On the marginal utility of fiat money: insurmountable circularity or not?

TL;DR

This paper investigates how fiat money acquires value through a novel agent-based model, addressing the challenge of decentralized price formation and proposing a more realistic mechanism than previous models.

Contribution

It introduces a new agent-based mechanism for price discovery that overcomes limitations of earlier models like Gintis's, providing insights into fiat money valuation.

Findings

Proposes a realistic decentralized price formation mechanism.

Demonstrates the model's effectiveness through simulation results.

Offers a new perspective on fiat money valuation processes.

Abstract

The question of how a pure fiat currency is enforced and comes to have a non-zero value has been much debated (Selgin, 1994). What is less often addressed is the case where the enforcement is taken for granted and we ask what value (in terms of goods and services) the currency will end up taking. Establishing a decentralised mechanism for price formation has proven a challenge for economists: "Since no decentralized out-of-equilibrium adjustment mechanism has been discovered, we currently have no acceptable dynamical model of the Walrasian system" (Gintis 2006). In his paper, Gintis put forward a model for price discovery based on the evolution of the model's agents, i.e. "poorly performing agents dying and being replaced by copies of the well performing agents." It seems improbable that this mechanism is the driving force behind price discovery in the real world. This paper proposes a more realistic mechanism and presents results from a corresponding agent based model.