Is John Nash channeling von Hayek?
December 28, 2010 8:22 PM Subscribe
How original is John Nash's idea for "ideal money" where the world's currencies are fixed to a basket of commodities. Background information is here (briefly) and here (extended).
How "original" is it? I'm not sure what you mean by "original". Currencies have long been pegged to other real goods, such as the value of specie (metal) or the value of some other nation's currency.
posted by foursentences at 10:12 PM on December 28, 2010
posted by foursentences at 10:12 PM on December 28, 2010
A single world currency is an old, bad idea. Paul Krugman has written about why the euro was a poor idea that's now making economic adjustment harder. A global currency would cause even more problems. Basically a currency that's adjusted for Germany is not good for Spain and would be even less adjusted for Argentina. (Argentina did peg its currency to the dollar for awhile; this helped exacerbate a huge recession.)
posted by zompist at 12:36 AM on December 29, 2010 [1 favorite]
posted by zompist at 12:36 AM on December 29, 2010 [1 favorite]
It is not original. See the Big Mac Index, or the Euro.
Here is the problem- fixing a currency to anything besides it's "market" value always leads to trouble. The fixing is the problem, not what it is being fixed to. Money is an abstraction for work and capital, used to allocate resources. If there is less bread, it needs to cost more so people consume as little as necessary, so everyone gets their share and so producers get the hint that they ought to make more bread. If you fix the price of your currency TO bread, that signal is lost.
Pegging a currency to something else is like riding a skateboard attached to a car with a rope. When it accelerates you can fall off, and when it stops you can crash into it. If you are on your own, you can get where you need to be much more comfortably. Maybe not as fast, but with fewer bruises.
The US public got screwed slightly by this sort of effect in 2008 when the oil prices went up. The value of the oil wasn't quite that high, but because the dollar was losing value in international trade, and oil is sold in dollars, the price went up. The internal value of the dollar hadn't changed, but the external value changed. We had to spend more of our work and capital to get the same thing, not because it was more scarce, but because it was fixed to our dollar.
posted by gjc at 5:13 AM on December 29, 2010 [3 favorites]
Here is the problem- fixing a currency to anything besides it's "market" value always leads to trouble. The fixing is the problem, not what it is being fixed to. Money is an abstraction for work and capital, used to allocate resources. If there is less bread, it needs to cost more so people consume as little as necessary, so everyone gets their share and so producers get the hint that they ought to make more bread. If you fix the price of your currency TO bread, that signal is lost.
Pegging a currency to something else is like riding a skateboard attached to a car with a rope. When it accelerates you can fall off, and when it stops you can crash into it. If you are on your own, you can get where you need to be much more comfortably. Maybe not as fast, but with fewer bruises.
The US public got screwed slightly by this sort of effect in 2008 when the oil prices went up. The value of the oil wasn't quite that high, but because the dollar was losing value in international trade, and oil is sold in dollars, the price went up. The internal value of the dollar hadn't changed, but the external value changed. We had to spend more of our work and capital to get the same thing, not because it was more scarce, but because it was fixed to our dollar.
posted by gjc at 5:13 AM on December 29, 2010 [3 favorites]
Response by poster: Thanks for the replies. I realize the history and issues surrounding gold and the renewed efforts to take us there again, I was wondering if this was a much sounder or realistic approach to reach the same goal, as far as the world's currency exchanges are concerned.
Nash argued that the emphasis on stabilizing the value of currency should extend to the international level, where exchange rates represent currencies' value relative to each other. He proposed that international exchange rates be fixed by pegging the value of each currency to a standardized basket of commodities, called the "industrial consumption price index." Such a policy would curtail the ability of central banks to make monetary policy.
Another thing is that is mentioned somewhere in there that Nash has assumed that inflation is a device that incentivizes more work, while it shrinks the value of past loans, and this seems to me to be self-defeating in the long run. I think he also came to the conclusion that saving money under a mattress would be the result, because its value grows on its own. He also claims that Hayek was in the same boat, though private money is mentioned nowhere.
posted by Brian B. at 10:23 AM on December 31, 2010
Nash argued that the emphasis on stabilizing the value of currency should extend to the international level, where exchange rates represent currencies' value relative to each other. He proposed that international exchange rates be fixed by pegging the value of each currency to a standardized basket of commodities, called the "industrial consumption price index." Such a policy would curtail the ability of central banks to make monetary policy.
Another thing is that is mentioned somewhere in there that Nash has assumed that inflation is a device that incentivizes more work, while it shrinks the value of past loans, and this seems to me to be self-defeating in the long run. I think he also came to the conclusion that saving money under a mattress would be the result, because its value grows on its own. He also claims that Hayek was in the same boat, though private money is mentioned nowhere.
posted by Brian B. at 10:23 AM on December 31, 2010
In a Best Answer attempt, I'll whore out my favorite podcast, Planet Money. In particular, Episode #216 Planet Money: How Four Drinking Buddies Saved Brazil discusses how a severe inflationary environment was turned around. This was done in 1994. I've seen a few economics professors propose it in the US as a way to improve the average American's knowledge of inflation. But I don't think it'll ever be done globally, and not just because politicians want a lever to pull.
The problem with tying value to a basket of goods is that these things are in constant flux. There was a recent drought in Russia, raising the cost of wheat and the cost of bread in your bundle. This isn't inflation (despite certain prolific Mefi finance guru's insistence), and any attempt to keep the price of wheat stable in that situation introduces market inefficiencies.
Plus, you can't just buy a bundle and keep it, because most of the things we want have shelf lives. Money (and gold) does not. Any intrinsic value gold has will exist for decades, whereas wheat's value will decay.
Moreover, even if you could, the bundle you will want changes over time. Silicon and rare earth metals weren't that interesting until personal computers came along. So your bundle of goods can't encompass large shifting market forces.
Careful planning can overcome most of these obstacles in post-hoc analysis, aka inflation numbers. But given how often these numbers are restated I wouldn't bother trying to shop with Real Dollars.
posted by pwnguin at 1:52 PM on January 1, 2011 [1 favorite]
The problem with tying value to a basket of goods is that these things are in constant flux. There was a recent drought in Russia, raising the cost of wheat and the cost of bread in your bundle. This isn't inflation (despite certain prolific Mefi finance guru's insistence), and any attempt to keep the price of wheat stable in that situation introduces market inefficiencies.
Plus, you can't just buy a bundle and keep it, because most of the things we want have shelf lives. Money (and gold) does not. Any intrinsic value gold has will exist for decades, whereas wheat's value will decay.
Moreover, even if you could, the bundle you will want changes over time. Silicon and rare earth metals weren't that interesting until personal computers came along. So your bundle of goods can't encompass large shifting market forces.
Careful planning can overcome most of these obstacles in post-hoc analysis, aka inflation numbers. But given how often these numbers are restated I wouldn't bother trying to shop with Real Dollars.
posted by pwnguin at 1:52 PM on January 1, 2011 [1 favorite]
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posted by pwnguin at 9:56 PM on December 28, 2010 [1 favorite]