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.
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| 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.
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| 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.
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| 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.
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| 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.