What is money - An extract from The Tyrants Handbook of Economics

It takes effort and time to produce something. Not everything that is produced is immediately consumed: houses, food etc.. Therefore it is saved - even if for only short periods although the latter are only cash-flow savings and only as a national aggregate do they amount to savings. But savings, properly so-called, from a few months but mostly from a few years to many years are what we are considering here. These are savings that could be called surplus labour; labour that has produced goods beyond what is immediately required for sustenance, be it personal or business sustenance.
Savings considered as Surplus Production

Savings are therefore surplus labour - of time and production above normal requirements. This can be in houses, cows, bottles of beer, biscuits etc. All these things can be exchanged. They are surplus only in the sense that they exist and are not going to be immediately consumed. Thus I may have to eat my last biscuit now or I may exchange it for a chocolate. While it still exists it is surplus. If it is eaten it ceases to be surplus and clearly cannot be exchanged and it is no longer a saving.

For the present money can, in its simplest form, be described as saved production, in this case Biscuits. (Yes the purist will argue that money can exist before it is saved, which of course it can, but that diverts us from what we are now considering - a simple consideration of what money is).

Savings

If I do not spend all I produce then what is left over is called savings - provided the government does not take it in which case it is called Tax. If I am living in a very primitive society I could keep these extra biscuits under my bed. In that way the tax gatherer will not know about them. In overtaxed societies the intelligent individual tries to find a home for his savings which is unknown to the tax authorities. In S Africa it is estimated that about 30% of savings have been moved out of the country for this reason.

What are savings?

Savings are labour/production that is stored up for use another day. Thus if I cannot produce any Biscuits tomorrow because I am ill, I can live off my savings of Biscuits. Savings are a way of keeping previous hard work for use at another time. Savings are therefore surplus earnings - never mind what the Marxists may call them.

They are surplus because they are not immediately required. But what is surplus? For most people enough is never enough! A great theologian, not widely know for his economic insight. observed that the ear is not satisfied with hearing nor the eye with seeing. They spend all they have - (The poor are notorious for doing this, as are governments and this is probably why governments always claim to have no money); In reality (something economists don't often think about) there is a basic standard of living to which people aspire and once they have achieved this they are able to save.

This varies from society to society and the actual standard is based on socio-psychological and cultural perceptions. A rich man in an Indian village would be considered poor by an American automobile mechanic. Basically, once the basic needs of eating, clothing and shelter have been met a person is able so save if he so chooses. In modern society, known as the Consumer Society, the basic needs are really no longer basic at all and there is an attitude of eat, drink and be merry for tomorrow we die - or inflation will overtake us. Savings in Western society could be substantially higher than they are.

A certain amount of savings is desirable and necessary for old age, illness etc. So we can confidently say that wealth lies in savings (provided they are profitably invested and not hoarded) and that savings are surplus to our immediate requirements. To produce a surplus we have to be able to work efficiently enough to produce more than we immediately require.

More about the Nature of Economics

At this point it is necessary to remind you about what I said about money in the paragraph “a Definition of Economics”. That is that economics is the study of human behaviour not the study of money itself.

Economics is the study of people and how they react to money - which is a very different thing. A$100 dollar note lying on the pavement has no life of its own. It is quite incapable of jumping up into your pocket. You have to bend down and pick it up. Therefore economics is the study of human behaviour in relation to money. It has been found over a long period of time that most people react in fairly similar ways to money and economics is based on these broad principles. Economics can therefore never be an exact science because it is impossible to know always and under all circumstances how people will react to it. Economics is based on the almost universal observation that 99% of people will pick up the $100 dollar note - but some won’t!

Hindus entertain the unreasonable idea that cows are in some way sacred - so India is not an ideal place for cattle ranching.

In Ireland, it was recently reliably reported that in the County of Kerry, a number of citizens fell out with their local bank and were determined to drive the bank from the town or into insolvency. One of these Kerrymen had read a book on economics in which he was informed that every bank note issued was a credit owed to the bank and therefore an asset of the bank (which indeed it is and which we shall discuss in more detail later). With this knowledge they determined to destroy the assets of the bank by destroying their own bank notes which they did in a large bond-fire. I mention all this not to call attention to the intellectual superiority of the Irish (of which I am one) but to show the irrationality to which all men are inclined.

Economic behaviour, or the so-called behaviour of money, will only be rational insofar as the people who handle it are rational.

Inflation and A W Philips

Both Keynesian and Monetarist economists were primarily concerned with the demand side of the economy - how to stimulate demand and thereby production and concomitantly expenditure. So along came A W Philips.

Philips got the notion that a high rate of unemployment is usually accompanied by a low rate of inflation, and vice versa. (Full employment accompanied by high rate of inflation). Consequently it was thought that if you deliberately caused inflation you could wipe out or reduce unemployment. This is fallacious reasoning. It is obvious that printing money will for a short period cause high employment. You can provide money for gangs of men to make clothes pegs and then throw them away- the problem comes when you have to pay for them.

If the money was used to produce something useful and that could be sold at a profit, then although t there would indeed be a rise in the price of the wood and wire to make the pegs (because of the extra demand) but such increase would be repaid when the pegs were sold.

Furthermore, the demand for pegs, schools and airports is usually fictitious. No money is generated by their construction and therefore the loans cannot be repaid. Real inflation now starts when the money supply is again increased to repay these borrowings. So Philips is partly right - if you increase the money supply to stimulate useful production and provided it is repaid, higher employment can be achieved.

The problem is that Governments think they know better than businessmen what to produce. Business men (and women) have to repay their debts or suffer for their mistakes. Governments can simply print more money. But in the end even they become nervous at the rising inflation: the merry-go-round is abruptly stopped, the workers fired. Now unemployment increases and it is expected that inflation will come down -but it doesn’t. It does not come down because the money supply has not been curbed and debts paid out of real money.

Moneterist theory continued from part 1

Investment in plant and machinery will tend to reduce unemployment because after the machinery has been made someone is required to operate it. If money is spent on non-productive infrastructure, like a grand highway leading up to the president’s palace, or building the palace itself, employment will cease as soon as the project is completed. In such cases the money borrowed was not used to increase real production, it merely increased activity.

It is the difference between building an airport near a small town in the desert and building a factory.

It is important to understand the difference between increasing the money supply and increasing expenditure in one area whilst decreasing it in another place. In the latter instance there has been no increase in the total amount of money in the economy.

If the government wants to reduce unemployment by spending money this must be done from the existing supply of money, then inflation cannot occur. But government projects are usually notoriously bad investments. They are one-off indulgences which involve no continuing process of profitable production.

Investment is generally better left to businessmen. The government can assist by freeing the economy from beaurocratic restraints and allowing the entrepreneur to get on with the job.

Governments initiate the cycle of inflation by directing and encouraging the production of useless goods with borrowed money which has to be repaid. When the project is completed only the debt remains; there is no asset only a liability.

 How is the liability paid? By further increasing the money supply, this time not to produce but to repay the debt. The reason why Keynesian policy appeared to work after the Depression but does not work now is that the spending increase then was mostly on productive goods with real value. This led to full employment and inflation was limited because borrowings were repaid out of the profits of production generated.

The fact is that the monetarist approach also worked for a while to reduce inflation without causing noticeable unemployment. Unemployment did exist but nobody cared because everyone else was doing so well. When this became an embarrassment the monetary policy was relaxed (which means that useless government-led production was entered into and borrowings were not repaid) and of course unemployment declined for a moment.

As we have already seen, borrowing for useless production decreased unemployment while the money is being spent but as soon as the non-producing asset has to be repaid more money is released into the economy which now causes inflation.

Ultimately inflation is caused by refusing to acknowledge and therefore to pay your debts. I do not think that simply increasing the money supply on a one-off basis is in itself highly inflationary but real inflation occurs when further increases in the money supply are made necessary to repay the borrowed money and a vicious cycle ensues.

An occasional and judicious increase in the money supply may be useful to induce a shock to stimulate the economy during a depression but as a continuing policy is fraught with danger. It is too often used to put off the evil day of resolving fundamental weaknesses in an economy.

It is probably true (although no politician would dare admit it) that full employment can only be achieved in theory but never in practice. This is because demand for labour never exactly fits the labour available. This is brought about because of constant changes in labour requirements as production techniques change. People trained for one kind of job may be unsuited to the changed technological requirements of ten years later.

Also it must not be forgotten (although never publicly admitted) that some people are simply unemployable, totally uneducated, shiftless, dishonest or of too low an intellect to be employed in a modern economy.

The number of these people is likely to increase - not because more people are becoming dumber - but because the intellectual demands of technology are becoming greater and out of reach of more people. The gap can to some extent be reduced but never entirely closed by appropriate, market-driven educational policies.

THE KEYNESIAN ECONOMIC MODEL

John Maynard Keynes was born in 1883 and died in 1946; he was educated at Eton and studied mathematics at Cambridge as well as taking courses in philosophy and economics.

This Model arose because after the depression full employment did not return. Of course it could be argued that they did not wait long enough or that the Classical Model was attenuated by constant interference with the liaise fare principles on which it rested.

 Keynes posited that total expenditure must be raised to adequate levels to cause full employment. However, it seems to me that total expenditure is already total and axiomatically cannot be increased - another case of Economese.

In any case what are adequate levels? If government spends more by increasing taxation it follows that the public will spend less and therefore no increase in total expenditure can take place. There will only be increases in relative and favoured production at the expense of other things.

In reality, to increase expenditure must mean rather to increase production and this can surely only be done by borrowing - hopefully for productive investment. If the government attempts to do this without fiscal (tax) interference it then must borrow by creating a deficit in its budget and causing an increase in the supply of money and thereby inflation. This led to the old chestnut or conundrum you cannot have full employment and no inflation at the same time.

Keyne’s critics pointed out that focusing on increasing expenditure is like flogging the wagon instead of the horse, or to extend the analogy, it is using the stick instead of the carrot. For expenditure to increase (and hopefully thereby to soak up unemployment) there must be savings available to be borrowed - together with incentives such as a drop in interest rates.

This expectation can be realised up to a point but when that point is reached, and savings have been all invested, and it is then found (as it was found during the depression) that these savings were hopelessly insufficient, the momentum could only be carried forward by borrowing or creating more funny money. (We will return to Funny money later)

This is likely to be expensive and will tend to force interest rates up rather than down (as one of the incentives demands). The exchange rate will also go down, particularly if the borrowing is done from abroad, adding further to the cost of money and thereby once again putting upward pressure on interest rates. This will have the consequence of stopping further spending - the exact opposite of what Keynes hoped for. Thus the Keynesian Model is contradictory. It is of course implicit that by increasing expenditure borrowing must be increased beyond what is naturally available.

None of this seemed to bother Lord Keynes. Real increase in expenditure requires borrowing and foreign borrowing introduces more money into the economic system which causes inflation. Alternatively the government Monetizes its own debt which increases the money supply, and because this happened, and we should not be surprised by it, an impatience began to develop with Keynesian fiscal policy after the war. This led to a new theory of Monetarist Economics, developed by Milton Friedman.

Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management. 

This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C 

Supply and Demand - An Extract from the Tyrants Handbook of Economics

We will start off with a few easy-to-understand concepts by looking at supply and demand. This should more accurately be termed demand and supply because supply very rarely precedes demand except in the case of taxation where when the government sees a supply of money and then demands a piece of it.

One authority has proclaimed that a shift in supply occurs simultaneously with a shift in demand. This leads to the inflationary spiral or wage-price spiral.

Indeed it is the demand or anticipated demand that causes an increase in supply. The converse is surely impossible; increasing supply cannot increase demand unless of course the price of the supply dropped.

Furthermore, it is difficult to see how an increase in supply and demand can effect the inflationary spiral. Inflation surely is caused by increasing the money supply. If the rise in demand was equal to the increase in supply surely the price would remain unchanged. Only if the demand exceeded the supply would the price rise.

In any case, a rise in a particular price on its own cannot cause inflation (only an increase in the supply of money can) but it will cause an adjustment of relative prices - some prices rising and some falling. These are the kinds of controversies with which economics deals and it is necessary to think very clearly, step by step, about causes and consequences.

Most university students who study economics learn the traditional theories off by heart and have very little real understanding of the dynamics involved. It is important that the reader of this little book, be they university students or Ministers of Finance, should fully understand the principles and processes involved. Economics is a fascinating subject but it needs to be read, studied and inwardly digested.

Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management. 

This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C 

An extract from the Tyrants Handbook of Economics - Part 1 - Economics Defined

CHAPTER 1

The first thing you will notice about this book is that there is only one chapter. I have done this for reasons of economy - both the readers and mine: if there is only one chapter it will allow you to read it faster and will be quicker for me to write it.

1) Definition of economics

Economics is about MONEY. Wrong! It is about PEOPLE and how they react to MONEY. In all cases money is of all substances or essences the most inanimate. Some people, but by no means all, do show some signs of animation and so economics may be defined authoritatively as the relationship of PEOPLE to MONEY. Not money to people.

Money can have no relationship with people. This is important to remember and you can test my definition by a simple experiment. It requires you to place two ten-dollar notes side by side in a fairly public place. It will strike you immediately that neither note will make any effort to pick up the other. This has never been known to occur although one economist I know has lost quite a lot of money trying to disprove it. 

What nearly always occurs is that some PERSON will pick up the money. I say nearly always because on one occasion when I tried this experiment a flock of the nuns of the Order of Poverty walked right past the notes without so much as glancing at them.

This would seem to demonstrate that the laws of economics (there are really no laws or economics only economic probabilities) are not cast in stone as were those of Moses. Not all people will always act in the same way and therefore whilst economics, for most practical purposes, obeys the mechanistic theories of Newton, they act in some cases more like those of Quantum Theory - neither waves not particles. 

Consider this by way of example of this truth: it is believed as a fundamental fact of economics that if you reduce interest rates you stimulate the economy. This happens because money becomes cheaper and everyone is expected to rush at a bargain. Yet paradoxically this did not happen as a remedy to the problems of the depression when interest rates were in some cases almost negative.

The banks, assisted by the government were close to paying borrowers to borrow money in the hope of firing up the economy! The reason that there were no takers was simple. After Uncle Billy has lost his life’s savings when his hardware store went bust, and Aunt Betty-Jane’s inheritance disappeared, and Billy’s dad killed himself when his stocks evaporated, and the money for crippled little Jo-Anna’s callipers had disappeared along with the Agricultural Bank for Farming Prosperity - and Aunt Betty-Jane thereafter decided to invest all her remaining money in houses (public houses) and ......... and so on and on the sorry storey continued. 

Well, the lesson to be learnt from this is that nothing would induce such people to take any more chances with borrowed money and debt. In a word (or three words): they lacked confidence. Confidence and perceptions are to economics the same as they are to faith healers: neither can function without them.

Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management. 

This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C