Quote from: Imerman2 on March 27, 2014, 07:55:11 PM

I'd like to hear your response to this idea, it's a theory that I've kept in mind while developing a crypto-currency (I've had to assume quite a lot to keep it short). The only rational measure of economic calculation is profit and loss, there is no accurate way to calculate the "real" value created by an activity, but the use of money allows individuals to rationally calculate the production of "real" value in an economy and thereby reward activities with wealth by using a common unit of account, money, as a rough approximation of a measure of value. Because economic calculation can only be measured through profit and loss, and profit and loss uses as its measure of value money, the way to make the calculation of profit and loss an exact science, such as physics, would be to use a stable unit of value, just as Physics uses stable units of measurement. However, because value cannot be measured, all monies released on the market are simply approximations of a unit of value (some are closer than others).

It is certainly true that calculating real values is non-trivial, but I wouldn't say it is impossible. Where we can observe prices and quantities it's quite easy to derive a measure of real output which ticks most of the boxes one might like such a measure to tick. See https://en.wikipedia.org/wiki/Price_index for an introduction. (Modern statistical agencies use the Fisher index almost exclusively.)

The idea that "profit and loss" is the source of value is also problematic. We only care about firms profits because they use those profits to pay dividends, which enable us to consume more. So, rather, it is household consumption which is the ultimate arbiter of value in the economy. If a good is not valued by consumers, and is not an input into the production of other goods that are valued by consumers, then it will be worthless.

Quote from: Imerman2 on March 27, 2014, 07:55:11 PM

Monies chosen on the free-market, notably gold and silver have an inherent price mechanism that works to stabilize their value. If the value of gold rises, then gold mining becomes more profitable, thus more resources are allocated toward gold mining capital equipment, thereby increasing the supply of gold to offset the increased demand. If the price of gold drops, resources are directed away from gold mining capital equipment therefore causing the supply to rise at levels in tandem with the slowing demand for gold. Historical records indicate relatively stable prices of gold over centuries, from the Greeks to the Romans and up to the beginning of Central Banking, which is an empirical proof that the ideal money has stable value.

This is a compelling idea, but it's unfortunately wrong. As you suggest, the way to look at the problem is from the demand and supply sides in turn. Let's write D(p,t,ed) for the demand at a price p at time t given short-run demand fluctuation ed and S(p,t,es) for the supply at a price p at time t given short-run supply fluctuation es. Now its certainly true that if ed is high at some moment in time, then the price will increase, which will increase S. However, with plausible degrees of supply elasticity the result will be both an increase in price, and an increase in quantity, so supply adjustment is not going to perfectly stabilise prices in the short-run. In the long-run, supply adjustment is even more powerless to stabilise prices. Recall that the underlying source of demand for gold stems from its use in jewellery, or in chemistry, or in electronics, or in products manufactured using that chemistry or those electronics etc. So on the demand side, we might see trends coming from population, or from technology. Now higher population will also increase the amount of gold you can extract, as indeed will higher technology, however there's no reason in general why the demand side and the supply side trends should cancel each other out. Just imagine that someone worked out how to use gold to build an incredibly efficient fusion reactors, then the price of gold would sky rocket. In any case, the assertion that the price of gold has been stable just isn't true. See e.g. this graph http://pragcap.com/the-goldwheat-ratio, where the price of wheat may be thought of as a proxy for the world price level (since subsistence crops such as wheat still make up a large chunk of the world consumption basket).

Quote from: Imerman2 on March 27, 2014, 07:55:11 PM

The rate of growth of an economy is determined by the rate at which individuals prefer present satisfactions over future satisfactions which decides the rate at which they allocate present resources towards present consumption and investment for greater future consumption. As an economy grows the satisfactions gained from present consumption grow in direct proportion to the satisfactions gained by future consumption so the rate of growth can only change by a species wide change in values, which is highly unlikely (although at the individual level the rates of present to future consumption are always changing). Therefore, the way to achieve long-run price stability is to simply create a create a crypto-currency with a long-term stable ratio of coin production, although it is not evidently clear what this ratio would be.

Yes, the discount factor has an impact on the rate of growth in many endogenous growth models, but so do a whole load of other parameters! I also don't see how the conclusion of this paragraph follows from the first few sentences.

Quote from: Imerman2 on March 27, 2014, 07:55:11 PM

Finally, any money that has long-term changes in value will inevitably cause errors in the calculation of profit and loss in "real" terms because money is simply the unit of measurement for economic production (if Physics used units of measurement whose values changed then all calculations of moving bodies would inevitably contain errors). Therefore, an economy that uses a money that has 0% inflation will be more productive than the same economy using a money that either inflates or deflates.

Yes, inflation causes real distortions. I think we're in agreement there.