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You may remember that I once cooked an example called "gold for soybeans" where I showed that, if you are sitting at a point of the Production Possibility Frontier of Gold and Soybeans, the slope of the normal direction is the relative price of the two, and the intercepts of the tangent line with the axes are the GDP expressed in units of gold or of soybeans. Assuming that the PPF is convex (mild assumption) you get that moving along the PPF will increase one of the GDP values but decrease the other. This fails the change-of-numeraire sanity check. But if you can move the PPF outwards you can increase the GDP regardless of which numeraire you're using.

If you keep making more stuff, GDP grows by any numeraire, but if you can not make more stuff some numeraires will show a growing GDP and some a shrinking? Would that be a fair summary?

The discussion of fiat money leads me a bit of topic: I have theory on the relatively succesful fiat moneys of today.

Sometimes you hear statements about todays fiat moneys not being based on anything tangible (at least since the Bretton-Woods collapsed), but only on how much you trust the government. I think this needs expanding upon.

Let me first start with some historical examples of fiat money. The american and french revolutions printed money to finans their wars. The trust was low and as soon as trust went away in an area, huge inflation kicked in as people started to use other numeraires.

Today you can not stop using the governments numeraire. Why? Because of taxation. Of course people payed taxes in the 18th century to, but often as work or in kind. Today you need to pay your taxes and the taxes are in the governments currency. So even if you switch to exchanging beans for gold with your neighbour, you still need some euros, dollars, renminbis to pay the government. Which means that at some point you need to accept fiat money for real products.

So the currencies of today rests on taxation and the governments ability to punish you if you do not pay your taxes.

Assuming I was right on the origins of GDP in my comment on Colmans diary the other day:

I have long suspected that GDP/capita becomes an important measure at about the same time as you can get that number from the tax offices.

Then both fiat money and GDP stems from the same source: modern taxation.

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by A swedish kind of death on Fri Jun 30th, 2006 at 07:50:21 AM EST
[ Parent ]
I have also seen it claimed here on ET that the one thing for which GDP is useful is to extimate a country's tax base.

Taxation is also the reason why barter is discouraged.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Jun 30th, 2006 at 07:54:16 AM EST
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So, then:

1. What does GDP measure?
Tax base.

2. Why does it need to grow?
To enable politicians to keep their promises, wheter in expanding services but not increasing taxes or lowering tax percentages while keeping services constant. Or both. Few run on a platform of increased taxes and lowered services. Or on a reality-based platform where you need to pay for what you eat. Fiscal conservative is just a oppostion position, when in power you need to keep promises.

3. Does the need for GDP growth outweigh any other policy goal?
Policy is set by politicians right? Then - almost always - yes.

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by A swedish kind of death on Fri Jun 30th, 2006 at 08:47:56 AM EST
[ Parent ]
If you keep making more stuff, GDP grows by any numeraire, but if you can not make more stuff some numeraires will show a growing GDP and some a shrinking? Would that be a fair summary?
Yup, thanks for putting my unreadable stuff in understandable form. It is also possible for the PPF to expand in such a way that the GDP contracts by some numeraires but expands by others while the amounts of all products also increase, but I don't know how contrived that is. It doesn't require nonconvexity so it is not too contrived.

Here is my original gold-for-soybeans example, half-way down the diary.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Jun 30th, 2006 at 08:00:40 AM EST
[ Parent ]
In English, that means I can think of a situation in which more is produced of everything but the GDP still would seem to increase or decrease depending on which good is used for money, and that the situation I am envisaging is not too much of a strain.

I think what this indicates is that there must be hidden inflation in the model. I have to think about how to quantify that.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Jun 30th, 2006 at 08:17:59 AM EST
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I must admit I've never bought the people saying that fiat money is bad and that they prefer gold or whatever but big government curb their liberties etc...

In the current system, including for paying taxes, you can right now be practically independant from fiat money value fluctuations.

You just have to have a bank account and minimal fiat money for the day, the trick is to log on internet each evening and use all or most of the positive balance to buy gold or whatever fund you want to keep the balance near zero. You need to buy something? Just sell your whatever fund and use the fiat money immeditely to make your purchase or pay your taxes.

So no issue here, the current system allows you the freedom not to depend on fiat money value at the cost of one click per day.

Of course if everyone does that, all the private banks of the world have to change their model since the government granted priviledge of creating money is of no use anymore since all customers accounts have zero balance...

by Laurent GUERBY on Fri Jun 30th, 2006 at 02:58:47 PM EST
[ Parent ]
You might have read something which was not there.

I have no problem with fiat money and I am happy not having to carry big pieces of metal around. But I find the construction interesting.

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by A swedish kind of death on Fri Jun 30th, 2006 at 11:05:10 PM EST
[ Parent ]
Indeed, my note was not directed at your comment, but just to inform ET'ers on my view on the "fiat money = evil mandated by the government" things that are sometimes said in libertarian circles :).
by Laurent GUERBY on Sat Jul 1st, 2006 at 07:09:36 PM EST
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