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Spiral Architect

Fiat Money as Economics’ Floating Abstraction?

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A thought I’ve been “chewing” on is the application of the Floating Abstraction Fallacy.  I would like some critical feedback on a theory I’ve been working on.

 

First, just as a reminder, from the wiki in Fallacy of the Floating Abstraction:

 

The fallacy of the "floating abstraction" is Ayn Rand's term for concepts detached from existents, concepts that a person takes over from other men without knowing what specific units the concepts denote.

 

I’d add only for purposes of this discussion that any value the Floating Abstraction does have in a discussion is due to the pervasiveness (authority) of the speaker and the willingness of the listener to accept it.  This will be important in a moment.   

 

Now economics and money:  The gold standard is… well the gold standard of money discussion in several theories, including Oism.  As a commodity it is a real value connected to wealth creation, or daily work and trade.  It isn’t the actually work, like corn or a forged plow, but due to having a universally recognized value can be traded for such stuff.  From there you get into pricing theory which is beyond where I want to go. 

 

What is important is that gold (or any other similar commodity) is a universal value that represents specific values in the market place.  Gold as money is a universal value representing real items created or earned.

 

Fiat Money however can be printed ad hoc and manipulated since it is not connected to any standard.  There is no actual connection to real wealth in the market place, which is why it is popular as this allows it to be printed on demand. 

 

Money is a universal value which developed attached to existents in the market place, but frequently today is not attached to existents so it can be manipulated by the issuer.   It is printed and has value based solely on the promise of the issuing authority and the willingness of the recipients to accept its value. 

 

You can say that Inflation is simply the process of Money returning to the intristic value of what it is printed on.

 

That leads me to an observation:  Fiat Money is the economic equivalent of a Floating Abstraction. It is detached from its existents and taken over by a Government which doesn’t know or cares about the specific concepts it denotes and came. 

 

Critical thoughts are welcome :)

Edited by Spiral Architect

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Fiat currencies exist in reality. For instance, there's the US Dollar. It exists. You may not like it, but it exists. It is not a Floating Abstraction.

 

Floating Abstractions are an epidemic among Objectivist, but that's another thread entirely...

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I can see what you're getting at, but I don't think that it's a fitting analogy to begin with. Fiat money has its value in the goods that it can purchase, which is what really defines "money" in the first place. Few people care for gold for the sake of gold in a gold standard, rather they care for the mass nexus of goods that it can be exchanged for.

 

Concepts change over time, just as the value of the monetary unit does. The value of the dollar today is very different than it was fifty years ago, and the way that Darwin thought about evolution was significantly different than the way that we do. What is more is that a fiat currency is actually likely to be more stable in value than a gold standard is. This has been true off and on, and in the times that it has not been true this has often been because those who issue fiat currency didn't wish to keep a constant purchasing power, as was the goal of Irving Fisher.

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Two terms I've heard used in connection with this issue is "honest money" contrasted with "dishonest money" in conjunction with the reduction of the concept of money to its metaphysical and epistemological roots. Identifying the disconnect in the chain of reasoning requires rigorous, meticulous work.

 

One either grows or raises what one needs to eat, or needs to produce something (goods or services) to trade for it.

 

I can't locate where I ran across this paraphrased statement.

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Fiat currencies exist in reality. For instance, there's the US Dollar. It exists. You may not like it, but it exists. It is not a Floating Abstraction.

 

 

I did not say paper money doesn't exist.  What a silly suggestion.

 

I said it was the economic equivalent of a floating abstraction, which means it is disconnected from it's roots.  I this case the work and commodities money is based upon.

 

Money is a commodity with a source.  My proposition is that fiat money makes that commodity disconnected much in the same way ideas are disconnected from their intellectual roots.

 

 

Floating Abstractions are an epidemic

 

Fixed.

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I can see what you're getting at, but I don't think that it's a fitting analogy to begin with. Fiat money has its value in the goods that it can purchase, which is what really defines "money" in the first place. Few people care for gold for the sake of gold in a gold standard, rather they care for the mass nexus of goods that it can be exchanged for.

 

Concepts change over time, just as the value of the monetary unit does. The value of the dollar today is very different than it was fifty years ago, and the way that Darwin thought about evolution was significantly different than the way that we do. What is more is that a fiat currency is actually likely to be more stable in value than a gold standard is. This has been true off and on, and in the times that it has not been true this has often been because those who issue fiat currency didn't wish to keep a constant purchasing power, as was the goal of Irving Fisher.

 

It may very well be a poor analogy.  That is what I'm sorting out.

 

Money is a commodity like anything else.  It's value is derived from that and the work/creation/value that turned it into a tradable good. (i.e. The Wealth of Nations).  It just happens to be a commodity that is universally exchanged since it is portable and non-perishable.  I'm wondering if the long range danger of fiat money is being disconnected from it's origin as a commodity and the work/creation that gives all such commodities value. 

 

I'm fine with the commodity changing, which by your own excellent words makes perfect sense from an evolution stand point.  That happens due to market forces, much like language changing words by societal forced over time  The difference here is that fiat money is changed by fiat of the issuer.  Fiat money can change value by the whim of the issuer much like a floating abstractions corrupt an idea by whim of the user(s). 

 

I might add that I'm only looking in essence at the connection between ideas and their intellectual roots and comparing it to money with it's economic roots.  In these examples their is an intentional separation of the subject from it's origins so the issuer can manipulate the "commodity" (money or ideas). 

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It may very well be a poor analogy.  That is what I'm sorting out.

Seems like a pretty good analogy to me. The essential notion that the is "no there there", is common, regardless of how people use their floating abstractions/money.

One might say a floating abstraction is like an egg-shell from which the egg has been drained.With analogies, I think it is, in part, a question of "to each his own": I'm looking for structure and patterns in some area, and so I look for similar patterns in a more familiar domain. Of course an analogy only gets me so far; it is not reasoning, nor an argument. It illuminates but does not explain.

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Money is a commodity with a source.  My proposition is that fiat money makes that commodity disconnected much in the same way ideas are disconnected from their intellectual roots.

 

 

Your definition is too narrow. Money is a liquid form of trade that is valuable to the parties within the given trade.

 

Cigarettes are "money" in prison, gold gloops might be "money" in some online game, etc. etc....

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Seems like a pretty good analogy to me. The essential notion that the is "no there there", is common, regardless of how people use their floating abstractions/money.

One might say a floating abstraction is like an egg-shell from which the egg has been drained.With analogies, I think it is, in part, a question of "to each his own": I'm looking for structure and patterns in some area, and so I look for similar patterns in a more familiar domain. Of course an analogy only gets me so far; it is not reasoning, nor an argument. It illuminates but does not explain.

 

I think you nailed it on the head.  I was struggling with the concept of a floating abstraction (gaining certainty from a context standpoint) and when I hit on this it took me down the path of really grasping it.  Thank you.

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Your definition is too narrow. Money is a liquid form of trade that is valuable to the parties within the given trade.

 

Cigarettes are "money" in prison, gold gloops might be "money" in some online game, etc. etc....

 

My definition was simply what I considered essential for integration.

 

Any commodity can be money.  I have no issue with that.  What is important here is not what is held as a value, but what gives it value.   I'm simply looking at the causal link between practical real world commodities that give it value and the universal medium that develops from it . 

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Value presupposes a valuer. Practical real world commodities serve the valuer in different capacities. Corn, pork bellies and orange juice satiate the hunger. Iron ore makes a better material for crafting a plow than oak trees. Orange juice and houses are not practical to use for general exchange due to durability in one case and portability/divisibility issues with the other.

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People can--and do--value something for its (albeit recursive) ability to be widely traded. People value US dollars because... lots people value US dollars.

 

I realize that this is what you are trying to say, but people value dollars because they can be exchanged for goods, which is because people value dollars. People don't care that people value dollars, people care that people will exchange for dollars. As I said above the predominant value of money is in goods, not in the money itself. This occurs both in a commodity and a fiat standard. Thus as to this insight:

I'm fine with the commodity changing, which by your own excellent words makes perfect sense from an evolution stand point.  That happens due to market forces, much like language changing words by societal forced over time  The difference here is that fiat money is changed by fiat of the issuer.  Fiat money can change value by the whim of the issuer much like a floating abstractions corrupt an idea by whim of the user(s). 

 

I don't think that this is relevant unless the value of money changes so much that it is no longer, in fact, money. The value of money changes suddenly in the case of fiat, but this doesn't devoid it from economic "meaning". Indeed, one can argue that it can enhance it.

 

For instance, if we take the worldviews of the monetary interventionist and the monetary non-interventionist we see that there are two possibilities. I doubt that anyone denies that the fundamental purpose of money in a metallic standard is to act as a stable source of value to allow a smoothly functioning economic system. This is its prime purpose on a social level that is desired by every individual except those who wish to speculate in the currency itself. If the interventionist is right, then fiat money provides for better money, if the non-interventionist is right then it doesn't.

 

Therefore I think the matter comes down to whether or not fiat money is substandard when compared to its substitute for acting as money. If this is the case then it is "valuable" and necessary that the value changes based upon the actions of the central bank, it is the "best concept" that we have. If it is not, then it is a worse concept and shifts without importance. To reiterate one more time, this is all because the value of a commodity in use is such a small part of the value of money in a commodity standard.

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I realize that this is what you are trying to say, but people value dollars because they can be exchanged for goods, which is because people value dollars. People don't care that people value dollars, people care that people will exchange for dollars. As I said above the predominant value of money is in goods, not in the money itself. This occurs both in a commodity and a fiat standard. Thus as to this insight:

 

I don't think that this is relevant unless the value of money changes so much that it is no longer, in fact, money. The value of money changes suddenly in the case of fiat, but this doesn't devoid it from economic "meaning". Indeed, one can argue that it can enhance it.

 

For instance, if we take the worldviews of the monetary interventionist and the monetary non-interventionist we see that there are two possibilities. I doubt that anyone denies that the fundamental purpose of money in a metallic standard is to act as a stable source of value to allow a smoothly functioning economic system. This is its prime purpose on a social level that is desired by every individual except those who wish to speculate in the currency itself. If the interventionist is right, then fiat money provides for better money, if the non-interventionist is right then it doesn't.

 

Therefore I think the matter comes down to whether or not fiat money is substandard when compared to its substitute for acting as money. If this is the case then it is "valuable" and necessary that the value changes based upon the actions of the central bank, it is the "best concept" that we have. If it is not, then it is a worse concept and shifts without importance. To reiterate one more time, this is all because the value of a commodity in use is such a small part of the value of money in a commodity standard.

 

I think we're saying the same things, in a round-about way.

 

And yes, the live point here is not the economics, but rather the politics. A fiat currency can be manipulated by a government (although I've argued that this characteristic has almost completely been eliminated in advanced countries in the last ~20 years). A fully commodity-based currency presumably cannot as easily. These are two perfectly valid tools, and perfectly valid concepts.

 

Perhaps Spiral was reacting to the fact that most people don't have the faintest clue how global commerce and financing work--they go to the store and buy stuff, and everything behind it is black magic. That's not a floating abstraction either, but merely an abstraction based on simpler precepts that are nonetheless present and true.

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I think we're saying the same things, in a round-about way.

 

And yes, the live point here is not the economics, but rather the politics. A fiat currency can be manipulated by a government (although I've argued that this characteristic has almost completely been eliminated in advanced countries in the last ~20 years). A fully commodity-based currency presumably cannot as easily. These are two perfectly valid tools, and perfectly valid concepts.

 

I agree that we're talking about the same thing.

 

Not to derail the thread, but want to share what you mean by the bolded section?

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I agree that we're talking about the same thing.

 

Not to derail the thread, but want to share what you mean by the bolded section?

 

Here you go:

 

http://forum.objectivismonline.com/index.php?showtopic=26189

 

The tl;dr for that thread is that inflation is rapidly becoming meaningless as technology, globalization, and the instant proliferation of information come together. Nobody keeps their savings in physical cash, and anybody can easily trade into whatever investment instrument they want, and thus not expose themselves to US dollars, and thus there's no real reason to care about inflation anymore. This phenomenon makes it rather pointless and thus politically untenable for a government to inflate its currency.

 

It's a complicated point, but it has rather broad implications...

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Here you go:

 

http://forum.objectivismonline.com/index.php?showtopic=26189

 

The tl;dr for that thread is that inflation is rapidly becoming meaningless as technology, globalization, and the instant proliferation of information come together. Nobody keeps their savings in physical cash, and anybody can easily trade into whatever investment instrument they want, and thus not expose themselves to US dollars, and thus there's no real reason to care about inflation anymore. This phenomenon makes it rather pointless and thus politically untenable for a government to inflate its currency.

 

It's a complicated point, but it has rather broad implications...

I take this as an admission of failure for fiat money to serve as a "tool of saving", a point arguably involved as part of an integration of the concept of "money".

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I take this as an admission of failure for fiat money to serve as a "tool of saving", a point arguably involved as part of an integration of the concept of "money".

 

Um, US dollars, at various times, have been a good investment. Other times not.

 

There is absolutely no investment instrument, by definition, that only goes up in real value and not down.

 

That said, I don't see why a thing's ability to be an investment (successful or otherwise) is a prerequisite of being "money". I've always defined Money to be, "a liquid form or trade that is widely accepted within a given market context". Maybe there are other definitions but I've never used the term that way.

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Um, US dollars, at various times, have been a good investment. Other times not.

 

There is absolutely no investment instrument, by definition, that only goes up in real value and not down.

 

That said, I don't see why a thing's ability to be an investment (successful or otherwise) is a prerequisite of being "money". I've always defined Money to be, "a liquid form or trade that is widely accepted within a given market context". Maybe there are other definitions but I've never used the term that way.

You're identifying an "investment instrument" (tool of investment?) while "tool of savings" was the terminology Miss Rand used to articulate the much more important aspect of money over and above its being a "tool of trade". By converting fiat money into stocks, bonds, currency arbitrage, etc., it is the "investment instrument" rather than "money" being used as the "tool of savings".  

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You're identifying an "investment instrument" (tool of investment?) while "tool of savings" was the terminology Miss Rand used to articulate the much more important aspect of money over and above its being a "tool of trade". By converting fiat money into stocks, bonds, currency arbitrage, etc., it is the "investment instrument" rather than "money" being used as the "tool of savings".  

 

I'm not sure where she said that, but it would have been a pretty dumb thing to say. Currency is just an investment like any other.

 

But no, I don't think Ayn Rand would tell people to shun all other investments but US dollars. I'm pretty sure she had no opinion on the matter.

 

Oh, and "savings" and "investment" are the same thing, technically speaking. It's true that laymen don't often understand this, and they don't know how a bank works, etc. but there is no difference.

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Interesting. I guess in that context Ayn Rand meant the word "money" (and note she didn't use the word currency) to mean "stored  value".

 

She then seems to list gold as an example of how one's store of value could be held.

 

Ayn Rand was certainly not a financial expert. To whit, she said:

 

"To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with."

 

To a financial expert, she might as well have said that money needs to be ground up Unicorn testicles. There's absolutely no (single) substance or derivative of a substance that meets all those criteria nor will there ever be--the last two characteristics are logically in opposition to one another.

 

This is interesting though. The reality of persistent wealth storage is that is requires at least some level of diligence by somebody. Is the faith in gold trying to be a denial of that fact?

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Having faith in anything is done at the expense of the denial of facts.

 

Exactly. Insofar as one refuses to understand how finances work--yet still wishes to enjoy the benefits of them--they evade.

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Exactly. Insofar as one refuses to understand how finances work--yet still wishes to enjoy the benefits of them--they evade.

Having faith in anything is done at the expense of the evasion and/or denial of facts 

 

That being said, finances and money do differ. Finances presuppose money (fiat or otherwise). Fiat or otherwise, raises the question: why is it necessary to make the distinction between fiat money and other money?

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