Hard Money, Soft Money, and Economic Ontologies

 V. Ramanan gave my thinking quite a boost when he posted his comments on a recent critique of "neochartalism by Costas Lapavitsas and Nicolás Aguila at the Developing Economics blog titled Monetary Policy Is Ultimately Based On A Theory Of Money: A Marxist Critique Of MMT." 

Ramanan's contribution to my thinking revolved around the idea that the international acceptance of currencies does not fit into a soft currency framework. This realization fits perfectly with my earlier thinking that society functions systematically with the private economy operating under a hard, Physical Money constraint at the same time that the government sector acts out a soft, Ethereal Money existence. As both Ramanan and C.L. with N.A. point out, international trade also functions systematically under a Physical Money constraint.

It turns out that this realization is an important part of building a better understanding of the effects we might expect as MMT style fiscal policies come to be practiced more vigorously around the world.

Ownership Styling Defines Ontologies

All economic theories operate within an envelope of decision making abilities. Within each envelope, humans act in some role to make decisions, whether as individuals or as the decider for the collective group. Perhaps we can describe this envelope as being economic 'group thinking', perhaps a societal 'paradigm', or we could use C.L. with N.A.'s word 'ontology'. The decisions-to-be-made are always made as if the decision maker had ownership of the entire affected structure.

The point to be understood is that economic rules guiding decision makers determine the flow of money and resource ownership within each framework. On the other hand, an economic flow between frameworks is between ontologies [1] and therefore is dependent upon Physical Money as if each ontology was privately owned. And of course, we have the possibility of  'no money' ontologies wherein trade becomes barter.

At this point in this essay, we need to contrast 'hard money' with 'soft money'.  Hard money is treated as if it were indeed a physical object, indifferent as to being an actual physical presence (as a currency) or simply in existence as a numerical recording. On the other hand, soft money is easily created and destroyed, and has little permanence in meaningful economic terms. Soft money is one step above no money at all in the sense that decision makers can use soft money as a tool in allocating resources.

Surprise: A Theory of Money Merges With a Theory of Ownership

A truly satisfying theory of money needs to embrace the ownership span between Marxism and Capitalism, monetary conditions between hyperinflation and disinflation, and economic wealth differences between tribal isolation and globalism. Money as an owned store of value becomes a key concept when considering trade of goods between economic ontologies. Money as a measurement tool is but one aspect of the much broader role that money needs to play.

Let's look at the span we need to cover: 

The private sector, in order to function smoothly, needs to economically focus on an fair exchange of goods and services. Labor must be exchanged in some manner for goods, and goods are exchanged for goods. We are talking about physical, measurable quantities here. It is certainly possible that money can be one of these physical quantities, even if money is represented only by marks in a ledger. Physical Money can be managed to be a very stable, durable, hard, physical-like, object.

On the other hand, money can be made ethereal as in Venezuela today. 

Factors that promote durability include the persistence of debts, the persistence of currency, the consistency of acceptance in exchange, and 'sticky' prices. Factors that promote a soft, ethereal money include a rapid change in perceived money supply, rapid changes in exchange value, and soft legal support by governments.

One precondition of monetary thinking is that the private sector cannot produce money. So far as the private sector is concerned, all money is hard, enduring, and accessible only as a element in an exchange. On the other hand, government has not only the option to act as if it were a private economic entity with ownership rights, government has the ability to create money. This flexibility gives government the ability to act either in a hard money or soft money fashion.

We can think of money as existing only when it is owned by members of the private sector. In this way of thinking, money can have real and, enduring value that can be transferred between economic members. While government can be treated as just one of the economic members, more often (in the Western economies) government depends upon creating new money rather than purely upon taxation (thereby acting as if it was a powerful private entity). This sets up economic conditions wherein hard money is diluted with soft money at the same time that money is physically one universal construct. Hence, modern societies must somehow simultaneously accommodate hard Physical Money and soft Ethereal Money. Someone owns this money, no matter whether considered Physical or Ethereal. Money is always someone's property. To have ownership of money is to have ownership of keys to further ownership opportunities. Woe to those without ownership rights.

Summation and Conclusion

At this point we can begin to relate divergent economic theories such as Marxism and Capitalism. Capitalism depends extensively upon private ownership which (in turn) depends upon hard Physical Money to continue acquired ownership value seamlessly through multiple exchanges of unlike kind. A soft money condition compromises value relationships extended over longer periods of time.

Marxism concentrates ownership into the realm of government, effectively concentrating decision making into the purview of those few individuals in control of the government. Ordinary individuals take roles akin to members of ship's crew, guests on paid-in-advance cruise, or students in a college dormitory environment. Economic decisions are still made, just not on a daily individual ownership basis.

Both Capitalism and Marxism exist in a real world that economically interacts. The challenge for both systems is to value unequally distributed resources when a need to trade occurs. Marxism hardly needs money, the private sector depends upon hard money, and governments of all ontologies can create soft money. These are ingredients for a potential economic maelstrom.

Proposed MMT prescriptions can be seen as efforts to shift the ontology envelope in one direction or another.

[1] A good description of the use of the word 'ontology' can be found at http://www-ksl.stanford.edu/kst/what-is-an-ontology.html.

(c) Roger Sparks 2021