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Wednesday, March 16, 2016

Book Review: Money (Lonergan)

Eric Lonergan is a hedge fund manager at M&G Investments, and also publishes the "Philosophy of Money" web site. He first published the book "Money" in 2009, and has since updated to a Second Edition in 2014. I recently commented on some of his ideas on money in earlier article. Although his discussion of money do not match my "Chartalist" viewpoint, I found that the substantive differences are small, and the book itself is an interesting and a worthwhile read.

Money As Instrument Versus Concept

Throughout most of the book, the word "money" in used the loose way that most people use it, which is interchangeable with "wealth."  I am not particularly happy with that usage (and in the preface to the Second Edition, Lonergan suggests that he should have spent more time discussing the definition of money).

I can give a personal example of why I dislike the wider definition of the word "money." When I was a graduate student roughly twenty years ago, I tended to have a greater value in currency notes (at the time, British Pounds) in my wallet than I normally carry around now (even without accounting for inflation). Meanwhile, I had my entire life savings then in a bank account, whereas I normally now only keep my bank balance at a level so that my cheques do not bounce. Instead, I keep my wealth in various financial assets -- which do not qualify as "money" under most technical definitions of the term -- and my wealth now is obviously greater than when I was a student. In other words, I have more "money" (money as wealth) now than when I was a student, even though I now have less "money" (technical definition of money) than I did at that time.

I think that economists need to stick to the narrow technical definition of money, as otherwise discussion can be quite confusing. Correspondingly, I could complain about various statements that Lonergan makes, if stripped out of context. But if we re-phrase his statements about "how money effects the members of society" to be "how monetary capitalism affects the members of society," I have much less room to disagree.

In summary, we can say that "money" is important, without necessarily conceding that the monetary aggregates are useful for analysis.

Eclectic Approach

The bulk of the book consists of a philosophical discussion of the role of money within a capitalist system. His argument is that it is not neutral; the act of measuring things by their monetary value changes how we think about them.

Additionally, he offers a lot of insight into how to think about the financial markets, and discusses some financial/economic history. (He added a new section on the euro area fiscal crisis in the Second Edition.) For example, are we measuring risk correctly? (No; risk is not the standard deviation of returns, it's a measure of what can wrong.)

Finally, he does offer some policy recommendations; he argues in favour of the central bank distributing money to citizens as a recession-fighting tool. This is most distinctive part of the book, and I discuss this below.

His analysis is generally not too technical, and he follows a very eclectic approach. All of the major economic schools of thought get a mention at some point. This is fairly common amongst finance market economists, but is rare amongst academics.

Lonergan Versus The Chartalists?

Eric Lonergan and Randall Wray (one of the key developers of Modern Monetary Theory, which is also described as Chartalist or neo-Chartalist) had an argument about the nature of money, which I alluded to in my earlier article - "Money as Debt." Lonergan also responded in the comments of that article with regards to various points.

If one has strong Chartalist views, I imagine that there are sections of the book by Lonergan that you could object to. Certainly an academic needs to worry about the fine theoretical differences. Although my bias is to take a Chartalist view, I did not have strong substantive complaints with what he wrote. I sort-of agree with his policy stance -- which is what really matters -- as I discuss below.

Central Bank Money Creation

Lonergan argues that we can help reduce our current economic problems via a policy of central bank money creation. This is an increasingly popular view, with Lord Adair Turner being a prominent advocate. I am much less enthusiastic about this policy, but I would not vote against it.
  • In my view, this is just disguised fiscal policy. Since I think fiscal policy needs to be loosened, it is a reasonable thing to do. However, I think that fiscal policy needs to targeted for job creation, and not just creating aggregate demand. Otherwise, we will probably just repeat the 1960s experience of persistent unemployment and steady inflation. (Lonergan argues that we can avoid inflation, but at the cost of limiting the size of stimulus. The risk is that the stimulus will be too small to achieve growth objectives while at the same time keeping inflation stable.)
  • I see no policy space opened up by the use of "monetary financing." It is impossible to distinguish between the central bank handing out money and the Treasury sending people cheques within most simplified economic models. If there is a difference, it can only show up in institutional details that we cannot hope to model in the first place. (We discussed this issue in the comments of my earlier article.)
  • It is more difficult to implement than is implied. If scam artists get their hands illegally on $1000 within this programme, the media frenzy would be worse than would be the case if billions disappeared into a black hole within the defense budget. Although this is unfair and stupid, that is the political reality that we live in. Any disbursements to the public will require a hefty intrusive bureaucracy in order to validate that the right people get the right amount of cash. Do we want to build such a bureaucracy, just so that it can make small transfers only when a recession hits (which has been once per decade since the early 1990s)? We already have an infrastructure involved in collecting income tax, it is fairly straightforward to change witholding to create temporary stimulus.
  • Handing fiscal power over to largely unaccountable bureaucrats is troubling. I am strong believer in parliamentary supremacy; if we hand over power to technocrats, we are undercutting the legitimacy of representative government. A glance at recent headlines across the developed world shows the danger of the decay of the legislature.
The only real advantage of the central bank disbursing cash is that mainstream economists have questionable theories about "money-financed" versus "debt-financed" fiscal deficits. Doing the stimulus in this fashion means that it is easier to build a political coalition. That said, I see little value in building a coalition behind a policy that is essentially doomed to be unable to achieve the underlying policy objective. If the problem is a lack of jobs, create jobs.

Concluding Remarks

Eric Lonergan's writings are interesting cover a lot of territory. He provides an introduction to a great many topics that are relevant understanding modern economies. I have some technical disagreements with what he writes, but these do not necessarily translate into substantive differences,
(c) Brian Romanchuk 2015


  1. Good review again Brian. Thanks. Most of these discussions seem to be between two blind men holding the same elephant. A little bit of a waste of time really.

    Generally the government already has mechanisms to pay everybody - either via its benefits system or the pension system. There is sufficient existing infrastructure on the pay side as well as the tax side to put money into people's pockets based upon somebody's say so.

    But surely it is far better if it is all done automatically via the auto-stabilisers - including a Job Guarantee.

    1. Thanks. The importance of automatic stabilizers cannot be underestimated; relying on central planners to steer the economy is a dead end.


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