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Monday, March 25, 2013

Let's Do Monetary Theory

I am at home with a bad cold, so let's start on this. I think you will be quite sorry, because no economic theory worth a flip can be anything but rigorous. The problem with all modern economic theories is that they have lost their reality constraints. An awful lot of what we see is mere mental masturbation, sparked by the innate human tendency to generate hope. It is a good tendency, but when we allow it to corrupt our perception of reality, it turns vicious. 

Now for rigor, you need rigorous definitions. So here we start. 

Any theory of money must start with markets. What is the definition of a market? A market is a system that allows half-trades. Money arises from market trading, but markets do not arise from money. Money arises to facilitate half-trades among remote parties.

A half-trade: A half-trade is different from a barter swap in that one person receives goods or services, and the other does not. There two types of half-trades. One is a gift, in which the party donating the good or service expects nothing in return but good-will and future cooperation. The smaller and more closely-knit a society is, the more likely it is that gifted half-trades may predominate. The other type is a deferred trade, in which the party giving the good or service expects to get a good or service in return, in the future. Deferred trades are further split into two categories - promissory and by proxy. 

But before we get into deferred trades, we have to stop and dwell for quite a while on the gifts. The reason why we must do this is that gift exchanges form the basis of human societies, and they probably still form the majority of all human trades. Gift exchanges are instinctive, and other trades are not. Gift exchanges arose before humans were humans! If you look at primate groups (or for that matter a wolf pack), gifts of food, companionship and protecton determine the group structure, who mates with whom, and survival priorities when things get nasty. 

Moving forward from the wolves and the chimps, think about human families. Most of what we earn goes to support family members. This is so because human children are very dependent for a very long time, and when we reach our second childhoods in old age (should we be so fortunate), we too are dependent. Human females, despite all the propaganda, need special protections and a lot of rest in order to have human children. Thus the first and irrevocable need for gift exchanges arises from biology, which is immutable. We do these things mostly by instinct.

Now it is true that young unattached don't have families for which to care, although in many human societies, especially when things get tough, the family unit gets stronger rather than weaker. The young unattached male or female is mostly a product of periods of prosperity.. When things get rough, the young unattached stay with their families longer and receive much higher levels of support from their families, and probably give higher levels of support to their older family members later as a result.And even when things are not rough, young unattacheds spend a lot of time and money basically seeking out mates. 

The final reason why it is so important to realize the importance of gift trades, even in a modern economy, is that monetary systems break down when they no longer work to support gift trades. 

Further, there is a distinct and highly instinctive subsegment of the gift economy among males, especially younger human males. The good traded is social prestige, support within the group and protection from others outside the group. Call it the wolf-pack gifting system. Violence and the threat of violence can break down any remote trade market economy with stunning swiftness, in which case wolf-pack economies reemerge. The streets of Chicago, the Somali pirates, the soccer gangs of Europe - all these are an example of that subsegment of the human social economy, as are Nazi Germany.  Almost always wolf-pack economies confer prestige with females.

Now I do not intend to go on and on about this, so if you doubt the significance of the gifting economy, consider the history of the Irish and the fact that Communist party structure always turns into group massacres. Irish history is just wolf-packs. Communist party structure devolves very rapidly into a non-market gifting economy, and the only way to keep it going is to kill a lot of people. The party structure is nothing but a gang of gorillas in which the dominant parties can only keep their place by distributing rewards to their supporters which their supporters have not earned. So they rob, steal and murder to get those rewards. 

Objectivism is wrong not because it values a market-based economy highly - remote market economies do tend to be efficient, peaceful and more just - but because it completely elides the fact that even market-based economies only survive on a firm foundation of gift-based exchanges, and that if the market economy breaks down (stops supporting the gift-based exchanges) then you promptly wind up with wolves instead of gorillas. 

Well, this post is too long already. Neither a wolf or gorilla be! Next we can think about deferred trades.

Um, not too long at all. Please feel free to elaborate more. I'd appreciate a bit more on the difference between the wolves and the gorillas; were the Nazis really microwolves and macrogorillas?
I have been looking forward to your thoughts on MMT for a long time, MOM. Thanks for the interesting start, and I will await your next post!

So in other words a society, market-based or not, can only keep the wolves at bay if it supports the desires of most people for a sense of belonging and purpose. Thus, the fatal flaw of Objectivism.

But I thought the trader was the essence of morality... or somthing like that. In any case I look forward to where this leads.
Very interesting post....I look forward to the next in the series.

Possibly-related post about the relationship among: oxytocin ("the cuddle/bonding hormone"), group affiliations, and game theory:

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"Almost always wolf-pack economies confer prestige with females"....not everyone participating in the wolf-pack economy can have equal prestige with females, of course...I think what this means is that when a wolf-pack economy becomes strong in a particular area, participants in the wolf-pack economy will generally have higher prestige than those in the same area who are participating in either the half-trade economy or the nonviolent gift economy..ie, the street-gang member will have higher prestige than either the cab driver or the preacher.

Which seems pretty close to the common assertion: "Chicks like bad boys."

To the extent this is true, the reason could be that evolution has "learned" that however long a civilized half-trade economy (and/or nonviolent gift economy) lasts, the time of the wolf-packs will come sooner or later.
David - I think anyone who has reviewed the now substantial research into the communal life of the primates would recognize an older pattern.

The wolfpack membership can confer some degree of prestige, but the grand mating prize is to get high up in the order. When economic circumstances in a community are such that young non-connected males are unlikely to garner enough resources in the market to establish themselves with a family life, gangs form.

Try this paper.

Neil, Objectivism was originally an appeal to instinct itself as to why Communist philosophy was a degrading system. But when it turned into a philosophy, the failure to deal with family/group instincts doomed it.

A much better novelistic treatment of group life dynamics and why personal freedom will bring prosperity and dignity is, believe it or not, Willa Cather's "Sapphira and the Slave Girl". One of the striking excellences of this book (almost certainly based on a true story) is that it deals with female instinctual group relationships, which are vastly neglected in our modern thought.

What I want readers to take away from this post is some sense of how limited the monetary market economy can be in some circumstances. It floats always "on top" of the gift-based economy, and if the gift-based economy is not working, monetary systems will always break down.

You can't have a realistic discussion of monetary theory without first establishing the limits of money's reach.

When market economics no longer sustains the private gift-based economy, the market economics will ALWAYS break down, and for both adult males and females the instinct will shift toward forming group alliances and establishing a favored position within them for oneself and one's own.

The reason why they have a spate of slashing attacks on little school kids in China is because older folks are seeing their kids unable to establish a breeding territory. It's as instinctual as all that.
Saying it with less finesse, this is why black youth (males)shoot each other so much in the inner cities. They have false pride. It is the only pride they have.

The Boy Scouts teach that you sometimes have injustices and you lose and you have to walk away. Churches teach about false pride.

Neither Boy Scouts or Church are cool and are stigmatized for being anti gay marriage. Where is the state stepping in and replacing what was taught by these two disfavored institutions? Is communism next? Perhaps Islam would be better for them.
Joseph, Islam is what recruits them AFTER they wind up in jail.
Interested in the idea of wolf-pack behavior in Irish history. I can see it for tribal based society, but is there a handy analysis you can link?
M_O_M, how did you draw that conclusion about the Chinese school knifings? It does appear to be an entirely different phenomenon from U.S. school shootings, since the Chinese perpetrators tend to be middle-aged. But they also appear to be childless, or at least the news accounts don't mention their families.

Not sure Maxed out Mama’s response But I seem to recall one of the stories regarding a older man who went in and killed about 7 children at a school for communist functionaries: Went like this: Guy saved a lot of money for his single son to buy a house. Given the bad sex ratios, ~118 men for every 100 women of childbearing age, you need a house to have a chance to get a woman. So father buys some land (actually a 100 year lease), builds a house……..and then the local communist party voids his ownership to sell the land to a higher bidder. Dad and son lose everything; son will now have to play with him self, family line to end. Father decides to get even by killing the children of those that did it to him………….. That is what you get without Christianity.
MoM, you mentioned Objectivism. It's interesting that in Ayn Rand's first novel, We The Living (also the best in terms of character development, IMO), Kira's great love, Leo, is completely outside the half-trade economy: he's an aristocrat, whose main accomplishment to date seems to have been seducing quite a few women. Her friend and lover Andrei (who in other circumstances would have been only a friend) is by definition outside the half-trade economy, but as a military hero is a successful member and leader of a wolf pack...also gift-oriented, given his real but misdirected idealism.
One thing that is so base that it is easily forgotten: in order to give a gift, one must either have a surplus or make a sacrifice.

(Such is also true of paying tribute.)

Neil - I relied on some analyses of the various perps written by some Chinese writers.

It does seem to be a striking out against what other people have and the perps cannot have.

Very tragic. Beyond tragic.

Gordon and others - do you mind if we wait to discuss particular historical instances of market breakdowns and their social effects until we get to the end of this?

The purpose of this post was really to start from a realistic position. Markets and money arise and continue in order to facilitate some basic human needs. When those human needs are not met, they break down, and other ways of meeting those needs are employed.

Those other ways have varying degrees of success. I think this must always be true in any society because even with today's extensive market systems, the gift-based economy is going strong. Thus theories about decanted babies and so forth seem nothing but science fiction - and an economics which doesn't acknowledge the gift-based economy is to some extent economic fiction!

By all means, MoM. We'll take what we get. And We'll like it!
Objectivism is a very fine philosophy ... for Homo aspbergerus.
Roaring with laughter. Yup. Aspies can be interesting, highly productive people, but the society they would generate would make Jurassic Park look like paradise.

But you generally can't communicate with them when they roar off into outer space.
I'm close to an aspie, and not exactly roaring with laughter. The stereotype is overdrawn.
My impression of Irish history is:

1. Normans/English invade to beat some sense into those troublesome Irish.

2. Invaders assimilate to Irish culture and become part of "those troublesome Irish."

Rinse and repeat.

How do the wolf packs fit in to this picture?
My impression of Irish history is:

1. Normans/English invade to beat some sense into those troublesome Irish.

2. Invaders assimilate to Irish culture and become part of "those troublesome Irish."

Rinse and repeat.

How do the wolf packs fit in to this picture?
WSJ - you can't be. A true Asperger really is different.

You can be really far out on the abstraction scale but not Aspergers. They are all way out on that end of the abstraction scale, but there's something else missing that you definitely have got.
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