In the world of classical economics of the Banking School (of which binary economics appears to be the sole survivor), money is a symbol, a means of exchanging, measuring, and storing claims on the present value of existing and future marketable goods and services, i.e., production, whether produced by labor, land, or technology.
|A. Smith ... Also A Smith.|
Money allows people who produced something they don’t want to consume, to trade for something that they do want to consume, and to do so when it is convenient for all parties to the transaction. Given (as Adam Smith observed in The Wealth of Nations) that the purpose of production is consumption, money helps people tie production and consumption together. In that way (everything else being equal), the economy can be in balance; production equals consumption, supply equals demand.
|A Fugger Bill of Exchange, better than gold for 500 years.|
The legal definition of money is “anything that can be accepted in settlement of a debt.” Money is therefore a contract, consisting of offer, acceptance, and consideration. I offer you something of value (consideration) to settle a debt, and if you accept it, the debt is satisfied or settled. Some forms of money, in fact — bills of exchange — are still known as merchants, trade, or bankers acceptances, depending on who accepted them.
No, this is not a posting on understanding money . . . although that is a good idea, as soon as we get a round tuit. What we’re looking at today is the frenzy into which the financial fellows (male and female) have fallen as a result of the drop in the market early this week.
|Drake Oil Well.|
According to the experts, the drop in the price of oil and the low interest rates have somehow combined to bung a spanner into the workings of the market. A drop in the price of two key factors of production — credit and energy — mean that stocks are somehow worth less than they were hours before; that the potential of greater profits by reducing key costs and lowering prices has decreased the value of companies producing marketable goods and services.
Come again? Doesn’t lowering the price of something increase demand, thereby increasing sales and raising profits?
Not in Keynesian Fantasyland, a world in which money — the means by which I exchange some of what I produce for some of what you produce — has no relation to production! This is the case when government (which does not produce marketable goods and services) creates money backed by the present value of future tax collections, i.e., what the politicians hope to collect out of what other people produce.
In other words, when the government (consistent with “MMT” — “Modern Monetary Theory”) can create claims at will on what other people produce, the power to produce no longer means the power to consume. Then you have the fact that human labor — the means by which most people have traditionally produced — is being replaced at an increasingly rapid rate by advancing technology.
|Keynes's General Theory|
Except in Keynesian Fantasyland, in which labor is the sole factor of production, and capital only “enhances” labor. Which, of course, fails to take into account any and all automated production of goods and services by robots (and when did you last see an elevator operator?), as well as the “gratuitous offerings of Nature,” e.g., those apples that grew without any human labor input, or that Bambi steak you had for dinner after whacking the critter with your car.
So — how can stock values plummet when prices are dropping and consumption should be (and is) increasing? By ensuring that productive people are unable to consume what they produce by manipulating the value of the currency, and that the ability to consume is no longer dependent on the ability to produce by having a non-productive agency (government) issue claims on production (“money”) so that people have less incentive to produce in order to consume, and greater incentive to consume without producing.
Of course, the whole question would be moot if everyone owned enough capital to generate sufficient income to meet consumption needs. Then the rich could play the market all they liked, and everybody would be happy.
Except the stock brokers who would have to get real jobs, and politicians who would have to go to the citizens to be able to spend money.
But that’s a small price to pay.