The main issue this time is to give, within a general equilibrium framework, a rational explanation of the emergence of a monetary technology. A substantial part of their central logic is based on the probabilities agents attribute to the money they wish to hold to be later on exchanged against goods.
In an equilibrium position, no one has an interest not to accept money if all other agents are ready to use it. But do these models fulfil their promises?
In both cases, the hoped-for decentralisation postulated by a general equilibrium model is brutally replaced by a deus ex machina which, in the case of search models, could well be a government endowed with a monopoly on the supply of legal fiduciary money. Or, at least left to an exogenously determined probability? Since the choice of a monetary or non-monetary technology of exchange is a collective and not a individual choice, should one not refer to a disequilibrium social process rather than to a simple definition of equilibrium conditions?
As the subtitle makes clear, the author intends to answer first the question Why is there money? This will appear later as a first and most crucial ex ante hypothesis. In short, Starr adds to the standard Arrow-Debreu model in which ex definitio transaction costs are nil a resource-using transaction technology made up of two elements: exchanges have to take place at commodity-pairwise trading posts and—in the Hicksian tradition—trade implies transaction costs.
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Prices at each trading post are defined as bid and ask rates of exchange between the two goods traded at the post; and, logically, the bid-ask spread measures the transaction costs at that trading post. The most liquid good displaying the lowest bid-ask spread i. Hence, the price system seems to provide not only information on relative scarcity and desirability of goods but it also prices liquidity.
Clearly, network externalities encourage all transactions to use this single common medium of exchange. In a fascinating chapter 6, Starr demonstrates how the uniqueness of the medium of exchange and the exclusive use of monetary transactions even in the presence of double coincidence of wants are explained by economies of scale in transaction costs.
When most trading posts are active in market equilibrium, the economy operates like a barter economy. But when, in equilibrium, most posts are inactive, and activity is concentrated on n-1 posts trading a single good against the remaining n-1 other goods, then the economy is purely monetary with the single actively traded good as commodity money. Exchange is a resource using activity. Transaction costs are evident to buyers and sellers from a spread between bids and ask prices.
At each of many separate transactions, the requirement that payment be made for acquisitions implies a role for a carrier of value between trades there are consecutive transactions after all.
Households and firms choose a trading plan among trading posts that will optimise their utility subject to the trading post balance constraints at prevailing prices. In chapter 8, Starr develops the idea that his trading post monetary model also provides for the use of a unique monopolistic, government-issued, fiduciary money used in most if not all transactions. Accordingly, Starr introduces ex hypothesis a government endowed with a monopoly to print fiat money and to declare it acceptable in payment of taxes probably the second most crucial hypothesis.
Menger is reconciled with Knapp; or, alternatively, the unique use of government-issued fiat money seems to be at last given proper micro-foundations. Trade is monetary. Money is unique: the existence of a unique common medium of exchange in equilibrium is logically derived from price theory. Even transactions suitable for barter solutions, where the two parties have reciprocal demands and supplies are conducted with money.
As a natural monopoly, money is government-issued fiat money, trading at a positive value though it conveys no direct utility. This expanded Arrow-Debreu model emphasizes transaction costs and the multiplicity of separate pairwise transactions each fulfilling a budget constraint. Hence, Why is there Money?
How elementary are his assumptions? Money might no longer be an assumption but a conclusion of a theory based on elementary assumptions. But those elementary assumptions cannot be but a set of conditions on the transaction technology that allows the theorist to conclude that there is a common medium of exchange, that payments take monetary form and that money has a positive value. The trading post model is a set of institutions; the non-agent that partially and exogenously replaces the traditional fictitious auctioneer.
Moreover, the exogenously given large size of the government once again a non-agent in a general equilibrium setting and its natural monopoly on the medium of exchange is bound to lead to the hoped for corner solution. But is such an extended Arrow-Debreu model still connected in a substantial way with the highly parsimonious initial structure on which rely most of its optimising results?
Either the validity of these various models relies on ad hoc hypotheses and, hence, money is simply a theoretical afterthought added to a general equilibrium model fundamentally erected on barter assumptions; or, money is no longer a variable to be simply added to real variables but an intrinsic component of monetary exchanges the technology of which it is necessary to explain and not simply to postulate. In other words, either the theoretical logic of an exchange economy can be apprehended without money the neutrality tradition with an inessential money ; or, money is an essential characteristic of the fundamentals of an exchange economy and, thus, should be, from the very beginning, part of its analytical representation the essentialist tradition.
As in any social game, as in any kind of social contract, the social convention at the origin of the positive value of fiduciary money must be defined before the game starts, even if this ex ante rule will certainly not be always adhered to during the social game. Skickas inom vardagar. Hahn on Methodology: The Quest for Understanding addresses two fundamental questions: i what is distinctive about economic theorising?
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