In the
previous posting on this subject, we looked at the “Currency Principle,”
the fundamental assumption (obviously) of the Currency School that is the basis
of virtually all modern economic thought.
We discovered that the Currency Principle can be stated very simply as
the belief that the amount of money in the system determines the level of
economic activity.
In other words, under
the Currency Principle, if there is no money, there is no economic
activity. If there is a lot of money,
there is a lot of economic activity. All
this derives from the assumption that “money” consists of a claim on existing
savings.
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| "Let's see. Greed is good. I'm greedy. I'm good!" |
We also
discovered that the Currency Principle that is the basis for Keynesian,
Monetarist/Chicago, and Austrian economics as well as all forms of socialism
and capitalism, embodies an inherent contradiction that invalidates the entire
principle. That is, production cannot
take place without first saving, but saving cannot take place without first
producing.
Fortunately,
binary economics avoids the inherent contradiction of the Currency Principle by
accepting the Banking Principle. The
Banking Principle can be stated as easily and simply as the Currency
Principle. The Banking Principle
is that the level of economic activity determines the amount of money in
the system.
This is exactly
the opposite of the Currency Principle: that the amount of money determines the
level of economic activity. In finance
terms, under the Currency Principle production is a “derivative” of money,
while under the Banking Principle money is a derivative of production.
To put it another
way, the Currency Principle is really a version of the old paradox, Which comes
first, the chicken or the egg? The
Banking Principle assumes as a given that we already have either eggs or
chickens, and the real question is what to do with our eggs or chickens. Do we consume them, or do we trade them to
others for what we want to consume?
“Ah,” you might
say, “How did you get the eggs or chickens in the first place? Don’t they have to exist in the form of
savings before you can even obtain them?”
Excellent
question, and a good point — and it raises the issue of how we resolve the
fundamental flaw in the Currency Principle and why the Banking Principle is
more rational.
The fact is that
the Currency Principle is based on what is called a “logical fallacy of
equivocation.” This is a fancy way of
saying that somebody who commits a “logical fallacy of equivocation” has taken
a word, phrase, or concept that means one thing in one set of circumstances,
and another thing in a different set of circumstances, and claims that they
mean the same thing. It also goes the
other way, that a word, phrase, or concept that means the same thing even in
different circumstances is taken as meaning something different.
For example, take
the word “fix.” When you fix an
automobile, you repair it so that it runs properly. When you tell someone, “I’ll fix you!” you
don’t mean you will repair him, but harm him in some way. When you fix a horse race, you are
cheating. The exact same word in all
three circumstances, but three very different meanings.
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| We said "tort" not "torte" . . . forget we said anything. . . |
Thus, someone whom
you ask to fix your car destroys it thinking that is what you wanted has
committed a “logical fallacy of equivocation” and a tort, even a crime if the
court decides he should have known the different meanings of the word “fix” and
applied them reasonably, i.e., would a reasonable man whom you ask to
fix your car have destroyed it, thinking that is what you meant? Probably not, therefore a crime has probably
been committed.
The logical
fallacy of equivocation of the Currency Principle is the massive confusion
regarding the concepts of saving and production . .
. especially who or what is doing it.
You see, Currency
Principle adherents are both right and wrong when they say that saving must
precede production. They are right that
something must exist out of which something can be produced, but wrong that
this is necessarily classed as “savings.”
Currency
Principle adherents such as Keynes are correct — up to a point — in defining
savings as the excess of production over consumption. The problem is that they (probably
unconsciously) shift the meaning of savings from the individual to the
aggregate and back again, and sometimes take both meanings at the same time,
and then insist that all saving must precede production.
The simple fact
is that production is individual, not aggregate. Actual people and capital instruments are
what produce; aggregates — abstractions — do not produce.
And the same goes
for saving. “Saving” is not something
that occurs in aggregate. Aggregate
saving only exists because actual people are saving or have saved.
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| Sometimes false analogies are pretty obvious |
Thus, the
Currency Principle is correct that nothing can be produced overall if nothing
exists anywhere out of which it can be produced. It is incorrect when that is extended to
individuals or groups engaged in production.
The Currency Principle is based in part on a “false analogy,” that is,
because nothing can be produced out of nothing at any time (true), no one can
produce anything if he or she personally does not possess anything at the
present time (false).
Obviously you
cannot produce something out of nothing.
That is not what it means under the Banking Principle to say that
production is possible without the use of existing savings. It means — and it means only this — that an
individual or group can produce something if the individual or group has no
existing saving. It does not mean
that an individual or group can produce something out of nothing.
We’ll repeat that
because it is a key point. Nothing can
be produced out of nothing. The Currency
Principle and the Banking Principle both agree on that. The Currency Principle takes that obvious
truth and claims that because nothing can be produced if nothing already exists,
then it necessarily follows that if an individual or group has nothing at the
moment, then that same individual or group can never have anything, even if
others have all they want or need.
Under the Banking
Principle, however, nothing is easier than arranging for those who have nothing
to have something — without taking it from anyone else. All it takes is a good idea and the ability
to put the idea to work. All the Banking
Principle implies is not that something can be created out of nothing, but that
an individual or group can start with nothing, and gain something without
taking it away from somebody else.
For example, a
man (we’ll call him Smith) comes to a town
with only the clothes on his back and a solid character reference from a
trusted authority. He wants to be a
farmer, and there is a good 160-acre farm for sale. The current owner (whom we’ll call Jones) is
tired of farming and wants to cash out and retire on the proceeds.
Smith goes to
Jones and says, “I see you want to sell your farm for $100,000. How much profit do you make every year from
the farm?”
Jones says he
makes a minimum $10,000 clear a year plus all the food, fuel, and clothing he
needs, and the taxes are low, only $1,000 per year.
Smith says, “I
offer you no money down, but $5,000 a year for 20 years, plus an annual rental
of $2,000, to be decreased by 5% every year, paid after the crop is harvested
and sold. Here is a character reference
from a trusted authority.”
Jones says, “It’s
a deal.”
Smith was able to
purchase Jones’s farm without the use of past savings using the Banking
Principle. Smith used savings, of
course. Instead of reducing his
consumption in the past, however (past savings), he increased his production in
the future (future savings). Smith purchased
a capital asset without having any savings now, and paying for it with the
profits of the capital itself.
That is what it
means under the Banking Principle to say that new capital can be financed
without using existing savings. In the
next posting on this subject, we’ll look at how the Banking Principle
developed.
#30#
