If bad money is a collective bad, isn't good money a collective good?

Abstract

During the current crisis we have discovered that a sick monetary and financial system and bad money are a collective bad. But if that is the case, then is it not reasonable to consider a sound monetary and financial system and good money to be a collective good? One of the reasons economists have not taken up this simple idea is that they have treated money as too homogenous a phenomenon – apart from the fact that economics has never been able to satisfactorily explain why money exists at all. In addition, the great majority of economists were unprepared for the world financial crisis and for the crisis of the euro because they have neglected three basic lessons of economics. By distinguishing different levels of interaction between economic and political agents, I will show that the idea of money as a private good (excludable and rival) with positive and negative externalities cannot fully account for either the positive or the negative effects of money. The concept of money as a collective good (non excludable and non rival) also has its defects. Money as a club good (excludable and non rival) comes closer to accounting for its peculiarities. But the global character of money leads me to conclude that it is better analyzed as a common pool good (non excludable and non rival), at least at the level at which attempts are undertaken to stabilize the world monetary andfinancial system. I apply Elinor Ostrom’s work on common pool resources to the analysis of money, and in particular of the euro and its vicissitudes. This throws more light on the nature and functions of money, and perhaps even on its existence. There is, however, one crucial difference between the problems of the sustainable natural resources that Ostrom studies and the sustainability of money. Natural resources, if not overused to complete exhaustion, may replenish themselves without human intervention, a process that may be stimulated by an adequate governance system. In the case of social or cultural resources such as money (which is a “social construct”), however, the governance system is part of the resource itself. This leaves intact, but complicates, the relationship between the stock or pool (which in the case of money is trust) that produces a flow of products (monetary and financial services). In order for the stock to be maintained and to continue yielding its services (so: to be a renewable resource), continuous investments are needed. This is a central idea in Friedrich von Hayek’s capital theory, which may be used to improve Ostrom’s analysis. So, in order to return to a sound global monetary and financial system, and to save the euro, we should invest in trust. How this can be done is a largely unexplored domain, but I will show that the way European politicians have been acting during the euro crisis is exemplary of how not to solve this problem. Getting the global and the European monetary and financial systems back on track is a complex problem of collective action, which - as Ostrom has shown - is at the centre of the governance of all common pool goods. The story of the euro is a perfect illustration.