The theoretical foundation of abstract monetary systems and the subjective theory of value

The historical and theoretical consideration of the monetary system reveals a fascinating development from material objects of exchange to purely abstract calculations. While in early epochs trade was based exclusively on goods with immediate utility value, the modern financial system has moved far from this physical basis. Economists have long been investigating whether acurrency must still have an intrinsic value in order to act as a universal medium of exchange. This question leads deep into the theoretical foundations of economics and forces to fundamentally re-examine the nature of value and price.

The departure from the material utility value

Monetary units or other currencies are by no means fixed objects of known size, certain weight or inherent value. Nor has state-issued money consistently held the outstanding position it currently enjoys in most nations. In the course of the theoretical discussion, one has continued to refrain from the original use value of universalexchanged goods removed. While consumer goods such as food or everyday products can be consumed directly, precious metals and precious stones have hardly any use that goes beyond the classic monetary functions. Nevertheless, these materials have certain primary benefits, such as jewelry or in industrial production processes.

The theoretical possibility of a pure offsetting unit

The fundamental question arises as to how far this process of abstraction can be continued. there can be goods at all that have no primary benefits of their own and are still suitable as universal means of exchange. Let us first investigate this question in more specific cases. It is important to clarify whether there can be billing units that do not require any primary benefits.This billing unit does not include the function as a medium of exchange or as a store of value.

The subjective value theory and the abstract money concept

The first thing to do is to see whether the many exchange relationships between all real goods can be expressed in fictitious exchanges to goods without their own primary benefits. These exchange ratios could then be considered prices. The answer to this is provided by classical economists from France from well over a century ago. Léon Walras was one of the earlyThinkers who have understood that the value of a good is not exclusively the result of the work that you have to put into production. Rather, this value also depends on how people like to use it.

The market equilibrium model as the basis of the neoclassical

In the incident, these thinkers invented money theories that dissolve from the classic point of view that money must be real goods. He himself did not call this a monetary theory and many economists after him did not recognize it either. Nevertheless, he shaped the view that money can be purely abstract without any material basis. In Walras, money is an intangible layer above thatworld of real goods. Prices are based on exchanges between other goods and they are purely information collection entries for which he used the mathematical concept of directionality.

The fictional auctioneer and pricing

This results in the market equilibrium model, which forms the basic type of view of the Neoclassical and has taken a new perspective on the economic world. Walras assumes economies where there are initial equipment, production possibilities and preferences of individuals. Individuals now enter into organized trade with each other. It will be fromfictional central places, the auctioneers, a prize for each estate. This price is model exogenous, i.e. specified from the outside, and does not refer to goods that are already in existence.

Adjustment of supply and demand

For this price, a kind of virtual new good is created, but it does not give any of its own benefit. These are pure offsetting variables that can be imagined as entries in information collections. Every estate has exactly such entries. The money does not arise within the economy, but is placed over it from the outside. The difference between the outside andMoney generated within the system is considered even more closely in the context of the state fine.

The mathematical foundation of the market equilibrium

The fictitious auctioneers vary the prices proposed, i.e. the information collection entries, now until every good supply and demand are balanced. This is done by increasing the price of any good that has a surplus demand. At the same time, the price is reduced for everyone with a surplus supply. Then all participants swap to theproposed prices because all demand and production requests have been brought into agreement. This is called a market equilibrium.

The break with the classic labor value theory

Walras shows mathematically that such equilibriums exist under certain conditions, that they can be achieved and what properties they have. The process is a stylized market activity that shows how market prices can arise from individually not comparable benefit estimates. These are the objective exchange values, as Ludwig von Mises would call them. oneIt must be clear here that all technically possible production options are included in the emergence of these exchange values. On the other hand, all individual benefits are also included in this assessment.

The establishment of subjective value theory

The more popular a good is and the more complex it is to produce, the higher the price will be. At first glance, such models seem completely unworldly, but they are gigantic leaps compared to the view of the predecessors. Authors like Karl Marx and Adam Smith still had the idea that the value of a good was created exclusively by production. follow from thisAbsurdities like the production of uselessly large nails that weigh enormous amounts just because large amounts of nails should be produced. Walras and the other neoclassical thinkers introduced the subjective element for the first time.

The neutrality of money in the theoretical model

They showed that the value always contains subjective elements, namely the benefit that it creates in people. Without individual benefit, there is no value. This view of subjective value theory has spread so widely that it seems to us today that it is downright absurd that the value of a good is an inherent quality of it. But at some point the method had tohow the many subjective assessments of a good are connected to each other in such a way that metrics are created. These metrics are intersubjectively comparable and are now referred to as market prices.

Peculiarities of the simplified model

This is also the reason why the money is not given its own role for this. In this world of thoughts, money is a purely neutral layer above the level of real goods. Whether this consideration makes sense or not depends on what you want to investigate. We are still talking about the neutrality of money. Let’s first take the Walras world as idealized extreme pointsfor the question of the nature of money.

The detachment of the real good by a fictitious quantity

There are some peculiarities in these simplified worlds. The resulting price structures are not clear, but can be multiplied by any simple factor without changing anything to the price level. So if all prices simply have higher shares or you simply remove several zeros from used currencies, that doesn’t change theResult at the level of real goods. If there are certain numbers of real goods, there are fewer exchange ratios that can be freely defined. This point was already addressed in the discussion of freedom of arbitrage.

Conclusion on the theoretical possibility of abstract money

If a fictitious exchange ratio with the name price is now introduced, there are just as many real exchange relationships as goods. No real good then gets an outstanding position as a universal good. In its place, purely fictitious information collection entries without primary benefit and without a clear material basis take place. The analysis is comparatively static, which means you consider howStart states directly to end states. The adjustment processes in between are not dealt with, although in the real world they often make up the most important parts of the situation.

Outlook on real economic consequences

So here it is only about the theoretical possibility of purely abstract funds. We will look at their consequences for real economic situations later. The realization that money can only be a neutral shell over the real exchanges revolutionized economic thinking. She freed the theory from the need to always apply money to physicalto bind raw materials. This paved the way for the modern financial system, in which trust and mathematical models determine the value of a currency.