sin. Like with sex, humanity could not have gotten very far without it. But, if I may make yet another self-discrediting comparison, we are ready to move beyond tradition, it is the dawning of the age of the orgasmatron.

Your parable of dilution is not enlightening to me only because it is so close to how I conceive of the same phenomena. I have never argued that there is much wrong with destroying money, per se. As you suggest, it is just a redenomination. (There is a small problem with it, in that random distribution of wealth is informational noise, and reduces the efficiency of the information system that defines, according to my view of things, an economy.) But squirreling money under the mattress is not destroying it; the money is absented only temporarily. My problem is precisely with the fact that it can come back some day with claims that make no sense.

Suppose that Entrepreneur X invents an amazing thing and builds an productive business around it. In doing so, he amasses 50% of all money (under a fixed money regime), which he saves under the mattress. Everyone is wealthier thanks to X's work.

Some time later, entrepreneur Y invents an amazing thing and builds an productive business around it. In doing so, he amasses 50% of all money circulating, which he saves too under the mattress.

Some time later, it is entrepreneur Z's turn. He invents an amazing thing and builds an productive business around it. In doing so, he amasses 50% of all money circulating.

Now, X, Y, and Z all go to retire. Each, in turn, has done some wonderful thing that has in some ill-defined manner multiplied the world's wealth severalfold, and has captured only a fraction of the value he produced in the form of 50% of all money. But Z's wealth is only 1/4 of X's. This is not a time value of money issue. X, Y, and Z may have done their work nearly simultaneously, or with many years intervening. None of them invested their money, or even lent it. Why should X's claim be worth 4 times as much as Z? It's a mere incumbancy effect, an artifact of successive redenominations. X by saving may have temporarily merely given money to his fellows, but when he dilutes by redeeming, he will redenominate in a manner that impoverishes all by more than he enriched, because he will be capturing the value of Y and Z's innovations (as well as other productive changes that have occurred since he made his fortune). The saver is not only the hoarder, who destroys his money (little problem there), but also the eventual diluter, who contains effectively the power of the press, but withholds it until he can capture a great deal of wealth he's had no hand in creating.

[Would X, Y, or Z lend their gold? Only under genuinely risk-free circumstances, i.e. never. Why? Because although 'til true that regardless of gold's inevitable appreciation, 1.1 X is better than 1.0 X in tomorrow's gold, the risk-adjusted return on any individual investment is (by standard CAPM / portfolio theory arguments) worse than the risk-adjusted returns of the diversified market portfolio. But merely holding gold is equivalent to investing the market portfolio! In other words, an investor should do precisely as well holding gold as engaging in a diversified investment strategy, so the average investor will simply hold. Sure, some investors will have special opportunities and information (and others will be duped into thinking their opportunities are special), so some lending will occur. But markets will be thin and rates volatile, because by definition most opportunities are not above average, and taking a loss on an appreciating asset is much harder than taking a loss on a stable or depreciation scrip. BTW, A deus ex machina of using prediction markets to compute the risk of wide varieties of events is problematic. It comes around to the original post this debate is attached to. The scarce resource in finance is informational liquidity. Attracting sufficient liquidity for prediction markets is a challenging problem even for events "naturally" of widespread interest (e.g. US presidential elections), when the currency gambled is depreciating, and there's no natural proxy for the ideal "market portfolio". In a gold economy, where liquidity is inherently diminished because squirreling is a fairly optimal investment strategy, liquidity to support manifold fine-grained prediction markets is likely to be hard to come by without some subsidy. Indeed, under current circumstances, much is most interesting in prediction market research is how to attract sufficient subsidy to compensate skilled investors for their time and deploy without distorting prices.]

I also don't claim that all exchange should be spread evenly over all tradable assets. "Evenness", as you say, is an impossible computational and definitional challenge. I only suggest that there must be more than one medium of exchange, that there must be at least several always (though that several may vary over time), to prevent monopoly rents being paid to the holder of an arbitrarily anointed resource. (I don't think the value, or stability, of heterogenous money will be fully realized until there are direct money-like claims on goods and services that correspond to peoples' planned consumption. I think that when such claims do arise, we will find that the lack of a fixed point of reference, rather a conundrum, will turn out to be a great source of wealth. Diversity of desire means wealth-seeking need only be partially rivalrous; a single medium of exchange is a bottleneck that creates avoidable zero-sum games.)

We will not persuade one another, I'm afraid. We are both fairly attached to our viewpoints. That's not all bad. I'm pretty serious about this idea of heterogenous money. I want it to happen, and I think it will happen. I'm interested in helping to develop the sorts of claims, markets, and trading systems that would make it possible. I think fixed-quantity commodity money will crash under the weight of "empirical injustices" — defined not because I think they are unjust, but because in the real world, as the economy plays out, enough people will consider outcomes sufficiently unjust or constraints sufficiently onerous that they will overthrow or subvert the system. Perhaps I would change my mind if I were to learn more about the Dutch golden age. But I doubt it. That the age didn't survive, and that technological changes have arguably accelerated the dynamic by which inherent flaws in a monetary system lead to an inexorable undoing, are enough to keep my priors set firmly on "skeptical".

But, please do feel free to prove me wrong. I'm not standing in your way. As I've said, I see the current fiat credit bubble as wreaking great harm and sowing the seeds for terrible disorder in the not too distant future. I said at one point that I prefer fiat to gold, if those are the only choices, but that was meant in as a damned-if-you-do-damned-if-you-don't kind of choice under abstract circumstances. At this moment, I would love to see the credit bubble crash (because, "the worse, the better" — ugh! — sooner is better than later when terrible errors viz the real economy are being made on a very large scale) and a flight to gold-money would not bother me at all. (For one thing, it would make me wealthy.) I'd still try to prepare and promote alternative monies, and that's all. If I'm wrong, my error would be harmless. If I'm right, after a while people will be looking for ways around an artificially scarce medium of exchange, and my schemes will find adherents. (I more and more think that the state-as-antihegemonic-guarantor part can be dispensed with, so let's leave that part out.) I suppose that we'll actually see. We have the fortune, or misfortune, of living in times where these discussions may turn out to actually be relevant.

More on port 25. Tho' probably not tonight!

Alas, we are fairly hopeless in our resolutions. Port 25 has become a rhetorical promised land to which we make only ritual genuflection. "Next year in Jerusalem!" (You, at least, did once try.) But we do (or did for the first 25 comments or so) have lurkers to our hyperverbosity, so for their sake, I think the topic of mold vs. heterogeneity stays here (while unmold and other matters can move elsewhere).

Re X, Y, and Z, I think I explained myself poorly. Suppose there are 1000 grams of gold in the world when X does his thing. He accumulates 500 grams,and goes into cryogenic hibernation for 3t years, keeping his gold in the vault. Some time later, Y does an equally amazing thing, and manages to gather 250 grams of Au for his trouble. Y is perfectly happy with this for the moment, as money, like "the sign" is arbitrary and differential in its nature. Y is happy enough: 250 grams in his day has the same meaning that 500 g had in X's (in relative terms; in absolute terms it probably buys a little more due to technological change and population growth). Y sets the dial on his cryostore to 2t. Now Z is tiresomely brilliant yet again, accumulating through sheer marvelousness 125 grams of yellow. Again, for his day, he's as rich as X or Y ever were, which is only fair (uh oh, that word!), since by hypothesis our entrepreneurs have done essentially the same thing just at different times. Z yawns, and looks forward to a good t of sleep.

3t time units after X turned in, all three wake up. While all three did approximately the same thing, X is 4 times as rich as Z. You might argue that this is a time-value-of-money thing. After all, X produced but did not consume long before Z did, and his relative fortune comes from unconsumed production earning interest (here in the form of relative capital appreciation, actually the depreciation or dilution of value of others' holdings). After all, if those Indians had just put their beads for which they sold Manhattan in a bank, they'd be worth more than all those skyscrapers now, right?

[That last is one of the core myths of finance. What currency could they have chosen, and which banks, such that a chestful of beads would actually have been transmuted by the magicks of compound interest to trillions of dollars of present value? It simply would not, and could not, have happened in this real, historical world.]

Back to XYZ, no time-value-money explanation works here, quite simply because our outcome is entirely insensitive to the value of t. t can be a year or a millenium, but X ends up 4 times as rich a Z, just because he was around first. There is a mere incumbency effect, that, absent draconian action by states (confiscation of inheritances, property taxes, or whatever) will lead to plain inequities and constraints that will lead to the subversion of the system, or its maintenance by brutality. Obviously, X, Y, and Z here are like Gates, Buffet, and Jobs — too rich to pine about the injustice of their circumstances, just 'cause Gates is #1 in fortune. But the same dynamic holds at smaller scales. Suppose everyone starts with equal quantities of gold. Exchange occurs, because people need stuff. But over time, by luck or great deed, some accumulate more gold than any consumption needs might require, and store the rest, since mere storage is a good investment. Over time, new accumulators, regardless of their talent or diligence, find it harder and harder to build up caches of the stuff of comparable scale to that collected by early entrepreneurs. The first rounds of winners become noblemen and everyone else serfs, until the monopoly of gold is broken, which will not be long. Ambitious pretenders will write surreptitiously fractional notes to support living the lifestyle of their richer betters, and we are back in the world of fiat.

We are talking past one another about lending. My claim is that any lender under a gold standard has no investment portfolio whose risk-adjusted return is better than holding gold. Suppose someone offers you 1.1 grams next year for 1 gram today. As you say, if that's a certain bet, you'd be foolish not to take it. But it's not a certain bet. Suppose that independently, the risk of nonpayment is known with certainty to be 5%. Then you should take that bet. Now suppose a competitive market for the use of funds. No one now will offer 1.1 grams for this opportunity. In a nonfractional gold world, the price will approach 1.052 g, as any investors with no use for gold today will bid the price down towards that level. But at that level, a risk-averse investor is better off just holding than investing, as the expected value of the investment is his initial 1 gram! In the real world, the risk associated with an investment would not be so certain, so there would be some difference-of-opinion liquidity of the kind that helps prediction markets to sort of work. If I think that the real risk of nonpayment is 2%, and the market thinks it is 5%, than I have a profitable opportunity. But these are nonequilibrium anomalies, and prediction markets provide good examples of how liquidity is hard to come by when the expected profit on playing relative is no greater than expected profit on holding money for the average, no-special-information investor.

In today's fiat world (and any good world), where money-holders expect stable to depreciating, rather than growing, investing is positive sum relative to the alternative of mere storage. If someone offers me $1.1 for $1, a competitive market does not imply that there's a 10% risk of nonpayment. If dollars are being diluted by 5% of their value annually (in terms of a diversified portfolio of storable goods, for example) then a $1.1 investment implies a risk of default of about 5%. I might choose to buy and store a diversified portfolio of storable stuff, but actually that's very hard in practice to do, and since I have no comparative advantage in storing, I'm likely to achieve something less than my expected 5% profit. Much better to lend money into a competitive marketplace, and thus taking advantage of those with a comparative advantage in storing (who will borrow to buy storables, paying back just less than the value of the storables after a year, given a spread for their minimal storage costs, and a very small profit spread). In a fiat world, savers have to invest in order not to lose. And competitive markets for money don't happen magically. Investors have to evaluate and investment opportunities to ensure they are well and competitively priced, or else they also lose. Default opportunities ("index funds", CDs) arise for savers uninteterested in informational work. They must, over time, earn something less than the dilution of the currency, otherwise no one would do the information work required to define the appropriate weightings of the index, but are expected to earn more than mere holding.

There's a lot oversimplified in the above — the quantity and value (in terms of any other commodity) of "storables" is not fixed. If money is diluted by the same amount by which the quantity of storables expands, then investors lose only relative wealth, rather than absolute-wealth-in-terms-of-storables by holding. Most people are interested in both relative and absolute wealth, and in terms of some idiosyncratic variety of goods and services they hope to consume, not merely storables or a monolithic hypothetical portfolio. But the core case holds — Assuming people want to save (ie they have no use for their wealth today, but want it tomorrow) and will compete for the strategy that yields the greatest future wealth, the risk-averse average saver will invest in a fiat world, but hold under nonfractional gold.

As for heterogeneous money, I still don't think you have answered my main complaint, which is that either

(a) monetary energy - that is, demand from producers of nonsavable goods who are looking for a store of wealth, but have no direct demand for the monetary commodity - will be distributed evenly across all savable goods; or

(b) monetary energy will be distributed unevenly across savable goods, and will not be distributed statically, but will oscillate, causing price fluctuations which are inherently unpredictable and tend to disrupt productive activity.

If your choice is (a), I do not see how you enforce it. If your choice is (b), I do not see how it fits your value system, which seems to ascribe considerable importance to the problem of associating reward with productivity.

The difference between monopoly and competition is not an even division of monopoly rents. I don't think there needs to be any rent paid ("monetary energy") for use of claims on a commodity as medium of exchange, and therefore no price fluctuations based on the current popularity of a commodity for the purpose. When gold is the only medium of exchange, those who have it hold it, unless someone pays a substantial premium to use it to undergird their exchange transaction. If we assume that there is a natural, direct barter rate between corn and cows and also between wheat and cows and also between corn/chickens and wheat/chickens, if I have chickens and will want a cow, I can sell my chickens for wheat. If too many people do this, wheat holders might raise their prices, but even with infinitesimal moves in this direction, I'll switch to corn. If both cornsellers and wheatsellers try to profit from exchange mediation, I'll choose something else. By hypothesis, the number of commodities that potentially serve as a currency is infinite — there are low barriers of entry into the field of exchange mediation. While at certain times certain commodities may be popular, and the price of that commodity might be slightly affected by medium-of-exchange use, as soon as that elevation becomes significant at all, I'll choose another commodity for exchange. For any given commodity, price-fluctuation due to popularity of medium of exchange approaches zero as the difficulty of choosing alternative commodities approaches zero. Thus, there need not be any sort of wide price swings, even though some commodities may be widely used for exchange over some period of time. Since any attempts to extract much rent for that use would simply force a switch to competitors, holder of the exchange commodity have little interest in trying raise prices.

Anyway, I hope this makes some sense, though I'm under no illusion that I'll have persuaded you. As always, it is a pleasure neither persuading nor being persuaded by you...

MB — The last thing that interests me is the authority of a speaker. I am arrogant enough to believe I have things worth saying besides having no claim to authority, and arrogant enough to choose for myself who is worth arguing with and whose ideas are worth taking seriously without the distraction of knowing their "credentials". My fingers have already proven I find you worth taking seriously.

Here are some quick rejoinders:

1) My notion of heterogeneous money rests on a widespread expansion of the sorts of things that can be monetized. In particular, as I've mentioned, claims on services, which are not storable at all, should be collectable as claims in arbitrary small fractional increments, and exchangeable without friction. Obviously, there are technical/definitional issues here. Service provision is not homogenous. Here I think the recent burst of financial innovation will help us, that some of the ideas behind futures-markets/clearinghouses and ETFs will be of assistance. (In practice, you can buy future claims to lots of nonuniform commodities, from Treasuries to pork bellies, and markets have been defined imperfectly but sufficiently well that the nonhomogeneity of the underlying has not impeded liquid markets from arising. There are lots of futures markets in non-storables as well, energy or weather being extreme examples, perishable agricultural commodities more mixed.)

2) I think that many savers are more concerned with minimizing risk than maximizing returns. In the present scheme, the two goals are difficult to distinguish, because the returns on "low-risk" investment strategies (gov't fixed income, even "inflation protected") relative to volatile prices are such that accepting low "certain" returns implies accepting a large risk that I won't be able to afford my expected consumption when I wish to redeem my savings. If I could purchase directly, one year of desirable accommodation redeemable any time; one year of food and food service, one year of transporation services at least equivalent to owning a small car, etc. etc. I (and many others) might find these attractive regardless of the volatility of their prices viz-a-viz other commodities. The speculative dynamic you describe (which you describe very well, which I don't disagree with as a likely outcome given past technologies and current social habits) requires that many savers feel like "failing to keep up with the Joneses" — failing to achieve gains others are achieving — is equivalent to losing wealth, since in the end the economy will be what it is, and wealth will be allocated in proportion to money held relative to others. With money of this sort, the question is not how much I will have when I wish to redeem my savings. What matters is how much I have in relation to others. If I am a billionaire when I turn 80 and wish to retire, I may still be a pauper if others are trillionaires. But if I have collected claims on approximately what I will require in my dotage (or for my children's education, or anything else), my returns in terms of any money or commodity relative to someone else's will be of less interest to me than they otherwise might. If enough people choose this "low risk" approach to savings, and if people are willing to make exchanges against these sorts of claims, then the dynamic that leads to a hegemonic money disappears. If my unit of account is Hilton-years, their price in Iridium might be very volatile, might rise and fall dramatically, but so long as I am gathering Hilton-years, I have more reason to be content with my circumstances than I would have been with a growing dollar bank account, and am less likely to act as an absolute maximizer, as required of most participants for "Strategy B" to work.

Here's Strategy C: define what future goods and services you want, and make claims on those future goods and services your unit of account. Work and get paid at the "market rate" in whatever currency is on offer, enduring as you must the inflations and deflations and taxes and adjustments that will mangle the value of each paycheck. No matter. Immediately convert all current income, in whatever form its given, into claims against your chosen unit of account, which is precisely tailored to your expected consumption. (There are complications: You'd need to rebalance occasionally as expectations change, and with sufficient wealth, the expected consumption to be purchased incremental revenue will differ from "average" expected consumption, as many of your future consumption goals are already purchased. But these are refinements at the margin.) If enough people follow Strategy C, Strategy B won't work. Even if we posit that most savers will wish to devote a fraction of saving to speculating, rather than hedging future consumption, speculative money will be drawn to creating capacity to make good on hedging savers' claims, as this is where the most certain demand arises. Mere speculation on some metal, that is neither especially useful as a basis for exchange, nor especially widely used as a unit of account, will be putting wealth into a very volatile store of value.

I'm going to go back to liquidity on the main page of this blog now. You've gotten me way ahead of myself (I say that with gratitude, not pique). These are things I expected to write about, but was too nervous, and the ideas were (still are) too half-baked to present (to all four of my regular readers, really, it's terrifying). There are still a lot of holes, and a lot of work to do, but you've inspired me at least to overcome the greatest barrier to all intellectual work, nervous inertia, to get a rough draft of an outline down. I do thank you for that!

When "liquidity surfaces" has surfaced, I'll try to hit you back on port 80 re: unmold.

Steve,

I'll take the hint - you are officially released from my ugly, rotting teeth (tm).

Your idea of trying to push savings into representative claims on future goods is certainly very interesting. It is certainly better than most of the "amonetary" economic designs I have heard (don't even start me on LETS).

As I see it, you are essentially trying to eliminate all long-term indirect exchange, and replace it with futures contracts. Certainly, if you can pull this off, monetary pressure will by my definition be considerably lightened.

There are a few questions worth asking yourself about this model, though.

One is how you write futures on goods that don't technologically exist yet, and cannot even be defined in the present.

Two is how successful this replacement of futures with savings needs to be to eliminate the monetary pressure that makes my strategy B successful. By my analysis, this pressure needs to be entirely eliminated or at least reduced to a very small epsilon, or followers of strategy B will get way more time in the Hilton than even buyers of Hilton hours, and strategy C will collapse just as strategy A did.

Three is how these futures are underwritten and insured. The CFTC does not like you to think about this, but futures have default risk - and in most markets, the commercial shorts are practicing the equivalent of fractional-reserve banking, ie, have written far more futures than they can possibly redeem. Paging Dr. Hunt...

Fundamentally, the choice of a savings instrument is about exchange rate projection over time. Suppose you intend to buy yourself a long vacation in the Hilton, H. You are a rat hunter, you produce the commodity R, rat skins. Your question is: if I exchange R for X now, hold X for 20 years, then exchange X for H, what choice of X maximizes my expected H?

Your point (2) that since a scalar expected value does not capture the full informational scope of this decision, the word "maximizes" above is a false simplification, is certainly accurate. In the sense of mathematical economics, you have to take the full probability distribution and integrate its product with your utility curve. Sure. So there is some sense in which X = H, or X = some future claim to H, may start with an advantage.

But, in practice, in real life, very few people plan their retirements in this way. I certainly have no idea what I intend to be doing in 30 years. And many of the goods I will demand will, hopefully, be luxury goods for which my utility curve is relatively linear.

So the basic problem of saving, in which you compare X to Y simply by comparing their projected exchange rates forward, still probably has to assume a fairly high importance in your model. And in this analysis, it does not matter if X or Y is H itself, or even R (do rat skins keep?), or the usual G. The Schelling point strategy remains a threat - you need some way to make sure people buy these futures rather than flooding into storable commodities.

And problem four is how you prevent standardization from occurring just as a matter of monetary compatibility, for the purpose of standardizing calculation. I certainly find it hard to imagine a shopping interface at Amazon in which I trade rat skins directly for the mimeographed, right-wing fringe publications to which I am so partial. At a certain level this is just a UI problem, and the net demand it creates is certainly minor compared to the net demand for savings. But you are defining a fairly unstable system here, as I think you realize, and a little bit of standardization pressure seems quite capable of making it go up in smoke a la strategy B.

Anyway, this seems like enough - you are still working on this and it is not productive, for either of us, to bang on it too hard while it is in a tender and juvenile state.

I remain quite curious as to your thoughts on unmold. But this has the opposite problem - while not tender, it is dormant. So there is no great urgency.

Note that in Safari, if you print this exchange out as PDF, it comes to almost 100 pages. I do hope one or two of your other readers has followed along, but even if they haven't, it's been fun...