Goldenbar.com Home July 02 , 2001

 

CHAOS

Consequences of Idealism on Money
www.chaos-onomics.com

Are Money and Idealism a recipe for disaster?

Cogito ergo sum -- "I think, therefore I am"

                Rene Descartes

Cogito cogito ergo cogito sum -- "I think that I think, therefore I think that I am."

                Ambrose Bierce

One aspect of the thought process for which a study of Philosophy is hoped to prepare a mind is sometimes called a study of Universals.  Universals, in this usage, referring to abstract general labels or existents, depending upon one's philosophical inclination, which refer to or define collections of particular things in our experience, again depending upon one's philosophical inclination.  As I consider the issue, there are 2 attitudes taken as relates to the conception of Universals, Idealism and its variants or Nominalism and its variants.  I believe that much of the confusion that man faces in his interactions with the external universe can be decomposed into a debate over these 2 attitudes, including our current confusion, or so I view it, over ideas of money and economy. 

Idealism, as I consider the term, is the frame of mind that our ideas of the world are prior to our experience of the world.  Explained from another perspective, idealism may lead one to believe that the way one thinks about the world will change the world one lives within.  Taken to an extreme, one could think that any belief structure, if held fervently enough, could change the world, because the world is how we conceive of it.  At a minimum, idealism, is the frame of mind that experiential data which conflicts with an idea is more likely than not an aberration.  I sometimes think of this as a notion that universals trump particulars.

Nominalism, as I consider the term, is the frame of mind that our ideas of the world are posterior to our experience of the world.  That is, our ideas are more accurately conceived of as labels or perhaps nominal representations of experience.  It follows, again at least as I consider the philosophic attitude, that nominalism leads one to believe that the world is what it is, to the extent something can change, it is the way one thinks about it.  Therefore one should always remember that one's awareness is what one thinks, not what is.  At a minimum, nominalism is the frame of mind that experiential data which conflicts with an idea might be proof that our idea is incorrect in some sense.  That is, the skepticism associated with nominalism is, I believe, directed at our, individual, sense of the world, not at the world as it is.  

The two quotes above might help in further distinguishing the two frames of mind.   The quote from Bierce, referring to Descartes' existential foundation, separates the epistemology, what is thought, from the ontology, what is.  It might seem a trivial distinction but I have found that it has its benefits.  Among them, a more Nominalist frame of mind has helped me to be wrong, avoid conflict and expand my awareness of the world in that experience and perspective trump my universals, thus suggesting the need for refinement.  This is not to argue that a more idealistic frame of mind precludes such events rather that, in my experience, a more Nominalist frame of mind, in comparison, facilitates such transitions. 

Pardon the philosophic digression but I would like to frame the terms of the discussion, even at risk of boring the reader, for fear that we (you and I) might not conceive of these terms in consistent fashion.  One might think of this as another example of Nominalism in that I conceive of a world where your experience of particulars, relative to mine, might give rise to different notions of similarly denoted universals.  As a final example of the distinction, consider the notion, "the economy".  A more Nominalist thinker, such as the author, might argue that the " economy" as such, does not exist, rather, the economy is a term we use to describe, in one view, the interactions of men, the world and the idea of money.  Those of more idealistic attitudes might argue that the economy does indeed exist and can be described using the various aggregated data sets at our disposal.  As you might imagine, these 2 attitudes are likely to result in 2 very different models of economic behavior over time.  Having described the way I intend to use the terms above, let me unfold this little idea for your entertainment.

As I type this, I am reminded of Robert Heilbroner's The Worldly Philosophers, which bears the subtitle, The Lives, Times and Ideas of the Great Economic Thinkers.  I share Heilbroner's view that Economists can be thought of as worldly philosophers.  If you take as a description that a philosopher studies how humans (both individually and severally) through their ideas interact with the external world (or as an idealist might posit, how humans interact with ideas), perhaps you can consider the notion of economists as philosophers who examine how men use a specific idea, money, to interact with the external world.  This idea might not sit easily in some minds, as we remember all of the data which surround Economics in our times.  However, that money, or shall I write, currency, is easy to quantify, thus leading to the store of data, does not signify, at least in my mind, that the notion of money should be left unexamined. 

Indeed, in today's Economics, at least from this lay person's pragmatic, i.e. focused on the effects of the world, vantage point, debate over the notion of money seems moot.  It seems to me that we take as given, what money, is, or should be thought of, and are more concerned with derivative, and more easily quantifiable, effects.  To my mind, the dominant ideologies seem a mix of Keynesian notions of demand stimulus using monetary policy rather than government spending as the lever presumably based on Milton Friedman's notion that the depression of the 30's was a function of too little monetary stimulus.  I find it interesting that in a recent interview Friedman proposed the view that too much money was being supplied.  While I, and I presume, most other economic agents, would be quite pleased to discover that current policy choices prove correct, I offer the following recompilation of old ideas, on the off chance that man's interaction with the world works differently than currently presumed.

The question, what is money?, seems to me to be THE question of Economics.  In times past, the question might have been answered, incorrectly in my view, money is gold.  I would argue, to the extent the social system performed well, that gold served as an anchor reminding users of money that each unit of currency was backed by or represented something physical.  This is to take the Nominalist frame of mind to the notion of money.  

An Idealistic frame of mind, as I consider it, might think of "metaphysical money".  This is to think of money as an asset class of itself, like gold or a company or land.  I vividly remember this debate during my time on Wall St. as an FX options trader.  In the aftermath of the 1987 stock market crash, alternate investment methodologies, such as certain, "hedge funds", had managed to profit handsomely through, in part, speculations on the movement of capital between countries.  That is, or so I consider it now, these funds arbitraged the difference between what, they believed, was economically determined and what conventional wisdom had come to accept.  These profits, which to my mind, represent the cognitive dissonance of conventional epistemology, fed in part by a "new media" induced assault on rational thought, led some to argue that currencies had value in their own right, a conclusion at odds with the more nominal views of Adam Smith et. al.

This is not to argue that the events following the 1987 crash "caused" this phenomenon, to the extent this notion has merit.  Rather, I think the very success of Central Banks in perpetuating a sense of currency stability among economic agents in a world of fiat currencies, has lulled the public mind to sleep on the issue.  Recent events would seem, I think, to have simply accelerated a process that is to be expected under a successful regime of centrally controlled fiat money.   To the extent that conventional wisdom thinks that money is a thing, of permanence, it will expend little effort contemplating it, much as our minds grow accustomed to the constant effects of gravity.  

However, I think, money, when viewed from a more nominal perspective represents, inter alia, an aspect of human cooperation.  I think, when the capitalist model is functioning well, money represents the idea that commerce can and will transact freely.  I choose can and will specifically to refer to the ability and willingness to engage in commerce, sometimes referred to as "free trade".  (I note the term has come to be used more for international, inter- and intra- corporate commerce, but the abstraction, to my mind, applies at least equally well to personal commerce) Goods or Services can be traded for money which can be traded back for other goods or services with as little disruption as possible.  Written another way, money, in this frame,  represents faith in social cooperation with respect to commerce.

From whence comes this faith?  It seems to me that the current view is that this faith flows from the ability of the Federal Reserve to successfully manage the expectations of economic agents.  While this view may prove accurate, I take a different view.  Faith in my fellow man on an individual basis comes from my recollection of my interaction with him/her.  To the extent that my memory, on balance, contains more evidence that past extensions of faith have proven valid, I would think that trust in my fellow man might be increasing.  Conversely, to the extent that my memory, on balance, contains less evidence that past extensions of faith have proven valid, trust in my fellow man might be decreasing.  In this view, trust is learned and unlearned, dynamically adjusting to changing conditions.  When applied to money the question of faith might be framed: to the extent that my memory, on balance, contains more evidence that past extensions of faith in matters of money have proven valid, I would think that trust in my fellow man in matters of money might be increasing and vice versa.

The question then, what is a dollar (or Yen) worth?, can perhaps be rephrased as, how is the notion of money treating you?  That is, instead of getting hung up on the quantification of currency, as if $1.00 had some metaphysical value, citizens in capitalist society might wonder how the notion of money is helping them interact with the external world.  This question, in contrast to the first, is answerable by most within the context of their daily lives.  That is, instead of looking to some external source, economic agents can decide for themselves how the idea of money, that is, their faith in social cooperation in monetary matters, is helping them with their lives.  

The answers to these questions, dependent as they will be, on each individuals' life, will be subjective.  However, to the extent that the world reacts in similar fashion to those living similar lives, I would assume a fair bit of harmony in these individual responses.  Some might find that the idea of money is assisting them in pursuing their goals, while others might find that their ideas of, or experiences concerning, money might not be increasing their faith.  Some might view the question within a frame limited to obtaining food, shelter and clothing over the short term, while others might view it within a frame of allocating the resources of nations towards ends consistent with civil society and away from ends inconsistent with civil society.  I suggest that one possible model within which to consider the latter might substitute the "capital markets" for the more general notion of money.

It is in the notion of the "capital markets" where I believe I have found a source of confusion.  These capital markets include, for the purposes of this debate, equity and debt instruments, which in the aggregate are expected to allocate resources efficiently, more efficiently than would be achieved, in theory, by a small group of individuals.  However, from time to time, the notion of capital markets as transmission mechanisms which allocate societies' scarce resources amongst competing industries fades and the notion of capital markets as mechanisms for wealth creation, per se, grows.  

Just as Central Bank success in perpetuating a sense of currency stability among economic agents in a world of fiat currencies can lead to complacency, so too can capital market success in allocating resources.  A string of profitable bets may lead one to believe that the next bet is more likely to succeed than might be justified by a sober evaluation of conditions.  To the extent that the capital markets are both expected to reward and punish investments based on the foresight of the investors, notions of losing, absent some God-like ability to know the future, seem to me to be part of the game.  When investors cannot afford to lose, expectations of "zero sum" can become expectations of "prosperity for all".  

Capital markets, when thought of in this epistemology, lose their ability to allocate capital efficiently.  To borrow from Adam Smith, the invisible hand is not allowed, temporarily, to work its magic on economic agents.  Investors, grown accustomed to a steady stream of capital gains-type profits, argue for policies which dilute the costs of, in hindsight, unwise decisions.  The result of this policy in the past has been a combination of shortages, inflation, rising market volatility and eventually an asset market collapse.  When the capital markets become a tool for rewarding the believers in everlasting prosperity, they lose their original functionality, in effect causing their own destruction.  

Returning to the original premise, Idealism, as I consider it, leads to the acceptance of many unexamined ideas under the rubric of "a priori" knowledge.  Under certain conditions, within a limited experiential perspective, these ideas might seem certain, such as "stocks are the best long term investment".   However, as the prospectus warns, past results are no predictor of future returns.  A more Nominalist frame of mind, in its exhortation to individually examine each idea, given the notion that the particulars of life sometimes fail to conform to our expectations, can assist in avoiding this mental trap.  Who knows, maybe this era is different, I just don't think so.

Author email   2001 Dave Lewis
Reprinted on Goldenbar with permission of the author