I disagree with the proposition that money is a veil over barter. I have an objection to the "proof" based on the fact that a balance sheet balances. It does indeed balance but only if you value the components of each transaction as money. If you value ine side of a transaction as a "cake", you lose the permanence of the value. Next week the cake may be stale and of no value. Money has value over time. Cake does not. The fact that a cake does not hold value over time effects its price! The fact that a birthday cake with the wrong date has no value, effects price even more. The advantage of money is that it separates itself automatically from the nature of the purchased service or item. The seconda advantage of money is precision. The idea that four individual could find any set of transaction exactly equal in money equivelence, id practically nil. There would be winners and losers. The losers would often decline the transaction, which would leave the other paties isolated. the only aguement that this proposition solves is that it makes possible the idea of economic equillibribium. I do not belive that this concept is realistic because every buyer and or seller has a different view of the value of the transaction.
Thanks for leaving a comment! It's great to get feedback.
I think it might be worth me just clarifying the "One Lesson" approach. It's purely about looking at how actions (what people do, and events in the natural world) affect what people own, are owed and owe - nothing more. Have you read the article https://economics21st.substack.com/p/the-7-economic-actions which describes it from first principles? It's almost embarrassingly simple, but that's its strength. Ideas like value and equilibrium don't enter into it. If Alice buys a book for £10 at a bookshop, all the One Lesson concludes is that:
1. Alice has lost £10, and the bookshop has gained £10.
2. The bookshop has lost the book, and Alice has gained the book.
So to address your points:
My argument isn't that balance sheets balance (which they must do by definition of "raw net worth"), but that the effects of debt-related economic actions (pink/green arrows) often exactly cancel each other out. If I transfer £20 to your bank account, and you later transfer £20 to my account, do you agree that the effects on our balance sheets are entirely determined by *other* economic actions which have occurred?
Cake does go stale, yes. In the "One Lesson" model, this is a form of consumption(*), affecting what the owner owns. It doesn't affect the argument the article's making, because exactly the same thing would happen whether the 4 people had engaged in 4 separate transactions involving money, or they had all met up to barter their products in one big transaction.
You're right that it's almost impossible for 4 products to be sold at exactly the same price, but if I made a more complex example, I think readers would rapidly lose interest. Maybe I'll do that in a separate article, so thanks for the idea! As a quick illustration now, imagine that Dom pays Alice £30 for the amber. In that case, £10 of the transfers of cash around the loop would cancel each other out, leaving just the 4 transfers of tangible assets and a £20 transfer from Dom to Alice.
So just to summarise, all the article is saying is that the effects on people's balance sheets of debt-related economic actions cancel each other out over the lifetime of a debt, leaving only the effects of the actions from the real economy (production, transfer of tangible assets and consumption).
Did I address your points to your satisfaction?
(*) Technically it's modelled as consumption of a good cake and simultaneous production of a stale cake.
Money does look like a veil over barter, but the majority of money created by banks denotes a bank promise and is not created as a debt, as you and Karim (@realonomics) suggest. It is created as a credit, offset by an equal debit. A voluntary promise carries only a moral obligation. It is not a debt obligation, which stems from a prior transaction in which you received someone else’s asset.
Your previous article on “Debt” [2 Jun 2023] rightly says that a debt implies a promise, but the reverse is not necessarily true. Naked promises, in particular, cause this asymmetry and explain why the debit - recorded against your name in a bank’s asset account when it creates money as a credit - carries no debt.
Consider this: deposit a £100 Note at a bank and the bank creates a £100 debit against your name in an asset account, accompanied by a matching bank promise (a £100 credit in your account) that you accept as a substitute for your £100 Note. The same accounting steps apply whether you deposit a £100 BoE Promissory Note or a personal £200,000 Promissory Note. For auditing purposes, the bank must enter the debit against your name, simply to identify you as the depositor in each case. You become a creditor of the bank in both cases, and for the same reason: you own the credit because you made the valuable deposit.
It is an accounting mistake to think that your £200,000 promise puts you “in DEBIT”, meaning you “owe” the bank £200,000, as a DEBT. Like the £100 note, your £200,000 promise is naked because it actually increases the bank’s total assets by £200,000, and no existing bank asset is affected by it. Banks know the “note business”. They willingly accept promissory notes as valuable assets.
With the £100 BoE note, the resulting £100 credit and £100 debit offset each other completely, just as they do with your £200,000 promise. But you don’t ‘owe’ the bank £200,000 any more than you ‘owe’ it £100 after you deposit your £100 BoE promissory note. The £100 debit and £100 credit destroy any notion of a £100 loan or implication of a £100 “debt” owed to the bank. In each case, the credit is your asset, the debit is the bank’s asset, and both your promise and the bank’s promise must be kept.
That is why the bank can’t “lend” you either of those credit items, and if you don’t believe the Bank of England on that point, ask any competent accountant whether you can lend the credit balance in any of your liability accounts. Once you see the accounting logic that says the bank can’t lend you the £100 Credit in the case of the £100 Note deposit, because it is already your asset (and the bank’s liability), you should accept the same logic for the £200,000 deposit as well, since both are naked promises.
To create the illusion of a “£200,000 loan” in the second case, a bank MUST therefore disguise these accounting facts, and does so by inserting a deceptive narrative into its accounting record. Since May 2023, my Substack (Forensic Focus) has been exposing clear evidence of this ongoing deception by banks in Australia (see articles #2, #3, #5 & #6) and in Bavaria, against Richard Werner (see article #10).
For all the good accounting analysis they do, Steve Keen and Richard Werner have yet to make this “giant leap”.
The claim that money is a veil over barter is so utterly absurd... For a start, no society has ever run on barter; this is a myth taught to primary school children, grown-ups really should know better.
Second, even if you could model individuals *as if* they are bartering one thing for another, the proposition fails in the aggregate. The macroeconomy is not simply the sum of the individuals within it, it is a complex system with emergent properties. One of those properties is that the macroeconomy creates new money. Individuals can't, and if they try it they face a lengthy stay at one of HM's correctional facilities.
BTW - my book is out now from Shepheard Walwyn, if you're still interested in a copy.
"The claim that money is a veil over barter is so utterly absurd... For a start, no society has ever run on barter"
I don't know about the history of ancient economic systems, but all I'm saying is similar to what Say said:
"Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity
has been exchanged for another." (A Treatise on Political Economy, Book I, Chapter XIII).
I don't agree with him that it's part of the same transaction, but the changes to people's balance sheets are the same as if it had been a barter transaction.
"The macroeconomy is not simply the sum of the individuals within it"
What I've realised is that linearity isn't a property of a system, but of *a particular analysis of that system*. The movement of physical objects in the universe is complex and chaotic, with emergent behaviour, but the Newtonian analysis is still linear: the effects on objects' motion from the set of forces acting on them is the exact sum of the effects of the individual forces. Economic actions are analogous to forces, and changes in RNW are analogous to changes in momentum.
"One of those properties is that the macroeconomy creates new money. Individuals can't, and if they try it they face a lengthy stay at one of HM's correctional facilities."
My analysis says that banks create new money, simply by writing an IOU (a "new debt" action). In fact, as Minsky said, *anyone* can create money - the hard part is getting people to accept it. In the model I use, money doesn't have special properties - it's only *how people use it* that is different from most debts.
"BTW - my book is out now from Shepheard Walwyn, if you're still interested in a copy."
Ah - now I recognise you from Twitter when you had a different username. Congratulations on getting published! I've had a look at the preview of the introduction on Amazon. (There's a typo on P4 btw: "black swan even"). Looks interesting.
Yes, changes to the balance sheet are identical because money has the same value, by definition, as the thing traded for that money. However, in the aggregate, the macroeconomy creates new money and individual people and firms do not (even if purely because of legal prohibition. Also, while anyone can theoretically print off some notes, what they can't do, as you observe, is guarantee acceptance of those notes. Without acceptance they have created worthless bits of paper; creating actual *spending power* is a very different matter!) I agree with your balance sheet approach to modelling the economy, it's what Steve Keen does in his Ravel software, and I think he's dead right - Ravel is capable of generating results that mirror the real world perfectly.
I also think you have to reject the idea that money is a vale over barter, for the reason given above. Microeconomics has value. Macroeconomics has value. But macroeconomics is not simply the aggregation of microeconomics, you cannot understand the whole by studying the parts, any more than studying fuel pumps and clutches will teach you how to drive a car. The unique process of 'driving' emerges out of the complex system that arises out of the interaction between the car's various parts. Studying one teaches you nothing about the other, just as studying geology teaches you a lot about rock, but nothing about the orbits of large rocks around the sun.
I think you're right, we first encountered each other on Twitter, and I've been following your Substack ever since. It took 3 years, but my publisher finally got my book out! If you're interested, I've been doing videos on various themes from the book on my YT channel, called, unsurprisingly, Realonomics.
"Yes, changes to the balance sheet are identical because money has the same value, by definition, as the thing traded for that money."
The argument I'm making isn't about value. It's about the effects of some actions cancelling each other out. Let's look at the baker/glazier example. Here are the changes to their balance sheets when the baker buys a replacement window:
{Baker}
[A] - £50 (cash); + window
{Glazier}
[A] + £50 (cash); - window
And the changes when the glazier buys a replacement cake:
{Baker}
[A] + £50 (cash); - cake
{Glazier}
[A] - £50 (cash); + cake
The changes to balance sheets *can* be added together. (Steve Keen's Ravel relies on this). So what we end up with after the two transactions is:
{Baker}
[A] + window; - cake
{Glazier}
[A] - window; + cake
Each person's increase and decrease in cash cancel out. This leaves each person with the same balance sheet they would have had if they'd simply exchanged the window for the cake. That's the argument the article's making.
"But macroeconomics is not simply the aggregation of microeconomics"
Not in every aspect, but in some important ones it is. The changes to balance sheets at the macro level is simply the sum of the changes at the micro level. Again, this isn't just my observation: Ravel relies on this.
And while you're right that there are macroeconomic phenomena which aren't obvious consequences from microeconomics, there are some important invariants in macroeconomics which do follow from microeconomics, comparable to conservation of momentum which can be derived from Newton's laws. We can be *certain* that there's a flaw in any reasoning about motion on a large scale which breaks conservation of momentum; and that there's a flaw in any reasoning about macroeconomics which breaks the invariant that (ΔRNW = production - consumption).
You're right that it's not a barter system, and I'm not trying to say that it is.
Banks (including central banks) create money. They also destroy money. What I'm saying is that there's no *lasting* effect on what everyone owns, is owed, and owes as a result of the actions creating, transferring, and destroying a particular unit of money (or of any debt). The only effects which remain are from other actions.
The power of money is its ability not only to split complex real economy transactions into a series of much smaller transactions (involving money) which are far easier to coordinate, but also to allow the underlying changes in the real economy to develop over time instead of having to be determined beforehand. In the "Multiple people" example above (https://www.economics21st.com/i/184166782/multiple-people), Alice doesn't need to know who is eventually going to buy her amber. She only needs to know that Bob is happy to accept the money. Once the money returns to her, what's left over has the same effect on everyone's balance sheet as a barter transaction would.
Thanks! I think this approach of splitting transactions into individual actions is the most important discovery I've made. (It was also discovered independently by Borja Clavero: https://www.survivalconstraint.com/p/four-ways-to-pay). It brings a regularity to analysis, which I don't think you can get from treating the transaction as the unit of economic activity. Grouping actions by the tangible asset or debt to which they belong, rather than by the transaction to which they belong, turns this approach into macroeconomics as superposition of very simple parts. https://www.economics21st.com/i/151547522/macroeconomics
The next article will look at what happens when a debt is perpetual, but the quick answer is that it's equivalent to a transfer in a barter economy, rather than an exchange. The same as a default on a debt. In fact, while a time-bound debt is still in existence, it's also equivalent to a transfer, and the settlement of the debt is what converts it into an exchange.
I disagree with the proposition that money is a veil over barter. I have an objection to the "proof" based on the fact that a balance sheet balances. It does indeed balance but only if you value the components of each transaction as money. If you value ine side of a transaction as a "cake", you lose the permanence of the value. Next week the cake may be stale and of no value. Money has value over time. Cake does not. The fact that a cake does not hold value over time effects its price! The fact that a birthday cake with the wrong date has no value, effects price even more. The advantage of money is that it separates itself automatically from the nature of the purchased service or item. The seconda advantage of money is precision. The idea that four individual could find any set of transaction exactly equal in money equivelence, id practically nil. There would be winners and losers. The losers would often decline the transaction, which would leave the other paties isolated. the only aguement that this proposition solves is that it makes possible the idea of economic equillibribium. I do not belive that this concept is realistic because every buyer and or seller has a different view of the value of the transaction.
Thanks for leaving a comment! It's great to get feedback.
I think it might be worth me just clarifying the "One Lesson" approach. It's purely about looking at how actions (what people do, and events in the natural world) affect what people own, are owed and owe - nothing more. Have you read the article https://economics21st.substack.com/p/the-7-economic-actions which describes it from first principles? It's almost embarrassingly simple, but that's its strength. Ideas like value and equilibrium don't enter into it. If Alice buys a book for £10 at a bookshop, all the One Lesson concludes is that:
1. Alice has lost £10, and the bookshop has gained £10.
2. The bookshop has lost the book, and Alice has gained the book.
So to address your points:
My argument isn't that balance sheets balance (which they must do by definition of "raw net worth"), but that the effects of debt-related economic actions (pink/green arrows) often exactly cancel each other out. If I transfer £20 to your bank account, and you later transfer £20 to my account, do you agree that the effects on our balance sheets are entirely determined by *other* economic actions which have occurred?
Cake does go stale, yes. In the "One Lesson" model, this is a form of consumption(*), affecting what the owner owns. It doesn't affect the argument the article's making, because exactly the same thing would happen whether the 4 people had engaged in 4 separate transactions involving money, or they had all met up to barter their products in one big transaction.
You're right that it's almost impossible for 4 products to be sold at exactly the same price, but if I made a more complex example, I think readers would rapidly lose interest. Maybe I'll do that in a separate article, so thanks for the idea! As a quick illustration now, imagine that Dom pays Alice £30 for the amber. In that case, £10 of the transfers of cash around the loop would cancel each other out, leaving just the 4 transfers of tangible assets and a £20 transfer from Dom to Alice.
So just to summarise, all the article is saying is that the effects on people's balance sheets of debt-related economic actions cancel each other out over the lifetime of a debt, leaving only the effects of the actions from the real economy (production, transfer of tangible assets and consumption).
Did I address your points to your satisfaction?
(*) Technically it's modelled as consumption of a good cake and simultaneous production of a stale cake.
Money does look like a veil over barter, but the majority of money created by banks denotes a bank promise and is not created as a debt, as you and Karim (@realonomics) suggest. It is created as a credit, offset by an equal debit. A voluntary promise carries only a moral obligation. It is not a debt obligation, which stems from a prior transaction in which you received someone else’s asset.
Your previous article on “Debt” [2 Jun 2023] rightly says that a debt implies a promise, but the reverse is not necessarily true. Naked promises, in particular, cause this asymmetry and explain why the debit - recorded against your name in a bank’s asset account when it creates money as a credit - carries no debt.
Consider this: deposit a £100 Note at a bank and the bank creates a £100 debit against your name in an asset account, accompanied by a matching bank promise (a £100 credit in your account) that you accept as a substitute for your £100 Note. The same accounting steps apply whether you deposit a £100 BoE Promissory Note or a personal £200,000 Promissory Note. For auditing purposes, the bank must enter the debit against your name, simply to identify you as the depositor in each case. You become a creditor of the bank in both cases, and for the same reason: you own the credit because you made the valuable deposit.
It is an accounting mistake to think that your £200,000 promise puts you “in DEBIT”, meaning you “owe” the bank £200,000, as a DEBT. Like the £100 note, your £200,000 promise is naked because it actually increases the bank’s total assets by £200,000, and no existing bank asset is affected by it. Banks know the “note business”. They willingly accept promissory notes as valuable assets.
With the £100 BoE note, the resulting £100 credit and £100 debit offset each other completely, just as they do with your £200,000 promise. But you don’t ‘owe’ the bank £200,000 any more than you ‘owe’ it £100 after you deposit your £100 BoE promissory note. The £100 debit and £100 credit destroy any notion of a £100 loan or implication of a £100 “debt” owed to the bank. In each case, the credit is your asset, the debit is the bank’s asset, and both your promise and the bank’s promise must be kept.
That is why the bank can’t “lend” you either of those credit items, and if you don’t believe the Bank of England on that point, ask any competent accountant whether you can lend the credit balance in any of your liability accounts. Once you see the accounting logic that says the bank can’t lend you the £100 Credit in the case of the £100 Note deposit, because it is already your asset (and the bank’s liability), you should accept the same logic for the £200,000 deposit as well, since both are naked promises.
To create the illusion of a “£200,000 loan” in the second case, a bank MUST therefore disguise these accounting facts, and does so by inserting a deceptive narrative into its accounting record. Since May 2023, my Substack (Forensic Focus) has been exposing clear evidence of this ongoing deception by banks in Australia (see articles #2, #3, #5 & #6) and in Bavaria, against Richard Werner (see article #10).
For all the good accounting analysis they do, Steve Keen and Richard Werner have yet to make this “giant leap”.
The claim that money is a veil over barter is so utterly absurd... For a start, no society has ever run on barter; this is a myth taught to primary school children, grown-ups really should know better.
Second, even if you could model individuals *as if* they are bartering one thing for another, the proposition fails in the aggregate. The macroeconomy is not simply the sum of the individuals within it, it is a complex system with emergent properties. One of those properties is that the macroeconomy creates new money. Individuals can't, and if they try it they face a lengthy stay at one of HM's correctional facilities.
BTW - my book is out now from Shepheard Walwyn, if you're still interested in a copy.
Thanks for your comment!
"The claim that money is a veil over barter is so utterly absurd... For a start, no society has ever run on barter"
I don't know about the history of ancient economic systems, but all I'm saying is similar to what Say said:
"Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity
has been exchanged for another." (A Treatise on Political Economy, Book I, Chapter XIII).
I don't agree with him that it's part of the same transaction, but the changes to people's balance sheets are the same as if it had been a barter transaction.
"The macroeconomy is not simply the sum of the individuals within it"
What I've realised is that linearity isn't a property of a system, but of *a particular analysis of that system*. The movement of physical objects in the universe is complex and chaotic, with emergent behaviour, but the Newtonian analysis is still linear: the effects on objects' motion from the set of forces acting on them is the exact sum of the effects of the individual forces. Economic actions are analogous to forces, and changes in RNW are analogous to changes in momentum.
"One of those properties is that the macroeconomy creates new money. Individuals can't, and if they try it they face a lengthy stay at one of HM's correctional facilities."
My analysis says that banks create new money, simply by writing an IOU (a "new debt" action). In fact, as Minsky said, *anyone* can create money - the hard part is getting people to accept it. In the model I use, money doesn't have special properties - it's only *how people use it* that is different from most debts.
https://www.economics21st.com/p/money-and-banking-1
"BTW - my book is out now from Shepheard Walwyn, if you're still interested in a copy."
Ah - now I recognise you from Twitter when you had a different username. Congratulations on getting published! I've had a look at the preview of the introduction on Amazon. (There's a typo on P4 btw: "black swan even"). Looks interesting.
Yes, changes to the balance sheet are identical because money has the same value, by definition, as the thing traded for that money. However, in the aggregate, the macroeconomy creates new money and individual people and firms do not (even if purely because of legal prohibition. Also, while anyone can theoretically print off some notes, what they can't do, as you observe, is guarantee acceptance of those notes. Without acceptance they have created worthless bits of paper; creating actual *spending power* is a very different matter!) I agree with your balance sheet approach to modelling the economy, it's what Steve Keen does in his Ravel software, and I think he's dead right - Ravel is capable of generating results that mirror the real world perfectly.
I also think you have to reject the idea that money is a vale over barter, for the reason given above. Microeconomics has value. Macroeconomics has value. But macroeconomics is not simply the aggregation of microeconomics, you cannot understand the whole by studying the parts, any more than studying fuel pumps and clutches will teach you how to drive a car. The unique process of 'driving' emerges out of the complex system that arises out of the interaction between the car's various parts. Studying one teaches you nothing about the other, just as studying geology teaches you a lot about rock, but nothing about the orbits of large rocks around the sun.
I think you're right, we first encountered each other on Twitter, and I've been following your Substack ever since. It took 3 years, but my publisher finally got my book out! If you're interested, I've been doing videos on various themes from the book on my YT channel, called, unsurprisingly, Realonomics.
"Yes, changes to the balance sheet are identical because money has the same value, by definition, as the thing traded for that money."
The argument I'm making isn't about value. It's about the effects of some actions cancelling each other out. Let's look at the baker/glazier example. Here are the changes to their balance sheets when the baker buys a replacement window:
{Baker}
[A] - £50 (cash); + window
{Glazier}
[A] + £50 (cash); - window
And the changes when the glazier buys a replacement cake:
{Baker}
[A] + £50 (cash); - cake
{Glazier}
[A] - £50 (cash); + cake
The changes to balance sheets *can* be added together. (Steve Keen's Ravel relies on this). So what we end up with after the two transactions is:
{Baker}
[A] + window; - cake
{Glazier}
[A] - window; + cake
Each person's increase and decrease in cash cancel out. This leaves each person with the same balance sheet they would have had if they'd simply exchanged the window for the cake. That's the argument the article's making.
"But macroeconomics is not simply the aggregation of microeconomics"
Not in every aspect, but in some important ones it is. The changes to balance sheets at the macro level is simply the sum of the changes at the micro level. Again, this isn't just my observation: Ravel relies on this.
And while you're right that there are macroeconomic phenomena which aren't obvious consequences from microeconomics, there are some important invariants in macroeconomics which do follow from microeconomics, comparable to conservation of momentum which can be derived from Newton's laws. We can be *certain* that there's a flaw in any reasoning about motion on a large scale which breaks conservation of momentum; and that there's a flaw in any reasoning about macroeconomics which breaks the invariant that (ΔRNW = production - consumption).
Fair comment, and I'm not disagreeing with you BTW. I think our approaches are entirely compatible.
You lot getting scared the cat's out of the bag.
Can you explain what you mean by that? I'm not quite sure what you're getting at.
We know governments create money when they spend and banks create deposits when they lend. Obviously this ain't no barter system.
Thanks - I see what you're saying.
You're right that it's not a barter system, and I'm not trying to say that it is.
Banks (including central banks) create money. They also destroy money. What I'm saying is that there's no *lasting* effect on what everyone owns, is owed, and owes as a result of the actions creating, transferring, and destroying a particular unit of money (or of any debt). The only effects which remain are from other actions.
The power of money is its ability not only to split complex real economy transactions into a series of much smaller transactions (involving money) which are far easier to coordinate, but also to allow the underlying changes in the real economy to develop over time instead of having to be determined beforehand. In the "Multiple people" example above (https://www.economics21st.com/i/184166782/multiple-people), Alice doesn't need to know who is eventually going to buy her amber. She only needs to know that Bob is happy to accept the money. Once the money returns to her, what's left over has the same effect on everyone's balance sheet as a barter transaction would.
Let me know if you don't find that convincing.
Thanks! I think this approach of splitting transactions into individual actions is the most important discovery I've made. (It was also discovered independently by Borja Clavero: https://www.survivalconstraint.com/p/four-ways-to-pay). It brings a regularity to analysis, which I don't think you can get from treating the transaction as the unit of economic activity. Grouping actions by the tangible asset or debt to which they belong, rather than by the transaction to which they belong, turns this approach into macroeconomics as superposition of very simple parts. https://www.economics21st.com/i/151547522/macroeconomics
The next article will look at what happens when a debt is perpetual, but the quick answer is that it's equivalent to a transfer in a barter economy, rather than an exchange. The same as a default on a debt. In fact, while a time-bound debt is still in existence, it's also equivalent to a transfer, and the settlement of the debt is what converts it into an exchange.