Procrustean Art of Backtracking: “Functions of Money”

 

One of the reasons for the macroscopic blunder of macroeconomics is richness in misnomers and misconceptions. As a natural consequence, many models are stillborn. The IS-LM is one  and the AS-AD another.

             The one out of so many misnomers is “stock variable.” To be true, the “stock” is the quantity as of a certain moment and by definition cannot “vary.” Basically, macroeconomists take mathematical variations without the time dimension (T⁰, or as at the moment) for economic changes over time (T^-1, or per period). For them, time flied across space (L^-1 but T⁰) in the first place.

             “Money supply” and “money demand” are two others. To be true, money is to the market what time is to life. Both time and money as currencies are beyond our control and anything but demanded; for instance, time is to Robinson Crusoe what “money” is to macroeconomists.

             There is only one “time” and there is only one “monetary outstanding” (M), period. No such things as M^s or M^d. Ironical or otherwise, “liquidity preference” is an oxymoron at best and deceptive at worst. “Liquidity preferably hoarded” is solid cash or “thin-airy” demand deposits, never fluid. Nearly a century ago Irving Fisher foresaw, “Money is of no use to us until it is spent” (1930, p.5), far from fluid or “liquid.” 

             On the sidewalk, macroeconomists list three functions as for money: that is, “a store of value,” “a unit of account,” and “a medium of exchange” (e.g. Gregory Mankiw, Macroeconomics, Ch. 4). This classification is highly misleading and almost of no use.

             First, “Money is not perfect store of value: if prices are rising, the amount you can buy with any given quantity of money is falling” as Mankiw explains. Moreover, “you” always and everywhere have a better alternative including T-bills. (Note: The economic man is envisioned to choose the best alternative.) As far as the saying is concerned, by the way, Mankiw is not exactly in the domain of macroeconomics where “rising prices” are irrelevant.

             Second, money in the form of legal tender or demand deposits is not a unit of account. To be correct, the currency unit, the dollar sign ($) if in the US, is the unit of account as far as Economics, Macroeconomics, Finance and Financial Accounting are concerned.

             Thus, we have only one legitimate function of money that is “a medium of exchange.” Ironically, this “naming” is still problematic. If in Cambridge macroeconomics, money must be the medium of exchange.

             Worse, if in reality the role of money as medium will gradually decline until it is gone. When AI is everywhere with us, the money will always  be replaced by book entries. Nevertheless “Don’t Worry Be Happy” as we will be able to enjoy ourselves with this “leisure” and that, while ubiquitous AI does all the dirty works of and for us.

 

Confucius say, “Masters (君子, jūnzǐ) shall first get the names correct (正名, zhengming).”