A General Summary for John Nash’s Proposal: Ideal Money

The following is a general summary for the proposal “Ideal Money”. The suggestion here is that the ICPI or consumption index, that John Nash spoke of and wrote of, as a possible ideal basis for backing a currency, is truly only a theoretical side street used to abstract a solution proposed by him and referred to as Ideal Money. In order to understand this point and the purpose of his side street we will outline a few key factors of the proposal.

First we must necessarily make a quick note of Hayek’s essay “The Use of Knowledge in Society” in which he explains the fundamental problem of economics lies in solving the ideal distribution of useful commodities .  Hayek not only describes this problem in great detail, but also a very clever machine we might use to solve it: the entirety of free markets as a pricing mechanism. Hayek is careful to explain no other subset of the markets, let alone an individual, could do this so accurately:

…the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

Interestingly, at the end of the lecture Ideal Money Nash admits there is a parallel line of thinking between Hayek and the proposal of Ideal money:

…after consulting with some of the economics faculty at Princeton, I learned of the work and publications of Friedrich Von Hayek.  I must say that my thinking i apparently quite parallel to his thinking with regard to money and particularly with regard to the non-typical viewpoint regarding the functions of the authorities that in recent times have been the sources of currencies.

We must keep Hayek’s solution to the market pricing problem in mind in order to understand the proposal “Ideal Money”.

The initial consideration from “Ideal money” can be summed up from the following excerpt:

…”ideal money” currencies could be arranged for by using an appropriate index of the prices of internationally traded commodities.

We can compare this point with a concept from Adam Smith’s TWON in which he explains that excess monies printed beyond the value of the commerce it represents, necessarily returns to the banks in exchange for a medium that better represents the underlying commerce and/or might be traded beyond the reach of the paper money:

The whole paper money of every kind which can easily circulate in any country, never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there, if there was no paper money. If twenty shilling notes, for example, are the lowest paper money current in Scotland, the whole of that currency which can easily circulate there, cannot exceed the sum of gold and silver which would be necessary for transacting the annual exchanges of twenty shillings value and upwards usually transacted within that country. Should the circulating paper at any time exceed that sum, as the excess could neither be sent abroad nor be employed in the circulation of the country, it must immediately return upon the banks, to be exchanged for gold and silver. Many people would immediately perceive that they had more of this paper than was necessary for transacting their business at home; and as they could not send it abroad, they would immediately demand payment for it from the banks. When this superfluous paper was converted into gold and silver, they could easily find a use for it, by sending it abroad; but they could find none while it remained in the shape of paper. There would immediately, therefore, be a run upon the banks to the whole extent of this superfluous paper, and if they showed any difficulty or backwardness in payment, to a much greater extent; the alarm which this would occasion necessarily increasing the run

In relation to modern day Keynesian economics Nash, in a curious and backhanded way, points out such an over printing of money, verses the underlying value it represents, effects “quality” in the gresham’s or “ideal-ness” sense:

 The idea seems paradoxical, but by speaking of “inflation targeting” these responsible official are effectively CONFESSING…that it is indeed after all possible to control inflation by controlling the supply of money (as if by limiting the amount of individual “prints” that could be made of a work of art being produced as “prints).

This relationship highlights the concept for a new standard for measurement-a currency’s supply in relation to the underlying commodities/value it represents:

…its was the observation of a new “line”…for “central banking” functions relating to national currencies that gave us the idea for the study of “asymptotically ideal” money.

However Nash also notes the difficulties of implementing this standard:

…although that scheme for arranging for a system of money with ideal qualities would work well…it would be politically difficult to arrive at the implementation of such a system.
…for the government of a state, acting on its own independently of other states, to rationally contemplate the evolution of the inflation rate for its currency towards zero there are clearly some very relevant considerations relating to tax revenue expectations.

This levates the possibility for a very interesting solution proposed by Nash:

…it occurs to me to think that that which is not achieved by a grand action of establishment by “fiat” may alternatively tend to come into existence as a consequence of a process of evolution.

Since only the markets can properly price commodities, and since ideal money functions in relation to an ideal basket of commodities, then only the markets can determine optimal currency supply.

It stands to reason then, in order to rein in the suppliers of each respective (Keynesian/central bank) currency towards an ideal policy standard, one simply creates a market for the currencies. By using the pricing mechanism Hayek spoke and wrote of,  the “players” of the markets naturally sort out the value of each currency (with respect to the relationship highlighted by Nash and Smith).

Consequently players in the great game of central banking/monetary policy control are FORCED to participate in a “survival of the fittest” market environment:

“Keynesian” players in this game have natural opponents (or co-players, beyond zero-sum perspectives) who are interested in not being themselves “outsmarted” by those who control the options that determine, say, the quantity supplied of the national currency.
And so the various currencies managed with “inflation targeting” would be comparable by users or observers who would be able to form opinions about the quality of the currencies.  And what I want to suggest is that “the public” or the users, those for whom a medium of exchange functions as a basic utility, may develop opinions that are critical of currencies of lower “value quality”.  That is, the public may learn to demand better quality of that which CAN be managed to be of better quality or which can be manged to be lof the lower quality observed in so many of the various national currencies in the 20th century.

Furthermore Nash notes, a standard that is as decent (or better!) as comparable present day standards in this respect, will necessarily evoke such evolution:

 I think of the possibility that a good sort of international currency might EVOLVE before the time when an official establishment might occur.
To be quite respectable, in a Gresham-advised sense, money needs only to be AS GOOD as other material commod-ities that might be hoarded.
Now the possible area for evolution is that if, say, an inflation rate of between 1% and 3% is now considered desirable and appropriate in Sweden, then, if it is really controllable, why shouldn’t a rate between 1/2 % and 3/2 % be even more desirable?

Because of bitcoin, as a decent (but not necessarily ideal!) benchmark (and especially since it is exchangeable in nearly every country), the result of market competition is that any currency wishing to survive MUST evolve to better represent it’s respective underlying ICPI:

Starting with the idea of value stabilization in relation to a domestic price index associated with the territory of one state, beyond that there is the natural and logical concept of internationally based comparisons.
 The currencies being compared, like now the euro, the dollar, the yen, the pound, the swiss franc, the swedish kronor, etc. can be viewed with critical eyes by their users and by those who maybe have the option of whether or not or how to use one of them. This can lead to pressure for good quality and consequently for a lessened rate of inflationary deprecation in value.

Therefore, the solution for connecting currencies to an (ideal!) ICPI happens without actually ever determining an ICPI or any formula or implementation for it:

 It seems possible and not unlikely, however, that if two states evolve towards having currencies or more stable value as measured locally by national CPI indices that then also these distinct currencies would tend to evolve towards more stable comparative relations of value.
Then the limiting or “asymptotic” result of such an evolutionary trend would be in effect “ideal money” but this as a result achieved without the adoption of anything like an ICPI index as a basis for the standard of value.”
…intrinsically free of “inflationary decadence”..a true “gold standard”, but the proposed basis for that was not the proposal of a linkage to gold

The impossible trinity still holds as impossible, however EFFECTIVELY “Ideal Money” solves the problem humanity has been prevented from overcoming by it. There is then an asymptotic approach to global stability-a true monetary standard!

The metric system does not work because french chefs de cuisine are constantly cooking up new and delicious culinary creations which the rest of the world then follows imitatively. Rather, it works  because it is something invented on a scientific basis…
Our view is that if it is viewed scientifically and rationally (which is psychologically difficult!) that money should have the function of a standard of measurement and thus that it should become comparable to the watt or the hour or a degree of temperature.
…this standard, as a basis for the standardization of the value of the international money unit, would remove the political roles of the “grand pardoners,”…

The conclusion outlined in this writing is that the new standard of “ideal-ness” whether solely theoretical or not, isn’t bitcoin per se, but rather a theoretical (or future!) money who’s supply and monetary policies functions in a stable and predictable relation to its’ underlying ICPI. This theoretical Ideal has been shown as impossible to reach in design yet effectively and naturally achievable with the implementation of a universally exchangeable money that has a truly competitive predictable and stable nature in the “Nashian” sense (ie bitcoin).

…my personal view is that a practical global money might most favorably evolve through the development first of a few regional currencies of truly good quality. And then the “integration” or “coordination” of those into a global currency would become just a technical problem. (Here I am thinking of a politically neutral form of a technological utility rather than of a money which might, for example, be used to exert pressures in a conflict situation comparable to “the cold war”.)
 So here is the possibility of “asymptotically ideal money”. Starting with the idea of value stabilization in relation to a domestic price index associated with the territory of one state, beyond that there is the natural and logical concept of internationally based value comparisons.

In turn (and in time) this evolution will naturally cause each currency (that survives), to asymptotically approach stability and predictability in relation to it’s respective underlying ICPI.

Lastly since bitcoin does have an interesting relationship to Nash’s proposal of ideal money, what is further curious is Nick Szabo’s seamless tying together of money with computer science, telecommunications and networks:
Metcalfe’s Law states that a value of a network is proportional to the square of the number of its nodes.  In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed.  The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation.  Combine this  with Metcalfe’s Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation.
Which is exactly what Nash hoped and predicted we might eventually do:
…since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like about a technology, such as a radio, to be used more or less efficiently.
…money itself is a sort of “utility”, using the word in another sense comparable to supplies of water, electric energy or telecommunications.
…we can consider the quality of money as comparable to the quality of some “public utility” like the supply of electric energy or of water.
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