Of fact and fiction

Novelist Kerry Greenwood (the author of the Phryne Fisher books, now a successful TV series), has recently published a book on the Somerton Man mystery, Tamam Shud: the Somerton Man Mystery. The book interweaves Kerry's memories of her late father--a wharfie who loved telling stories--and her memories of Adelaide with the famous mystery of the unidentified man dead of unknown causes found on Somerton Beach in 1948. The tale being one of her father's stories--odd and memorable because it had no conclusion. The title of the book comes from the torn-out scrap of The Rubayiat of Omar Khayam that was found in a secret pocket in the dead man's suit. It is not really "true crime" because it is not clear there was a crime; it may have been murder, but it could also have been suicide, or natural causes. (Declaration of interest: I did some of the research for the book.)

A review of the book in the Sydney Review of Books notes with some emphasis Kerry's comfort with her working class origins and bemoans an allegedly missed opportunity to challenge the distinction between fact and fiction:

Someone in love with their form can see infinite potential within it, and Greenwood’s storytelling is impeccable, engaging, great fun. But someone in love with their form can also miss the potential that lies in breaking away from it, shifting familiar parameters to suit the demands of a different kind of story. Greenwood’s curiosity is so infectious, her stories so interesting, and the mystery of Somerton Man so fascinating, that this flaw can easily slip past us. And yet Tamam Shud strikes me as a missed opportunity to challenge the separation of fiction and non-fiction, and bring them together in some kind of whole. It’s almost as if the book is haunted by Adelaide’s psychic dualities.

Actually, the reviewer writes 'fiction and non-fiction', which lacks the blunt directness of 'fact and fiction'. The latter phrasing can be expected to resonate with someone who is legal aid solicitor operating in magistrate courts, where separating fact from fiction is rather the point of the exercise. Facts about the law, facts about the case.

In fact, an unsolved mystery such as that of Somerton Man rather starkly reveals the distinction. Fact turns on what is known, fiction has no such limitation. For it is a work of creation, constrained in what can be known about the characters and their motives only by the decisions of the writer.

Fiction has other limitations. To be successful, it has to generate what J. R. R. Tolkien called (in On Fairy Stories) secondary belief. We have to be transported into the imagined world and held there.

The various forms of fiction also impose particular limitations. As Kerry Greenwood points out, a crime novelist has expectations to fulfil:

No coincidences are allowed in fiction … It is because readers of crime fiction rightly demand three things – a crime, a detective and a solution. Crime fiction is a puzzle and the author must play fair.

But fiction does not have the limitation of lack of knowledge--at least not about the characters, their action and purposes--because fiction is an act of creation. Where knowledge cannot take us, imagination can still venture. But then it is not fact, but fiction or speculation.

It is not that there was no complete story about Somerton Man. As the fictional crime novelist Castle observes in the pilot episode of the TV series of the same name in an exchange with detective Kate Beckett:

Richard Castle: I'm here for the story.
Kate Beckett: The story?
Richard Castle: Why those people? Why those murders?
Kate Beckett: Sometimes, there is no story. Sometimes, the guy is just a psychopath.
Richard Castle: [scoffs] There's always a story, always a chain of events that makes everything make sense. Take you for example. Under normal circumstances, you should not be here. Most smart good looking women become lawyers, not cops. And yet here you are. Why?
Kate Beckett: I don't know, Rick. You're the novelist. You tell me.
Richard Castle: Well, you're not bridge-and-tunnel. No trace of the boroughs when you talk. So that means Manhattan. That means money. You went to college, probably a pretty good one. You had options. Yeah, you had a lot of options, more socailly acceptable options. But you still chose this. That tells me, something happened. Not to you. No, you're wounded, but you're not that wounded. No, it was someone you care about, it was someone you loved. And you probably could have lived with that but the person responsible was never caught.
Richard Castle: [silence]
Richard Castle: And that Detective Beckett, is why you are here.
Kate Beckett: Cute trick. But don't think you know me.
Richard Castle: The point is there's always a story. You just have to find it.
Kate Beckett: [opens up letter and eyes grow wide] I think I just did.
[shows Castle letter with a drawing of the crime scene]

There is (or rather was) a chain of events which makes what happened to Somerton Man make sense. The facts are that much of that chain of events is lost in the passage of time, likely never to be recovered. It is not that there is no story, it is just that not enough is known for us to have the story. The story is not accessible, it is lost to the realm of speculation.

A guide to the land of Faerie

Which makes it splendid fodder for fiction, since the writer can do what reality can likely no longer do--provide a coherent story. Somerton Man does not blur the difference between fact and fiction at all, but renders the constraints of fact particularly stark. We are pattern-seeking beings, and having merely bits of the pattern, so that the story is lost, is frustrating. Hence the urge to find the missing pieces, the enticement of an unsolved mystery. Unsolved because the key bits of the pattern we want to discern, the story, the chain of events which makes things make sense, are lost to us.

But the distinction between fact and fiction is not quite the same has that between fiction and non-fiction. For fact has no audience, it just is. It may or may not be discovered, but is not less real for not being known--otherwise the process of discovery is something else. Non-fiction and fiction both have an audience (or at least seek to do so). They are aimed at an audience, at garnering a readership or viewers. One is an audience for facts, presented coherently; the other for tales, which offer a more complete coherence.

Non-fiction accepts the constraints of fact; which are heavy constraints. But does so without the joy and burden of creation that fiction both instantiates and labours under. Indeed, the constraints of fact are so heavy, much non-fiction fails to abide by them, intentionally or unintentionally, to a greater or lesser extent.

The commonalities of seeking an audience, and providing pattern and structure, do not, however, relieve the writer of the constraints of the difference between fact and fiction. On the contrary, they make those constraints of distinction even more important. To blur the distinction so that the reader does not know whether they are dealing with fact or fiction is not to play fair with the reader, with the audience. It is a distinction with a difference and a conscientious writer is always acutely aware of it.

Hence novelists, particularly historical novelists, typically research the facts of a period so they can invoke it more effectively. Getting the period details right also plays fair with the reader, that the world they are being asked to believe in could have happened; the more we believe in the possibility of its reality, the more we are transported into it. The more it has secondary belief.

Fiction can, after all, not only provide us with a sense of the past (or the future) but also the present. Over the years, many an observation by a novelist (particularly female novelists) on abiding emotional truths about people, and the interactions they have, has provided me with enlightenment, or solace, or both. Nor am I the only one, as this classic blog post I am a Dark Elf expresses nicely; how a Muslim immigrant can find inspiration in the story of a drow from tales set in the Dungeons & Dragons universe. A story has that much more power the more it is embedded in the reality of people, in emotional truth.

Yet, they remain made-up stories, things of secondary belief, of sub-creation, however great the art and perception they may embody.  The story of Somerton Man is not made up; it is opaque to us precisely because it is not made up. As Tolkien says of Fantasy, but applies to fiction generally:

Fantasy is a natural human activity. It certainly does not destroy or even insult Reason; and it does not either blunt the appetite for, nor obscure the perception of, scientific verity. On the contrary. The keener and the clearer is the reason, the better fantasy will it make. If men were ever in a state in which they did not want to know or could not perceive truth (facts or evidence), then Fantasy would languish until they were cured. If they ever get into that state (it would not seem at all impossible), Fantasy will perish, and become Morbid Delusion.

For creative Fantasy is founded upon the hard recognition that things are so in the world as it appears under the sun; on a recognition of fact, but not a slavery to it. So upon logic was founded the nonsense that displays itself in the tales and rhymes of Lewis Carroll. If men really could not distinguish between frogs and men, fairy-stories about frog-kings would not have arisen.

How real are you? Real enough for emotional power?

The appeal of fiction is precisely that it invokes the reality we live in but is not entirely constrained by it. In particular, it does not have the epistemic constraints of reality. There is precisely the level of mystery about people, their action and motives that the author chooses, and no more. Reality is nowhere near as obliging. We can only work with what we have or can find, with no guarantees or promises that it will be enough.

As reading Kerry Greenwood's rather splendid rendition of the mystery of the unknown man, dead of unknown causes, found on Somerton beach in 1948, makes very clear; a rendition interwoven with her past and that of her father's. To seek to blur the distinction between fact and fiction is not to provide new understanding, it is to betray the understandings that both can give us.

[Cross-posted at Skepticlawyer.]

The real convenience of money

I recently read Adam Fergusson's history of the early 1920s hyperinflation in Weimar Germany--which also covers contemporary hyperinflations of Austria and Hungary. (Well-spotted if you noticed that they were the losing Powers of the Dynasts' War--aka WWI; this was not a coincidence.) One of the striking things about the period is how misguided conventional wisdom typically was in the afflicted countries about what was causing the problem and how to solve it. People blamed almost everything except the actual cause--the flooding of the economies by the central banks with ever higher levels of currency. The rising flood of said currency having the consequence of rendering nugatory the war-debt incurred by patriotic citizens by inflating it into insignificance. (The losing-the-War reparations well in excess of the willingness to tax citizens were not, however, similarly eliminated: the history of the war reparations imposed on France in 1871 makes for an instructive comparison--the French paid theirs in full in gold before the due date.)

Getting money wrong

But getting money wrong is a recurring feature of commentary on matters economic. That the Great Depression was overwhelmingly a monetary phenomena was not a much accepted view at the time, and is still disputed. Worse, much conventional wisdom during the 1930s revolved around fears of imminent inflation which were profoundly misguided then and seem unbelievably obtuse in retrospect.

In our own time, that the stagnation of the Japanese economy, the problems of the eurozone, US and UK economies, and the Great Recession more broadly, all have monetary causes is very much a minority view, even among economists, while the fears of imminent inflation which so disfigured 1930s commentary is very much in evidence. Fears based, as were the same fears in the 1930s, on a profound misreading of monetary conditions and the significance of surges in the monetary base. (In particular, not apparently grasping that money not being used in transactions has no effect on the price level, nor any necessary effect on future price levels.)

The myth of the real economy

The fundamental error threading through much of the above--leaving aside the misguided inflation fears--is the notion that the "real" economy--the economy of goods and services--is much more causally important than mere money. Money is merely a means of transacting, it is the exchange of goods and services which really matter and have real causal power. (And even the overblown fears of inflation typically massively discount the significance of income expectations on economic activity.)

This discounting of money having any "real" effects whatsoever is an odd claim. (To put it in economic speak, that money is not merely superneutral--changes in the rate of growth of the money stock have no significant long-run effects--but entirely neutral--changes in the money stock have no short-run effects at all. Though I am generally much more concerned with expectations than monetary quantities on their own.)

If we take the analogy of an engine being like a car engine, then money becomes like the oil which allow the parts of the engine to interact smoothly. And engines do not work too well if the oil is lacking, or if it floods the engine. In a monetary-exchange economy, money is half of almost all transactions. Surely something that is one side of almost all transactions might matter for the level of transacting? Adam Fergusson's above-mentioned history When Money Dies is full of very real effects from hyperinflation.

The underlying mistake is to assume that money does not affect either the level or nature of transactions. That the "real economy" is basic and money is just a convenient epiphenomena. But not so convenient as to have serious effects on that "real" economy of goods and services. Convenient, but not "really" convenient.

This is profoundly wrong-headed. A monetary-exchange economy is dominated by transactions that would not take place if it were not for money. That being so, shifts in the willingness to transact because of shifts in the willingness to spend money can profoundly affect the level of transactions. This without entering into the bizarre world of hyperinflation.

Wrong origins
Getting the role of money wrong is connected to getting the nature and significance of barter wrong. If we look as the standard "just so" story as set out by economist Carl Menger about how money evolved out of barter, we can see there is an underlying assumption that the self-contained (often one-off) transactions between otherwise unconnected individuals which are so much the stuff of exchange in monetised economies is the "basic", the "original", form of economic transactions. So transactions are either monetised or barter.

This is flatly wrong. If we look at the origins of human society (and so economic activity) in foraging (that is hunter-gatherer) bands, they were not barter economies. Barter was something that one did on the rare occasions that one traded with people you did not have on-going connections with. The overwhelming majority of transactions were embedded transactions. That is, transactions embedded in a web of personal connections and which were typically ways of fulfilling explicit or implicit obligations that were so much the stuff of said connections.

Barter is awkward for all the reasons Menger and others have identified. As Menger states, in foraging and simple farming societies barter has the difficulty:

each man is intent to get by way of exchange just such goods as he directly needs, and to reject those of which he has no need at all, or with which he is already sufficiently provided. It is clear then, that in those circumstances the number of bargains actually concluded must lie within very narrow limits. Consider how seldom it is the case, that a commodity owned by somebody is of less value in use than another commodity owned by somebody else! And for the latter just the opposite relation is the case. But how much more seldom does it happen that these two bodies meet! Think, indeed, of the peculiar difficulties obstructing the immediate barter of goods in those cases, where supply and demand do not quantitatively coincide; where, e.g., an indivisible commodity is to be exchanged for a variety of goods in the possession of different person, or indeed for such commodities as are only in demand at different times and can be supplied only by different persons! Even in the relatively simple and so often recurring case, where an economic unit, A, requires a commodity possessed by B, and B requires one possessed by C, while C wants one that is owned by A — even here, under a rule of mere barter, the exchange of the goods in question would as a rule be of necessity left undone.

Far too awkward to be the basis of any society, no matter how simple. Instead, people lived in a web of personal connections and obligations that dominated economic activity, since transacting outside said web of connections and obligations was so difficult and chancy.

The first step to expand transacting possibilities was to create units of account, as such formal precision greatly expanded the connection and transaction possibilities. Such units were generally based on weight (shekels, debens, drachmas and pounds are all originally weights), but cattle and slave girls (in Irish law codes) have also been used. That transactions could be formal rather than personal meant that they could be incurred outside existing webs of personal connections. This also allowed credit exchanges--barter exchanges without the time constraint of immediate exchange. Hence the use of tally sticks--the discharge of the obligation ended the transaction with the rejoining of the  tally stick. (Not coincidentally, tally sticks were also used in tax collection--taxes being a compulsory obligation.)

Tally sticks

It was entirely possible to create highly sophisticated economies based on formal and otherwise embedded connections. That is the way manorial economics work, for example. Landlord and peasants are connected by a web of ongoing obligations, often involving a basic exchange of protection-for-labour. To call such transactions "barter" merely because they were largely non-monetary is to profoundly mistake their nature.

Add in credit, and the mixture of embedded transactions, credit transactions and barter (often implicitly using units of account) plus commodity media of exchange (e.g. silver) is how societies from Pharaonic Egypt to the Khmer Empire operated for millennia. Merely having units of account greatly expanded transaction possibilities (and likely reduced conflict even for many embedded transactions because they could be made more precise and so determinant.) What means of transacting are available profoundly affect the level and form of transactions which become practical.

The next step was to create media of account; things that were a medium of exchange that also instantiated the unit of account. That is money--originally in the form of coins. Suddenly, the transaction possibilities expanded greatly. One-off transactions discharged on the spot with people you had no connections with became much easier. Rulers were no longer stuck with "use or lose it" labour service as their dominant income source. They could gain revenue now and spend it later. Not to mention that collecting coins takes a lot less administrative effort than organising labour service. And can be levied on any agent or transaction.

Coins make the world transact a lot more

Once one grasps that money actually greatly expands transaction possibilities, and so the level of transactions, then the notion that money is some transparent epiphenomenon that cannot have "real" effects makes much less sense. The convenience of money is a "real" convenience affecting profoundly the level and nature of transactions.

That one can gain revenue now but spend it later also means that Say's Law does not apply. That, in Say's words:

it is production which opens a demand for products. . . . Thus the mere circumstance of the creation of one product immediately opens a vent for other products

is not correct (at least not in the same time period). So monetary causes can have "real" effects. Indeed, are much the most plausible culprit for the business cycle, of what used to be called "general gluts" (an overall fall in demand for goods and services; that is, in willingness to spend money to buy goods and services).

Monetary austerity--driving down income expectations--can and does affect the level of economic activity, the willingness to exchange in transactions. Particularly given that debt obligations are the ultimate "sticky" price, so adverse income expectations can drive people to cut back spending to service (or reduce) their debt while other "sticky" prices (notably wages) lead to spending having effects on quantities demanded that are not immediately "cleared" by price changes.

If central banks drive down income expectations, or fail to counteract a fall in income expectations, then the level and form of transactions will be affected. As the convenience of money is a real convenience, expectations about money income affects the level and form of transactions in a monetised economy. So money matters and can profoundly affect the "real" economy.

[Cross-posted at Skepticlawyer.]

Apologies for absence

The combination of the Melbourne heatwave, being very busy at work (having to get up a 5.30am in the morning to beat the traffic then doing a full day's presentation teaching takes it out of me) and an obsessive writing project have meant I have not been around much.  Apologies for that. When I have been, it has mainly to fill the spam bin.  In the war between spammers and spam-blockers, the spammers are clearly currently ahead. Apparently, praising one's format/choice of blogging platform/blogging content is part of the successful spammer's armoury.


I did manage to get to see Lincoln, which I enjoyed immensely. Intelligent films about politics, such as this Daniel Day Lewis vehicle, is a form of cinematic crafting that I particularly enjoy. At least one professor of American history has announced he is going to use it as a teaching aid, which seems entirely reasonable.

Lincoln manages to be at once uplifting about the possibilities of politics and wryly cynical about its processes. The Thirteenth Amendment is portrayed as being (narrowly) passed by a mixture of base political manouevring, blatant use of the patronage powers of the Presidency and simple persuasion. (I was also amused that Hollywood did a movie where the Republicans were the good guys and Democrats the bad guys.) Democracy as government by discussion is well on display.

But even the most blatant vote-buying displayed for our cinematic enjoyment is for the noblest of purposes--abolishing slavery, definitively and without evasion. That it was nearly de-railed by another worthy cause--ending the bloodiest war in American history--is also part of the stuff of politics, which is rarely a competition between good and evil but often one between rival goods. (And occasionally one between rival evils; that is the enormous tragedy of the Eastern Front during the Dictators' War.)

As Legal Eagle recently pointed out, serious blogging is a time-consuming activity. It also takes energy and cognitive effort. Lacking spare amounts of the former and having the latter very focused on a specific writing task has left me little time for blogging. I am hopeful that the onset of the school holidays will see a bit more time for the latter. But writing will (hopefully) being taking up more of my time than it has, so no strong promises are being entered into.

The problem with saying money is "tight" or "loose"

This is based on a comment I made here in response to a post which talks about recessions as monetary phenomenon (which I agree with). It is the terminology of money being "tight" or "loose" I have some problems with.


Money matters because, in a monetary exchange economy, almost all transactions are mediated by money. (Hence the demand for goods and services is the "supply" of money circulating in the economy.) So, everyone cares (at least to some extent) about their money income and the expected future swap values of (their) money. (In a monetary exchange economy, goods and services have prices, money has swap values; it keeps the terminology, and so thinking, clearer.) Something everyone in an economy cares about is going to matter a lot more than something only some folk care about.

If people have expectations that the money is going to significantly lose value, obviously they have an incentive to spend sooner rather than later. This will be an economy-wide tendency that will tend to drive up money incomes. If they think it is going to significantly gain value, clearly they have an incentive to spend later rather than sooner. This will be an economy-wide tendency that will tend to drive down money incomes.

If they expect it to retain value reasonably well, then it all turns on their future expectations about money income. If they have poor expectations, that creates an incentive to hold money. If those expectations are limited to a particular industry, then folk will tend to exit the industry and other industries will not have to bid quite so high for resources, stimulating them. If these expectations are general, then the tendency to hold money will tend to drive down money incomes. (Which comes back to something everyone cares about matters a lot more than something only some folk care about.)

The trouble with the "loose" and "tight" terminology is the two axes problem--do you mean that money will tend to lose/gain value, or do you mean that people have poor expectations of future income, or some combination of the two?  Presumably "disastrously tight" means gain swap value plus poor income expectations. And sure, "ugly" deflation means that, but there is a certain amount of chicken-and-egg problem here since each will cause the other. So the two axes are not causally independent.

Worse, you can have serious supply issues for goods and services as well as money, so poor income expectations AND falling swap values. (We could call this case "Greece": I have limited sympathy for a country which is still paying lots of people to get in the way of folk transacting and then complains about a shortage of transactions.) So we cannot even say they are simply causally interdependent.

Perhaps better terminology is needed?

Value and ambit

As economist Frank Mehrling has observed (pdf):

All monetary theories (at least all those of which I am aware) build from some underlying parable about the nature of money.

One such parable is money as pure creation of the state, or Chartalism. Its original texts are George Knapp's The State Theory of Money (pdf), which I have waded my way through--I don't recommend the experience; Knapp takes Germanic confusion of taxonomy with analysis to ludicrous heights--and two articles by Alfred Mitchell Innes, particularly his 1913 What is Money?

Modern Monetary Theory (MMT) is what Chartalism has evolved into. Wikipedia summarises the central claim of MMT as:

money enters circulation through government spending; Taxation is employed to establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that can only be met using the government's currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value.

This expresses very nicely the confusion at the heart of MMT: mistakenly holding that answering the very important question of what is the ambit of money (which transactions it can be used for) will provide some sort of answer to the question of what is the value of money (what are its swap values, its rates of exchange for goods and services). The problem is the ambiguity in the word 'value' between, in this case, being swappable at all and specific swap values.

A comment at one of my favourite economic blogs crystallised this confusion nicely:

Crazy as it sounds, taxes do not collect revenue for the government. They can’t because the government has to spend its money first to collect any taxes at all. Taxes ensure that the arbitrary, intrinsically worthless thing it spends is accepted.
This is based on historical record too: many times in ancient and recent history governors of subjugated lands would impose a tax payable in money only they possessed (eg the French in Madagascar – France wasn’t trying to raise francs in Madagascar that had none!) to ensure that local population accepts the thing in exchange for labor and goods.

Angkor Wat: a little something to keep the peasants busy in the off-season

The commenter is correct in that colonial governors in places which did not already have money did levy taxes in money to get people to start using money. But it is entirely possible for a state to collect taxes without money. It can levy labour-service (as Pharaonic Egypt or the Khmer Empire did–that is how the Pyramids, Angkor Wat, etc got built) or in-kind tribute or some combination thereof.

In fact, that is why, I would argue, that labour-service empires were so addicted to gargantuan building projects. Labour service has a use-it-or-lose-it nature, you cannot store it up for the future. So rulers found things for the labour to be used on; things that they decreed, thereby exercising control in their construction. Otherwise, someone else could have found use for that labour service and the ruler's own labour-service claims could atrophy. The edifices constructed by said labour-service are statements of power; but far more so was the (continuing) control over the labour that built them in the first place.

And when they finished this, they moved on to the next project

If, however, the state wants to collect taxes in money, then the state first has to make sure that there is money in circulation. The above commenter, in citing the colonial cases, is confusing establishing the form in which taxes are levied with the actual extraction of income.

What is money?
Something is money if it is used in transactions, not for its production or consumption utility, but because it can be used in further transactions. So, something is money if it has, and is money to the extent it has, transaction utility. Transaction utility has two parts to it. One is the swap value of the money.  How much money has to be used to purchase a given item. The (weighted) average of all such swap values for goods and services is the price level.

Swap values, being the price(s) of money in terms of goods and services (the price of money in money terms is itself), are generated by supply and demand. In the pure fiat money systems we use (by which I mean money in the form of otherwise largely valueless tokens not convertible into any real asset), said supply and demand is how much money is being transacted for how many goods and services. (Not, one notes, the amount of money in existence but the amount of money in circulation, in the sense of being transacted for goods and services).
In a gold standard, where any note can be exchanged for a given amount of gold, the price level is determined by how much monetised gold is backing how much output--the price of gold sets the underlying price level.

(Similarly with silver in a silver standard; historically, silver has been a much more widely used monetary metal than gold--though usually as coins rather than as backing for notes.) With commodity money, swap values are determined by supply and demand for the commodity, with some premium for transaction convenience if the commodity has been suitably branded, such as being turned into coins. (A thousand years ago, all money was commodity money; now none of it is.)

Said branding provides a face value or tale, a standard content and a transaction context. In our fiat money systems, the content is about the coin or note being authentic, being issued by who its face claims it to be issued by. In commodity money systems, it is having a certain amount of the underlying commodity. Being not counterfeit means being legal tender, so having a certain guarantee of transaction utility (and convertibility, if that is part of the monetary system). In commodity money systems, having a given amount of the underlying commodity provides its own guarantee of transaction utility, in that you can swap it out at the price of the commodity. If the transaction premium is positive, it will not get swapped out.  If it is negative (i.e. the price of the commodity-content is above the price-as-money), then it will. Such as having 50c coins with more than 50c of silver in them.

Ambit claims
As for transaction context (who issued the coin and where their writ runs), that is where the question of ambit, of the range of transactions over which a given money is acceptable, comes in. Each money has a currency realm, the range of transactions for which it can be used. The supply and demand setting the swap values of money is a matter of which output operates within which currency realm.

A very successful export

A major complication here is that exchange rates (official or unofficial) connect moneys to each other. If one has a national money--call it US$--which is easily exchanged for local moneys elsewhere, then it may be acceptable in transactions in many countries. Particularly in countries where the local currency is less trusted (such as a store of value) than US$. This more widely acceptable money's currency realm will therefore extend well beyond its national borders. It has been estimated that somewhere in the vicinity of 40-60% of US currency circulates outside the US.
In that situation, the US$ acts somewhat like gold in a goldzone; as a monetized store of value acceptable across currency realms. The similarity may go deeper; it has been very reasonably argued that a surge in demand for the premier global reserve currency not matched by increased supply was a major cause of the Great Recession.

Explaining ambit
Explaining why things have production or consumption utility is not difficult.  How do we explain the crucial second part of transaction utility; the range of monetised transactions? That money has transaction utility at all, based on the confident expectation of use in futuretransactions. Particularly for moneys--such as printed notes not convertible into say gold or silver on demand--which have no other significant value. Whose transaction premium is such a large part of their swap value.

Obviously, it is very convenient to have something which can be used across many transactions. In Ancient Mesopotamia, contracts where written that specified payment in shekels of barley, wheat or silver. Units of account, such as the shekel, were often originally weights (such as the pound, originally the pound sterling or a pound of silver) because it is an easy form of standardisation. Cattle were also used as a unit of account while ancient Irish law codes used a slave girl as a unit of account, and continued to do so even when there were no slaves. Units of account make it easier to have transactions on credit. Credit greatly expands the possible range of transactions, since credit transactions do not have to be concluded immediately.

But credit relationships remain of a one-to-one nature (I owe you). Money permits immediate conclusion of transactions--goods and services for money. Things of production or consumption utility swapped for something acceptable because of its expected use in future transactions. There is no need for any ongoing connection, or any past connection, between the transactors. Money expands the range of transactions precisely because it is so anonymous and self-sufficient. Which is also why monetising personal transactions can give grave offence--as the point is precisely that the interaction is not anonymous and is thoroughly embedded in on-going connection; by contrast, a monetary transaction you can have with just anyone. That is its great strength, but makes it lacking in the personal connection stakes. (Hence giving presents rather than money; a present is a much more personal statement of connection--even a gift certificate says you know what the recipient likes.)

Legal tender laws don't actually get us very far in explaining how modern, non-convertible, non-commodity money has expected transaction utility, as such laws they do not compel private transactors to engage in monetary transactions. Nor do they cover on-the-spot transactions. On the contrary, people are free to insist on a certain currency; or give a premium for preferred currency; or specify some other payment or refuse to contract. Legal tender laws merely specify that, within a given jurisdiction, a specified money must be accepted as payment in obligations already agreed to be monetised. In the words of economist Dror Goldberg:

... sellers are not really forced to accept legal tender money if they are slightly cautious. They only need to state in advance that they want to be paid in a different object, or use a different unit of account. The websites of some central banks are honest about this limited legal status of their money ... The role of the state, after declaring what is legal tender, can be described as passive and negative: To dismiss a creditor’s lawsuit if the debtor offers the right quantity of legal tender. A legal tender law never results in the state affirmatively prosecuting a buyer or a seller for using another currency or for rejecting the legal tender in a spot transaction. Other laws might do that, but they mostly exist in totalitarian regimes.

And what is the largest set of transactions in almost any state society? Taxes. Even more to the point, they are involuntary transactions, you cannot opt out of them or out of using the object set as acceptable payment. If a state sets that its taxes must be paid in its money, then that money has a guaranteed transaction utility. Making a money's use in the payment of taxes compulsory provides an anchor for expectations about its future transaction utility. Which does provide a good answer (pdf) to why otherwise near-valueless tokens have transaction utility--because they can always be used to pay taxes, lots of people have to pay taxes and the state can (and typically does) insist its money be used to pay its taxes.

Not even the Zimbabwean government uses this currency anymore

Even in the case of US$ outside the US--they can be swapped for money that can be used to pay taxes. Why not just stick with the local money then? Well, in places with "hard" (i.e. reliable) currency, including strong property regimes, folk do. US$ are used in ordinary transactions outside the US in place of local currencies due to failings in said local currencies (small matters such as[pdf] hyperinflation and bank confiscations). That US$ can be exchanged for local currency if needed (such as to pay taxes) provides an anchor for their local transaction utility, while their use to pay US taxes is the ultimate anchor for transaction utility.

In money terms, the US economy is about a quarter of world GDP and US taxes are about a quarter of US GDP (or about 6% of world GDP). Even given that maybe half the US currency realm is outside the US, US taxes are enough to anchor transaction utility expectations about US$, but not nearly enough to set its swap values. (Particularly not outside the US.) Add in the countries which use US$ as their official currency or accept it in official transactions to the ability of US$ to be exchanged for local money-you-pay-taxes-in, and the global transaction utility of US$ is well-anchored.

Use in taxes means that the money is, and will continue to be, swappable.  What its current swap values are is a different question. The two are connected by that money's expected future swap values--i.e. its function as a store of value. Hyperinflation is regularly associated with collapsing political authority, as whether the local money will remain swappable at all is increasingly unlikely and the point at which it stops being swappable appears to be getting closer and closer. If quantity was all that mattered, that the point at which production ceases was also approaching would help protect the value of that money (as its supply would be now forever fixed). But price is a matter of supply and demand, and anchoring their transaction utility through use in taxes anchors the demand for the local money.

But it anchors the demand in only a very limited sense. For use to pay taxes grounds a money's use, but not its price. A dollar's worth of taxes is not a set price in the way a given amount of gold or silver is in a gold or silver standard, as tax liability is discharged--once you have paid it, all you have is a release from that obligation. You have no specific item able to be sold, no production or consumption utility to show for it (apart from not being liable for punishment.) Taxes are an extraction, they are not a normal transaction.

Taxes are so much not a set price, that is in part why taxes are typically levied as a percentage of income, as a percentage of a transaction, as a proportion of asset value, etc. Levying tax liability at a set money rate obviously fails to adjust revenue to total output. More to this point, in inflationary periods, it would make revenue worth less and less in goods and services precisely because there is no set price for some asset, good or service involved. The money government gains has to be spent according to market prices, which tax liability sets no automatic connection to because taxes do not set a price, they discharge an extractive liability.

So, the MMT people are on to something. Unfortunately, they confuse questions of ambit for questions of swap value and write as if the guarantee of transaction utility sets the swap values of money, which it does not. The state may be the largest transactor, but it is not remotely the only transactor and, absent confiscations, has to buy goods and services at going prices. As hyperinflation demonstrates, anchoring a money's transaction utility is very much not the same as anchoring its swap values, how good a store of value it is. Just as the problems with inflation targeting show that anchoring expectations about money as a store of value is not the same as anchoring expectations about the future level of transactions (i.e. expectations about income).

The taxes-guarantee-transaction-utility is a nice, consistent story. If it wasn't for the existence of private currencies. It is entirely possible that coins were originally a private invention. During the late C18th and early C19th, privately minted copper coins circulated freely in England; a market response to the Royal Mint's failure to produce sufficient decent copper coins and the shortage of silver coins. (Copper pennies issued by the Anglesey copper mine were rather charmingly called 'druids'.)  Nowadays, there is even the virtual private money of bitcoins.

Privately minted in Anglesey

Except that the private currencies turn out to be much less of a problem than they appear. The tax-foundation story is about explaining the transaction utility of something otherwise valueless (or, at least, whose transaction premium is hugely dominant in its swap value). Despite much economist mythologising to the contrary, there is no clear case of private fiat currency. Private moneys turn out to be convertible, or failures. Convertible to a monetary metal (typically gold or silver), to a legal tender you-can-pay-taxes-with-it money or redeemable via other assets or goods and services. States have a major advantage in production of money in that they are the largest transactors, the only significant involuntary transaction generators, said transactions operate throughout their jurisdictions and are widely known as such. All of which gives them major "branding" advantages.

The questions of the swap value(s) of money and the ambit of money are related but separate questions. Confusing one with the other is a great way to go badly wrong in monetary analysis.

[Cross-posted at Critical Thinking Applied and slightly earlier version cross-posted at Skepticlawyer.]

Open borders

Uberblogger Matt Yglesias recently posted on why an open borders policy for the US--possibly using an auction system to regulate the rate of flow--is a reasonable option, basing his claim on comparative population densities and history:

But the United States ran an open borders regime throughout the 19th century and we weren't worse off for it. On the contrary, it laid the foundations for American greatness. Shifting back in that direction—with exceptions for dangerous criminals and other select problem types—over time seems perfectly feasible to me and would substantially increase overall human welfare.

Winners and losers
An obvious response is, "who is this we, white man?" Amerindians would have a distinct view on whether they were better off for said open border policy and the land hunger it fuelled. Though Yglesias is correct in that overall human welfare was improved, just as he is correct in suggesting that overall human welfare would be improved if all the 150 million adults who polls indicate would  like to migrate to the US did. Nor does raising US population density to 135 people per square mile seem over-crowded--not when you compare it, as he does, to other developed countries:

France has 303 people per square mile and Germany has 593. Japan has 873. The Dutch have 1,287!

But even leaving aside the dispossession of the Amerindians--settler land hunger was, after all, one of the grievances that led to the American Revolution; the commitment of the British Crown to its treaties with the Amerindians and the block that posed to settler land-hunger was one of those decisions-without-representation that the American colonists were aggrieved about--the effect of mass migration on the existing settler-and-descendants population was mixed, to  say the least.

In his Without Consent or Contract: The Rise and Fall of American Slavery, (which I review here) Nobel memorial Laureate Robert Fogel quantifies how high immigration led to drops in the average height and life expectancy of native-born American workers.

The exceptional health of native-born Northerners during the late eighteenth century is revealed by new time series on stature and life expectation ... They show that by the end of Washington's administration, native-born American white males were more than 68 inches tall (which was 2 to 4 inches taller than the typical Englishman and had an average life expectations of at age 10 of close to 57 years (about 10 years longer than the English). However, both life expectation and stature began to decline early in the nineteenth century. The most rapid period of deterioration was between 1830 and 1860. By the eve of the Civil War life expectation was 10 years less than it had been just before the turn of the century and males born in 1860 reached final heights that were about 1.5 inches less than those  born in the early 1830s (p.360).

High immigration advantages new migrants (if they survive the passage) since they benefit from increased opportunities. It advantages owners of capital, whether land (since rents and land prices go up), manufacturing (downward pressure is put on wages while product demand increases), or intellectual (since the migrants are unlikely to compete and demand for their services goes up)

In the case of intellectual capital, the contemporary tendency of the owners of intellectual capital to attempt to form cartels excluding those with competing ideas increases this effect, since support for immigration is a marker for cartel membership. The effect is increased further by encourage cultural diversity in immigration, which decreases intellectual competition from newcomers.That academics in particular live in transnational labour markets also increases their likely comfort with open borders.


High immigration disadvantages resident sellers of labour, through downward pressure on wages, upward pressure on rents and land prices, crowding effects, increased crime from decreased social trust (even though many migrant groups are less likely to be imprisoned for crime than locals) and increased disease exposure. The combination of these factors can outweigh increased demand for labour's products in an expanded domestic economy and far outdid so in C19th America (when disease control and sanitation were much worse and rates of immigration extraordinarily high). Hence the falling average height and life expectancy.

Migration politicsOne of the great themes of politics in settler societies in the C19th was that there were temperate zone migration flows and tropical zone migration flows; working class politics in settler societies was particularly concerned that tropical labour flows not spread into the temperate settler societies. This was far from a irrational concern on their part.

You could say that C19th native-born American workers suffered a milder version of what the preceding (by several millennia) indigenous settlers had suffered from the arrival of a mass of newcomers. Which is not to deny that the US gained both power and dynamism from immigration. (Or, that, for example, the great restriction of US immigration from 1923 was not a major tragedy.)


In his Without Consent or Contract, Fogel sets out how the anti-slavery campaign forged a victorious political coalition (the Republican Party) on the back of directing worker-resentment away from manifesting as nativist xenophobia (a political dead-end, with so many voters being recent migrants) to anti-slavery and resentment of Southern ‘Slave Power’. There are some contemporary parallels for such political dynamics.

An example of contemporary Lincolnesque political ju-jitsu was one John Winston Howard, the former Australian Prime Minister. John Howard’s politics of a sense of control (border enforcement), endorsement ("battler" aspirations) and security (family policy, external threat) were not so different from Lincoln’s: Lincoln finessed nativism, Howard finessed general anti-immigration sentiment. He did this while running a high immigration policy and Australia's least Eurocentric immigration policy up to that time. Lincoln and co saw off the nativist xenophobia of the Know Nothings, Howard saw off Pauline Hauline. And the jihadis are real enemies.

The differing interests and perspectives on migration create very different attitudes to illegal immigration. If one likes open borders, illegal immigration is a positive. If one does not, enforcement of immigration policy is the only way you can have an effective say on the matter. Since so much of what is at stake is that sense of control, the more visible the illegal immigration, the more politically salient it is. Arriving boats or organised border-crossing are going to figure rather more than visa over-stayers.

How compatible open borders are with how extensive a welfare state is an open question too. While belief that the welfare state channels taxpayer funds to illegal immigrants is a recurring sore-point. Provision of welfare extends the club good nature of the state.

If one looks at the issue from the comfortable heights of intellectual eminence, the gains from open borders seem obvious. They are rather less so to sellers of labour living in suburbs where neither infrastructure nor services keep up with demand.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]