Tuesday, October 16, 2012

The Concept of Money in Binary Economics

To understand how Kelso claimed that binary economics has the potential (as he put it in the subtitle of The New Capitalists), to "free economic growth from the slavery of savings," we first have to realize that by "savings" Kelso meant "past savings." New capital cannot be financed without savings of some kind. Kelso just said we need to shift from saving by cutting consumption in the past, to saving by increasing production in the future. To understand how we can save in the future as well as in the past, we need to get a better understanding of money.

Money is defined very simply in binary economics: anything that can be accepted in settlement of a debt.

Kelso perhaps said it best when he pointed out that "money" is only a symbol. Jean-Baptiste Say, of "Say's Law of Markets" said the same thing when he noted in a debate with Thomas Malthus that we don't really purchase what others produce with "money," but with what we produce by means of our labor and our capital.

That is, we can only purchase what others produce with what we produce. If we can't produce, we can't purchase. "Money," as Say and Kelso said, is only the symbol of what we are really exchanging. Money is the medium through which or by which we exchange marketable goods and services, it is not what we exchange.

Further, we do not have to have the marketable good or service on hand when we make a promise to deliver it. If the delivery date is in the future, we only need to have the marketable good or service on hand when the money we issued is presented for payment. Money therefore represents the present value of both existing and future marketable goods and services.

In binary economics, we can take the present value of marketable goods and services that do not yet exist, and turn that present value into money. We do this by offering ("offer") to deliver marketable goods and services ("consideration") in the future. If someone accepts our offer ("acceptance"), money has been created.

We can take this money and use it to finance the formation of the capital with which we expect to produce the marketable goods and services we promised to deliver at some future date. Assuming everything goes as planned (and in the vast majority of cases it does) when someone presents our promise on the due date, we will be able to deliver the promised goods and services, or the value thereof, redeeming the promise.

In this way (and trade and commerce has been carried out in exactly this way for thousands of years) there can always be just the right amount of "money" around. There need be no deflation, and inflation would be limited to "cost push inflation," i.e., a rise in prices that results from a decrease in supply for some reason, not an increase in the money supply unlinked to increases in the present value of existing and future marketable goods and services.

The understanding of money in binary economics, however, assumes as a given that only people who produce marketable goods and services should enter into contracts (i.e., "offer," "acceptance," and "consideration") for the delivery of marketable goods and services or the value thereof in the future or on demand. What happens when non-producers enter into contracts for the delivery of marketable goods and services or the value thereof that they don't own is something we will look at next week.