Principles of Microeconomics Scarcity and Social Provisioning Chapter 25 Money and the Theory of the Firm

CHAPTER 25 . MONEY AND THE THEORY OF THE FIRM INTRODUCTION TO MONEY AND THE THEORY OF THE FIRM A 10 National Gold Bank Note issued by the First National Gold Bank of Oakland , California ( the 18705 ) Public Domain ) PRINCIPLES or ECONOMICS 707 CHAPTER OBJECTIVES In this chapter you will learn about The and the Barter Myth Smith , Marx , Keynes , and Modern Money Theory The Money Hierarchy and the False Duality of the State and Market Local Currency Systems Social Money and Community Currencies The standard approach , taken in neoclassical texts , to describe the firms role in the economy is to ascribe a coordinating function the firm selects the inputs of labor and capital to efficiently produce output for the market . This functional interpretation ( of the firm allows the neoclassical economist to maintain the same level of simplicity , or abstraction achieved in consumer theory . This approach limits the scope of value determination to commodity market exchanges , as seen in Chapter . In this chapter , we investigate how this abstract methodology of modeling the economy our understanding of money . I ) where is output , is capital , is labor , provides a functional description of the firms technology . Understanding the limitation of money in the neoclassical framework will be achieved in three steps . First , the story of money will be told from the neoclassical perspective . In telling this story , we will discover that the neoclassical economist money to a secondary role in economic activity . The neoclassical presentation describes money as a commodity that facilitates the exchange of other commodities . This secondary role for money allows the neoclassical economist to continue to apply , what we will define as real analysis . After our neoclassical story is completed , a second story of money will be told . This story is guided , not by theory , but by history , and will help us to understand money true origins . In applying a historical and institutional methodology , we will see that money is much more critical to economic activity than neoclassical economists suppose . Money is special , because of how it can be used , and who is able to produce it . In the next section , the historical ing of money not as a commodity , but as a social relation will break down the traditional perspective of a strict duality between the state and the market . This is accomplished through an analysis of or

703 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER economy not as a barter system , but as a monetary production economy that operates within the of the legal and institutional framework of a money hierarchy . The final section extends our understanding of the monetary production economy by examining local currency systems . Local currency systems are emerging across the world in communities that have been abandoned by mainstream economic policies . These local money systems are supporting single mothers , helping children go to school , cleaning up streets and neighborhoods , and reducing waste . By comparing the monopoly issuing authority of the United States and these micro currency systems , the coordinating function of money in economic activity will become clear . Geoffrey once argued that money is our most powerful and social technology . This chapter will help you to understand why . This insight is drawn from contribution to john 2001 edited volume , What is Money ?

THE AND THE BARTER MYTH LEARNING OBJECTIVES By the end of this section , you will be able to Discuss the importance of barter in modern economic analysis 11 what kind of economy do we live and operate our daily lives ?

This is not a trivial question . As ideas about how human beings can best organize their resources developed into enlightenment philosophy , a prominent method for expressing what a society free of the feudal constraints would look like involved imaginary stories . Philosophers , such as john Locke , Thomas Hobbes , and jacques asked their audience to imagine a place called the state of nature to consider ble social outcomes when this place is populated with free individuals . In the state of nature , will chaos , barbarism , or a harmonious stable society result ?

In Locke version , individuals needed to follow two constraints or simple rules in order for a and stable society to emerge . The first of these constraints is the spoilage constraint . In the state of nature , no individual should collect more food , nuts , and berries than they can consume before they spoil . Second , the prejudice constraint can not be violated . This constraint is predicated on the right to subsistence the privatization of land can not disadvantage holders , their right to subsistence As long as all those in the state of nature follow these two simple moral constraints , then a harmonious and stable society is argued to emerge . Through the evolution of similar stories , political economist would add their own plot twists and establish the ting for neoclassical economics . What these imaginary stories have in common is the collective illusion that capitalism or economics grows out of a state of nature . The basic plot and stage for this story remain the same in neoclassical economics . How many of you got dressed and ready for your classes today in the sian plane ?

Like their enlightenment predecessors use of the state of nature , the neoclassical story also takes place in a space that is not inhabited by human beings . The mathematical universe of and optimal decisions , like Locke imagined individuals , to a harmonious and stable solution . This solution is known as equilibrium in the formalized mathematical models of classical economics . While the technical names and the math provide the neoclassical story with a scientific veneer , the underlying plot remains generally the same as those told over the previous four hundred plus years . A strong characteristic of these stories is their staying power , but a significant cost of such longevity is a lack of analysis regarding the actual economy in which we live and conduct our daily lives .

710 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER The economy described by Say and other classical political economists of his era , as well as by modern neoclassical economists , is a barter economy . In a barter economy , goods trade for other goods . If we were to open a barter market in class , students could trade their hats , packs , books , shoes , and whatever else they had in their possession with other students . In this , would much trade occur ?

Generally , the answer would be no . This is because it would be rare that the double coincidence of wants would be solved very often . This means that for trade to occur I must have what you want and you must have what I want . If and only if this is the case will trade occur because trade must make us both better off than we were before the trade took place . To solve this problem and reduce the amount of time individuals would need to spend seeking out solutions to the double coincidence of wants , society spontaneously agrees to accept a commodity as the tor of at least this is how the story is told from the state of nature and Cartesian plane origins . The magical device that solves the double coincidence of wants and sets the economy free is money . Commodity money in the form of gold or silver has an intrinsic value that can be measured and all parties understand its value . Intrinsic value is a key concept and can be defined as the value the object has in and of itself . This is why precious metals are central to this story , as it is believed gold has value in and of itself . Thus , through this agreement , the transaction costs for all the producers and consumers in this economy are reduced and are therefore better off . This is the story often told by a group of economists known as the , because of the use of precious metals to denote the value of money . We can model money as the facilitator of a barter transaction using the following notation of for commodity and for money . This is likely the story you have heard before , and it is definitely the one told to your parents in their introductory economics courses . As mentioned above , it is an old story . Roots to its origins go as far back as Plato and Aristotle , but the more modern versions are linked to the and enlightenment philosophers discussed above . The staying power and continued adherence to this story are heavily reliant upon metal intrinsic value . If money value is connected to the weight and quality of metal , then it , just like the gold , silver , or the other goods it trades for , is a commodity . As a commodity , money preserves the barter system . In a barter framework , economists are able to tice real analysis . Real analysis is described by the economist Joseph as all the essential phenomena of economic life are capable of being described in terms of goods and services , of decisions about them , and of relations between them . Money enters the picture only in the modest role of a technical device that has been adopted in order to facilitate . This device can no doubt get out of order , and if it does it will indeed produce that are specifically attributable to its modus operandi . But so long as it functions normally , it does not affect the economic process , which behaves in the same way as it would in a barter economy . In other words , economists can study real changes to output , employment , distribution , and growth without addressing money as anything other than a facilitator of exchange , because in the money is neutral . Money does not generate real changes only nominal changes that create disturbances to the stability of economic equilibrium . In other words , it disrupts the modus in quote . By examining money , within the context of modern economic events , it will become clear that the commitment made by neoclassical economics to the story is not

PRINCIPLES or ECONOMICS 711 intended to provide an accurate understanding of history , but is rather an effort to preserve their method of economic analysis and the continued application of optimization techniques and modeling . While the barter story is intuitively appealing , especially when described as an economy at a time and place far , far away , difficult questions about value and the role of the state complicate the drama . For instance , when gold or silver was spontaneously accepted as the commodity money , did people just trade nuggets of the metal ?

Where did coins come from ?

Who made the coins , and how was their value determined ?

Then finally , as economies incorporate paper money , how is the value of the maintained , especially if it can not be directly converted into gold or silver ?

These questions are examples of critical analysis . Rather than accepting the story as given , critical thinking and tion will help economists and to develop an understanding of money and its evolution in economic systems . To address these critical inquiries , let us return to description . Money value is as a technical device used in the facilitation of exchanges . Its value is intrinsically derived through a metal . In this scenario , it is a commodity like all other commodities . Difficulty only emerges , if it gets out of order . If money modus operandi extends beyond the facilitator role , then the economy is no longer functioning as a barter system . It is in this capacity , as something more than a technical device that the school of thought is introduced here , in the second act . The complications , regarding money value , have become increasingly difficult for to assume away and maintain money status as a commodity . The most significant of these changes to the global economy has been the development of fiat currency systems that have completely broken monetary systems from the gold standard . An example of fiat money is the dollar . They are issued by fiat because the issuer will not give us anything other than other dollars in return . It is an inconvertible paper money . The gold standard allowed for the commodity money story to survive the complications associated with the of both credit money lending and paper money , because money remained convertible into gold . However , the elimination of the gold standard has ended the convertibility scene and requires a new dialogue . If money can not be converted into gold , and value is not intrinsically determined , then where does its value come from ?

The academic journal The Review of Social Economy has published a number of works of by Modern Money Theorist including the piece Henry , Stephanie , and Randall , A Critique of john Locke Theory of Peoples Accumulation , and Money or is it Moral Trade your Nuts for Gold ?

Say is an important character in the development of the ideas that support economics . One of his most contributions is Say Law , which is commonly phrased as supply creates its own demand . Joseph is widely regarded as one of the most economists of the Century . Students are encouraged to explore his ideas on money in his 1954 text History of Economic Analysis .

712 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER GLOSSARY barter economy a system in which goods trade for other goods , that is , without money as an intermediary double coincidence of wants the fundamental problem of barter in which , for trade to occur , I must have what you want and you must have what I Want intrinsic value ( of commodity money ) the value the object has in and of itself metallism the belief that the value of money derives from the intrinsic value of the commodity ( for instance , gold ) the physical money is made from the study of real changes to output , employment , distribution , and growth without addressing money as anything other than a facilitator of exchange

SMITH , MARX , KEYNES , AND MODERN MONEY THEORY LEARNING OBJECTIVES By the end of this section , you will be able to Explain and compare the two views of money origin and its value The answers to the questions of value raised in the previous section can be found by examining the following two quotes , from arguably the two most significant characters in the history of political economy . The first comes from Adam Smiths The Wealth of Nations A prince , who should enact a certain proportion of his taxes be paid in a paper money of a certain kind , might thereby give a certain value to this paper money . The second quote , similar in theme , comes from Karl Marx Capital Vol . I , and reads The only part of the national wealth that actually enters into the collective possessions of modern peoples national debt . Hence as a necessary consequence , the modern trine that a nation becomes the richer the more deeply it is in debt . Public credit becomes the credo of capital . And with the rise of national , want of faith in the national debt takes the place of the blasphemy against the Holy Ghost , which may not be forgiven . From these two quotes , the primary difference between the and approaches to understanding money is revealed . Money is not a commodity . Money is , in the words of the legal scholar Friedrich , a creature of the state . What may seem to be a subtle difference is in reality substantial . The reorientation of money as a state phenomenon , rather than a market solution to the double coincidence of wants requires a completely different framework for analyzing the economy . The economy can no longer be modeled as a barter system . Real analysis fails to capture the complexity of money , and thus even the existence of general equilibrium itself is called into question . Returning to , if the modus operandi of money is not simply a facilitator role , then we must conduct monetary analysis . Simply put , this requires the abandonment of the idea that all essential features of economic life can be represented by a economy model ( 1954 ) We can begin to appreciate the difference between the analysis of a barter system and a money

714 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER by applying Marx notation and modeling of the circuit of money capital . This notation is ple and straightforward ( see also Chapter 16 The ) 334 49 ( where the first stage is termed purchase and is followed by the production process ing with sale . This analysis of the economy is a monetary analysis . Returning to the barter notation , from above , the transaction would look like this . 196 55 , Note , there is no in this exchange . This is because the value is generated , not by production or labor , but through the act of exchange . Remember , in the barter economy of the neoclassical school , trade does not occur unless both parties benefit . Value is created through the exchange process and relative prices become the measure of those values ( this is also described in Chapter On Values ) Where in Marx model , value is created through the production process and comes from labor . As you can see , the interpretation of how the economy operates is very different . The predictions of outcomes from market activity are also at odds . In the real analysis of neoclassical economics , tend towards equilibrium . Real analysis predicts a stable solution where the quantity demanded is equal to the quantity supplied . However , if the economy is investigated from the monetary analysis perspective , simple solutions do not immediately present themselves , as , business cycles , and crisis are all consistently observed in capitalist economies and central topics of analysis in Marx framework . This is one reason Maynard Keynes considered his approach to understanding the economy as The General Theory of Employment , Interest , and Money . Similar to Marx , although Keynes denies any , Keynes moves his analysis of the economy beyond the barter system and real analysis and attempts to understand the dynamics of a monetary production economy . For Keynes , in a monetary production economy , there is no reason to assume the economy will trend towards full employment equilibrium in the labor market . In fact , given the special properties of money , the is more than capable of coming to rest , for long periods of time , at a level of output far below what is necessary to achieve full employment .

PRINCIPLES OF ECONOMICS 715 Keynes argues that money has two special properties that differentiate it from all other commodities in the economy . The first is that money has a elasticity of production . This means that , while it might be reasonable to argue that a problem in our local economy is that there is a shortage of money , we can not go into the business of selling money . So unlike wheat , milk , cars , tables , or any other good or service , as entrepreneurs , we can not address the unmet demand for money by ing it ourselves . The second of these properties is a elasticity of substitution . This relates to the use of money as a means of payment . The state and most private vendors will only accept dollars ( in the United States ) as a means of payment to satisfy debt obligations . Wow , that is a mouthful , but it simply means that there are very few substitutes for money as a method of payment . The IRS will not take your laptop as payment for your taxes . The gas company is not interested in your to satisfy your bill , they will only accept one thing cash . As the Clan so puts it , cash rules everything around me dollar dollar bill all . Figure . Federal Reserve Note an nu nu nun ' I ' ma . I I I Image from the Federal Reserve Bank of Philadelphia , These two special characteristics of money a monetary production economy , by ing two missing pieces from the real analysis approach of neoclassical economics , uncertainty , and the state . Hence , it is a more general Let discuss the state first and then provide a brief sion of uncertainty . Why ca we produce dollars ?

Well , this is against the law . By law , the Treasury Department is the only producer of new dollars . We will elaborate on this in detail in the next section . Second , why won the state take my laptop ?

For this let take a moment to look at the dollar ( Figure above ) Up in the upper left corner , it says THIS NOTE IS LEGAL TENDER FOR ALL DEBTS , PUBLIC AND PRIVATE . This means that there is no reason for the state to accept anything else in payment . If you believe that your laptop is of sufficient value to cover your tax obligation , then you must first convert it into cash to pay your tax bill , and this introduces an important concept in Keynes monetary framework , liquidity .

716 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Liquidity is a measure of the costs associated with converting an asset into cash . For example , your savings account is an asset . It is very liquid , but to convert it into cash you need to go to the bank and withdraw the funds . This time and effort is a cost , but these costs are relatively low . An example of an asset that is not generally described as being liquid is a home . The sale and conversion of a home into cash is a time consuming and often expensive process . An asset liquidity is of great importance for understanding economic volatility and how risk and uncertainty differ . To describe the value of assets in a monetary production economy , Keynes uses what he describes as the own rate . The own rate is a measure of an asset economic value and is composed of three parts , the expected return on the asset ( its carrying costs ( and the liquidity premium ( This is played mathematically as , Returning to the example of a home , the expected return , crisis , was strong , based on historical data . A home carrying costs are not cheap . Maintenance , mortgage payments , property taxes , etc . all push up the carrying costs , but you get to live there and conventional wisdom said that a homes value always increases . The final component is its liquidity premium , which is also related to the expected return . A house in a sellers market in a good neighborhood might sell quickly , whereas a home next to a newly constructed slaughterhouse might not be so easy to unload . Thus , people view of the future plays a critical role in determining the own rate . If the housing ket is strong , then it is easy to sell because the expected return is positive and the future seller does not think selling in the future has many risks either . On the other hand , if the market is doing poorly , then the expected return is going down , carrying costs might be increasing , as buyers are ing more and more repairs , and the liquidity premium is disappearing , as a buyer can not be found . This equation can be applied to all sorts of commodities . Give it a try in the exercise section below . Think about a car , stocks , and bonds , or a record collection . These assets all change in own rate based on expectations of the future and how quickly they can be converted into cash . Because it is more to convert assets into cash when markets are unstable and uncertain , people tend to hold onto the one asset that is not negatively impacted . You guessed it money . The saving money by an individual in times of uncertainty is problematic for the economy . Keynes argues that this virtuous behavior , from the classical economic perspective , to difficulties for the as a whole . If you are saving , then , yes , this practice can be beneficial for you , but if we are all saving , then we are not spending and this sends negative signals to investors and ness owners . So while individual savings are good , the aggregation of this positive behavior generates adverse economic conditions as a whole . This problem is known as the Paradox of Thrift . This creates difficulties for the neoclassical argument that the aggregation of optimal decisions gates to a stable and harmonious society or equilibrium conditions . If we return to Adam Smith comments above , we can add the contributions by Marx and Keynes to complete the basic framework for understanding money , not as a commodity in a barter system , but as a social relation in a modern capitalist economy . Remember , the value of money in the story is derived intrinsically by a precious metal , but Adam Smith seems to be suggesting that value can be generated by the actions of the Prince . This is a prescient observation by Smith , as fiat currencies maintain the value by generating demand through the implementation of a tax or other obligation to the money issuing authority . Therefore , an historical and institutional approach

PRINCIPLES or ECONOMICS 717 to investigating money reveals fundamentally different dynamics and explanations of the operations of the modern economy . From this perspective all economic activity is observed to begin and end with money , money plays this central role because it has special properties , and an authority , such as the state , is responsible for maintaining their currency value . By breaking free from the methodological constraints of real analysis , Modern Monetary Theory ( is able to provide insights into economic activity where money serves as more than a to the modus operandi in support of barter . In the next section , money is investigated as a social relation . This social relation can be described as a balance sheet operation . These relations of credits and debits are ordered in the modern economy by a hierarchical structure . As this structure is outlined below , the coordinating function of money and its role in determining value becomes clear . For those looking for an accessible way to introduce themselves to Adam Smith vast opus , Robert The Essential Adam Smith is an excellent resource . Some may be already familiar with his text The Worldly Philosophers . This insight is drawn from Capital Vol . GLOSSARY the belief that the value of money derives , not from the intrinsic value of the commodity , but from its general acceptability for payments and the ability of the state to create demand for it through taxation liquidity the ease with which an asset can be converted into cash

THE MONEY HIERARCHY AND THE FALSE DUALITY OF THE STATE AND MARKET LEARNING By the end of this section , you will be able to Apply the vocabulary and conceptions framework developed in the previous section to the Hierarchy of Money Explain where money comes from in a monetary production economy once argued that anyone can make money the real trick is getting people to accept it . For the , gold or a precious metals intrinsic value insured money acceptance as a facilitator of exchange . While simplicity is often a strong characteristic , when it comes to money , a more thorough understanding of money source of value transforms the relationship between the market and the state . We often think of these two concepts as opposing forces struggling to direct economic activity . From this perspective , one might imagine the market as the strong lead character in pursuit of efficient solutions , and the state as a pesky nemesis taking resources from the market to achieve its own objectives . This plot , however , takes an unexpected twist in Modern Money Theory , as these two characters are revealed to be the same person . The real analysis claims of duality between the state and the market are the product of methodology . The trick is not that we accept dollars , but that the true source of their value continues to be largely ignored by economists , and the general public . In 201 , renowned London School of Economics anthropologist David published a examination of the historical origins and development of money , titled Debt The First 5000 Years . While all 5000 years are interesting , and students are encouraged to explore this exemplary work of scholarship , our focus is limited to the current economic system . This narrow focus will allow us to build upon the above ideas of Marx and Keynes and to develop an understanding of key concepts from . The first of these concepts is the hierarchy of money . From this conceptual framework , we will explore the of money ( see Chapter 16 The ) The collection of institutions that regulate money issuance or production is similar to market governance ( see ter 16 The ) of business enterprises in that stability is a primary objective . Given the central role of money in economic activity and its origins with the state , the clear delineation between where the market begins and state ends is all but erased .

PRINCIPLES or ECONOMICS 719 We begin our analysis with hierarchy of money . As a social relation , not all money is created equal . For example , by definition as a social relation , you borrowing a shirt from your roommate is a money transaction , as long as you promise to give it back . We call this an . I had a friend in high school that literally carried around a notebook listing all of the people that owed him money ( he now works in finance ) These records represented promises to pay . For some of those entries , repayment was completed and their name removed , for others , sure they are still in that notebook somewhere in Ol Cocktail archives . These promises to pay were money transactions . They are balance sheet operations . Johnny extends credit to his friend the friend takes on a debt to Johnny . When repayment occurs asset , and his friends liability is terminated . Going back to comment , if one regularly borrows and repays Johnny rapidly , then both parties are willing to accept the terms of the social relation . However , if one does not repay , then future credit extension will not occur . Thus , it takes two to tango . This type of transaction between friends and family are so common , we would not generally describe them as money , because that seems odd . Similarly , borrowing a cup of sugar from your neighbor to make cookies and promising to give some of the cookies in exchange is an informal arrangement , but is still one of credit and debt and thus money . The informality of these transactions makes them difficult to enforce hence they represent the money social relations at the base of our money hierarchy ( Figure ) Figure . The Money Hierarchy What differentiates the common and largely unregulated transactions from those that are described as we move up the hierarchy is the institutional formality and enforceability of those social

720 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER relations . So the second level , contracts , might be promises to pay businesses , such as your network services provider . They promise to provide a service for a year , and you promise to pay a dollar amount for that service . They credit you with service and you pay back your debt . This contract , unlike notebook , is legally enforceable in dollars . If you or the network provider breaks your promise legal recourse is available . Moving on up the hierarchy , we have the financial sector and then the Treasury at the very top . The formality and institutional structure of the social relations generated by these organizations is what places them at higher levels of this hierarchy . The financial sector is similar to the contracts below it on the hierarchy , so we will focus our attention on the Treasury . The Treasury is unique because by Constitutional Law it is the sole source of new dollar issue . This reality is one of the most significant aspects of because in stark contrast to the story money comes from the state , not the market . Figure . Sectoral Balances ( of ) 1960 to 2016 15 10 40 1960 1965 1970 1975 1930 1935 1990 1995 2000 2005 2010 I Public Sector I Private Sector Foreign Sector Figure ( vividly displays the hierarchy in action . As you can see , as the red line goes into the negative ( government deficit ) the green line increases ( private sector wealth ) at a nearly ratio . This

PRINCIPLES or ECONOMICS 721 between public and private spending is described by the accounting identity equation know as sectoral balances . net exports ) This equation states that the balance sheets of the private , public , and international current accounts sectors of the economy sum to zero . If we were to close the economy and only have the public and private sector , then when the private sector spends more than it takes in ( deficit spends ) the public sector , by accounting identity , runs a surplus . This situation rarely occurs . If we examine Figure , we see that in the early a very brief period of government budget surplus took place , only to be followed by recession and a movement back to state deficits and private surpluses . Before pressing forward , lets take a moment to summarize the hierarchy of money . Money is a social relation . It is a balance sheet operation or an . It consists of at least two parties who agree to a credit debit relationship . The hierarchy of money is characterized by the institutional and enforcement of these social relations . At the top of the hierarchy is the issuer of the . The currency issued in the United States is the dollar . Rather than the dollar emerging in the market to solve the double coincidence of wants , the dollar comes from the state . This leaves us with the question of value . If there is not a precious metal or intrinsic value to the dollar , then where does its value come from ?

Value comes from a promise from the state to accept dollars as payment for taxes . This promise creates a demand for dollars in the United States . The demand for dollars is what maintains the lar value . Thus , argues that taxes drive money . An important question that this raises is how does this impact the value of goods and services produced ?

Remember in the orthodox approach the prices of goods and services are measures of their relative values as they are traded in a barter system , but if we have a monetary production economy , then how are these activities values determined ?

Much of this was clearly outlined at the enterprise level in the Costs and Prices chapter and further analyzed in the . Here we ask the question , how does our perspective on value change when we approach money as an industry with the United States as the monopoly producer ?

As the monopoly producer of the dollar , the United States government is not the pesky nemesis taking money from the market to fund its spending . Instead , private markets and the financial industry are provided with the legal authority to create assets . This process greatly limits what is viewed to have value to activities that generate profits . This mode of utilizing authority makes it very difficult for many in the economic system to participate in the dollar . Orthodox economics and the story argues that value creation is best handled by , rather than direct state spending . As the monopoly producer of the currency , it is a political decision about how money enters the system and assigns value . Many theorists argue that the values of the community would be better met through a universal program for full employment . This would mean the monopoly producer would take more control over value creation to meet the needs of the public than it currently does . The sectoral balances relationship between the public and private sector , suggests that there is an mate relationship between the state and market activities . The approach taken by neoclassical suggests an antagonistic relationship based on real analysis . The foundation for this position is that the state must take money from the private sector to spend . The history and an institutional analysis of where money comes from debunk this foundation . If , as Keynes suggests , we live in a

722 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER monetary production economy and new issue comes from the state , then continuing to approach the market and state as hard is likely to continue to leave many outside of the dollar economy in states of unemployment and poverty . To further examine money ability to activate value , we will now turn to an examination of local systems . Local currency systems are experiments . These experiments are attempting to build an understanding of the power of our most important social technology . Remember , we have defined technology as the application of scientific or organized knowledge of practical tasks . What could be more practical a task than to understand money ?

Stephanie Bell 2001 Cambridge journal of Economics article The Role of the State and the Hierarchy of Money is widely considered to be a seminal piece in the development of Modern Money Theory .

LOCAL CURRENCY SYSTEMS SOCIAL MONEY AND COMMUNITY CURRENCIES LEARNING By the end of this section , you will be able to Compare to different monetary systems Critique money issue and the how money can be utilized for value creation an alternative to centralized money issue , communities are exploring their own money ing strategies . There are several types of local currency systems , and we will describe a couple of the most common ones general characteristics and institutional structures below . One source that outlines the extent to which currency experimentation has grown during the era of is described by the 2012 International journal of Community Currency Research Special Issue titled Thirty Years of Community Currencies A Review of Impacts , Potential and This edition contains papers from a academic conference that included scholars from several academic disciplines . Scholars in economics , history , geography , law , sociology , anthropology , and political science , etc . presented research from those disciplines individually and through nary as well . In addition to the diversity of academic perspectives community are attracting , they are also covering diverse political and geographic across the planet . More than 20 different countries were represented at this conference . One reason that such a diverse set of tools is necessary for studying community currencies is that if the story of money is false , then the price mechanism or the invisible hand is not an means of determining value . In The Picture of Dorian Gray , Oscar Wilde tells us that Nowadays people know the price of everything and the value of Community currencies are projects that work to allow communities to assign values to activities and goods that central currency schemes are not pricing properly . As such , these activities are experiments . These experiments are guided by general philosophies , such as solidarity and reciprocity . Their philosophies goals and the purpose of currency creation , examples include community stability , relationship building , and strengthening of territory or stimulating economic activity . From these general goals , communities create real jobs to promote sustainable production , support the elderly , women grams , and other civically oriented tasks not being met by the market of fiscal sectors of the . Thus , when value is reintroduced into a discussion about the economy , the limited available under real analysis is replaced by a diversity of from several academic .

724 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER In an effort to organize the analysis of this diverse and growing collection of money systems , three categories of local currency systems have been suggested . The first of these are local currencies are territorial projects . These projects are typically defined by geographic boundaries and are designed to strengthen the areas resilience or development . Second , community currencies are projects to address a specific community need . Such needs are usually determined by a group of local actors attempting to emphasize increased wellbeing , empowerment of a repressed group , or support environmental health . The third type is a complementary currency . Complementary currencies are designed to support an economic objective . These systems are generally designed with regard to ket principles and work to support activities between production and exchange of goods and services . These types of currency systems are not mutually exclusive in their characteristics . In fact , many take on objectives and characteristics that draw from multiple currency types . One such currency system is the Red del ( of Argentina . Ecologists developed the currency system . In this ecological model , the wellbeing of women and families was a primary objective . To accomplish their objective , markets or were set up in depressed neighborhoods . These markets used the currency system to organize labor efforts and create household stability by encouraging , reducing waste , promoting the resale of household items , providing social welfare labor , and helping to distribute unsold surpluses in local businesses through new trade outlets . Thus , from this description , we could classify the in all three of the suggested category types . It is a community currency based on its primary objective . It can also be described as a complementary currency as it facilitated market exchanges , and it targeted particular territories based on economic need , territorial . By creating a local currency system , many Argentinians who had been abandoned by the peso were provided an opportunity to contribute to social activity and find some economic ity . In a sense , Argentinians were able to solve Keynes elasticity problem . There was a shortage of money in their communities , so they found a creative , socially driven solution to solve the shortage . This local currency system effectively organized available resources and produced outputs that were deemed valuable to the community . To conclude , money takes on very different roles in our economic system based on the methodology applied to study economic activity . If it is simply the medium of exchange , then the coordination of inputs to produce outputs is the role of individual firms . However , when money is observed in its and institutional setting , business enterprises need money to initiate those coordinating , as we see in Marx circuit of money capital . Given this central role in all economic activity , the task of economists and other scholars is to help society create laws and institutions such that money is available to initiate productive activities because merely assessing value through profits appears to be a woefully inadequate approach . This information can be found in Community currency research An analysis of the literature in Vol . 15 in the 2011 of Community Currency . The French economists Jerome Blanc has published widely in the area of community and mentary currencies . Georgina Gomez and Bert from the in the Netherlands published a very

PRINCIPLES OF ECONOMICS 725 article about the spatial distribution of the in Argentina in the 2008 Vol . 36 ( 11 ) of World Development titled Selective Spatial Closure and Local Economic Development .