Monday, October 22, 2012


Gold, or at least gold money, is a favorite fetish of the Randists, Ron Paulists, and the right-wing crackpotia in general. Fiat money, or anything that is an emergent property of society (to use Krugman's term) drives them nuts. It overflows their shallow intellectual buffers.

Krugman puts them in their place.

So what is fiat money? It is, as Paul Samuelson put it in his original overlapping-generations model (pdf), a “social contrivance”. It’s a convention, which works as long as the future is like the past. Obviously, such conventions can break down — but then so can things like property rights. In fact, you could argue that almost every asset in a modern economy owes its value to social convention; green pieces of paper could become worthless, but then so could any paper claim, which is, after all, worth something only because laws say it is — and laws can be repealed.

And once you realize that a social convention is not at all the same thing as a bubble, several related fallacies fall into place.

Take the common claim on the right that Social Security is a Ponzi scheme because the system has few real assets. It’s true that Social Security is mainly a system in which each generation pays for the previous generation’s retirement, in the expectation that it will receive the same treatment from the next generation. But like monetary circulation, this process can go on forever; there’s nothing unsustainable about it (yes, demography, but that’s about the levels of taxes and benefits, not the fundamental nature of the scheme). So there’s nothing Ponziesque at all.