Ideal money

John Forbes Nash, Jr.

Ideal money is a theoretical notion promulgated by John Nash (Nobel Laureate in Economics), to stabilize international currencies. It is a solution to the Triffin dilemma which is generally about the conflict of economic interests between the short-term domestic and long-term international objectives when a currency used in a country is also a world reserve currency in the meantime.

Introduction

How does the idea of Ideal Money appear

"Money can be recognized as a technological development comparable to the wheel and of similar antiquity. Among the more recent developments in the technology that facilitates transfers of utility (in the sense of game theory) are systems like those of EZ Pass, by means of which vehicles traversing toll bridges or toll highways can pay their toll fees without stopping for the attention of human personnel manning the toll booths. In this lecture, I present remarks about the history of monetary systems and about issues of comparative quality or merit , along with a specific proposal about how a system or systems of ‘ideal money’might be established and employed."[1]

Main value standard of ideal money

Ideal money is working in the theory similar to the gold standard, but it is generally based on a Nonpolitical Value Standard. "A possible nonpolitical basis for a value standard that could be used for money would be a good industrial consumption price index(ICPI) statistic. This statistic could be calculated from the international price of commodities such as copper, silver, tungsten, and so forth that are used in industrial activities."[1] John Nash said in his lecture.

Why gold can not be an ideal money

The gold does not reach the standard of ideal money, despite its merits. The main problem is because the silver and gold do not have a constant value all the time. "To the undiscerning minds of the mass of men a pound sterling of gold, a silver five-franc piece, or a paper dollar, represents always a definite unit. It has not escaped attention, however, that a given amount of money buys much less at one time than another."[2] in other words, people are used to measuring the value of goods by money, but due to some reasons the value of money itself changes, which causes the value of silver or gold changes. We can't tell the constant value of the metal, and the fixed mind-sets can not easily be changed.

Welfare Economics

"A related topic is that of the considerations to be given by society and the national state to ‘social equity’ and the general ‘economic welfare’. Here the key viewpoint is methodological, as we see it. How should society and the state authorities seek to improve economic welfare generally and what should be done at times of abnormal economic difficulties or‘depression’? We can't go into it all, but we feel that actions which are clearly understandable as designed for the purpose of achieving a ‘social welfare’ result are best. And in particular, programs of unemployment compensation seem to be comparatively well structured so that they can operate in proportion to the need."[3] Generally, the social welfare is what we always expect to be improved, and if there is really an ideal money, the whole economy would be influenced, including the social welfare.

Money, Utility, and Game Theory

The concept of utility generally appears in the field of economics but it can be connected with the game theory in mathematics.In the game theory of economics, "utility" is a very important and essential factor. In the book (on game theory and economic behavior) written by the mathematician John von Neumann and the economist Oskar Morgenstern, a utility function is proved, which can be used to put the individual's preference on the interval scale, and the utility is always preferred to be maximized. (More details can be found in Von Neumann–Morgenstern utility theorem.)

In John Nash's lecture about ideal money, he gave the opinion that we can through observing the changing relationship between the money and the utility transfer to see "how the ‘quality’ of a money standard can strongly affect the areas of the economy involving financing with longer-term credits. And also, we can see that money itself is a sort of ‘utility’, using the word in another sense, comparable to supplies of water, electric energy or telecommunications. And then, if we think about it, money may become as comparable to the quality of some ‘public utility’like the supply of electric energy or of water."[3] The game theory of economics is a good way to check whether the quality of a money is ideal or not.

"Keynesians"

"The thinking of J. M. Keynes was actually multidimensional and consequently there are quite different varieties of persons at the present time who follow, in one way or another, some of the thinking of Keynes. A very famous saying of Keynes was ‘...in the long run we will all be dead...’"[3] Keynesian economics gives the opinion: in the short run, the change in economic output has a strongly relationship with the change in aggregate demand, the output is always affected by the demand. If there is an ideal money which can be stable in a very long period, we do not really need to worry about lots of problems in the long run.

Asymptotically ideal money

Main idea

Asymptotically ideal money is the currency close to but still not ideal money. In John Nash’s lecture, "Ideal Money and Asymptotically Ideal Money" focused on" the connection between fluctuation in inflation and exchange rates and the perceived long-term value of money", he mentioned that: "‘Good money’,is money that is expected to maintain its value over time. ‘Bad money’ is expected to lose value over time, as under conditions of inflation. The policy of inflation targeting, whereby central banks set monetary policy with the objective of stabilizing inflation at a particular rate, leads in the long run to what Nash called ‘asymptotically ideal money’– currency that, while not achieving perfect stability, becomes more stable over time."[4] That means if a currency has shown a trend to be more stable，it could become an asymptotically ideal money or even the ideal money in the future.

Euro

Currencies may become (asymptotically) ideal money

Euro

John Nash mentioned in his lecture that Euro might become an ideal money in the future, because Euro is used in a large range of places and has a good stability. It is the currency used by the Institutions of the European Union and is the official currency of the eurozone which consists of 18 of the 28 member states of the European Union. In general, Euro has a macroeconomic stability, people in Europe owning large amounts of euros are "served by high stability and low inflation." Moreover, in March 2014, Euro was commented as "an island of stability" by the head of the European Central Bank.[5]

References

  1. 1 2 "Ideal money". Southern Economic Journal, 2002, Vol.69(1), pp.4-11 [Peer Reviewed Journal]. July 1, 2002.
  2. ↑ "Is an Ideal Money Attainable?". Journal of Political Economy. 1903. doi:10.1086/250969. JSTOR 1820954.
  3. 1 2 3 "Lecture by John F. Nash Jr. Ideal Money and Asymptotically Ideal Money" (PDF).
  4. ↑ "Nobel winner Nash critiques economic theory". April 27, 2005.
  5. ↑ "ECB boss Draghi brands euro an 'island of stability' despite sluggish growth and high unemployment".
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