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Assuming Money

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In a Sept.24 OpEdNews article by Robert Reich titled, "When Will Wall Street Call for More Federal Spending?"   http://www.opednews.com/articles/When-Will-Wall-Street-Call-by-Robert-Reich-110924-414.html , Robert wrote,

"If this keeps up, we'll have a showdown between establishment Republicans who understand what must be done -- and who will support substantially more federal spending in the short term in order to goose the economy -- and Tea Party zealots who refuse to face reality."

Some of the "Tea Party zealots" actually do see reality, but they evaluate it differently due to their Austrian School monetary perspective. Austrians believe gold is the only "real" money, the only "natural" (and thus inevitable) form of money. They think the creation of credit money based on a "fractional reserve" of gold bullion is scandalous, and the pure fiat dollar that we've had since 1971 is an unmitigated abomination.

In the Austrian worldview the money supply should be a fixed sum, growing only as fast as miners can dig up new gold. If the real economy also grows about as fast as the increase of gold/money, then overall there should be price stability.  Money would retain its purchasing power over time rather than being diluted by money supply "inflation".  

Austrians want to hold the value of money fixed, and the real economy must revolve doggedly around this moneycentric system for the benefit of the 5% of the population who have lots of money. Proponents of modern money theory (MMT), on the other hand, see the real economy as central, with an adjustable supply "fiat" money system being used to keep the economy functioning for the benefit of all of us 95% who do not already have a lifetime supply of money and who depend on working in a functioning economy to earn ongoing incomes.

In a zero sum money system like the Austrians' idealized gold bullion money, one person's monetary "profit" can only come at the expense of another person's monetary "loss".  There is by definition a "fixed supply" of bullion, and for one person to get more of it somebody else has to have less. Yet everyone agrees that we all need to "profit" from our work.  If a caveman "spends" 3000 calories per day hunting food, and only "earns" 2500 calories for his work, that "unprofitable" entrepreneur/worker is going to starve to death. We "need" to profit from our work.

Austrians, like classical economists before them and like neoclassical economists today, circumvent this zero sum arithmetic problem by conflating "goods values" with "money". The tailor converts $10 "worth of" cloth into $100 "worth of" coats, which "adds value" into the economic system. Then, ignoring the logical gap between an immaterial idea like "value", and a physical commodity like gold bullion, the classicals and Austrians assume that somehow the tailor is manufacturing not only "worth of" coats but is also somehow creating "money" to "buy" that added value.

Which is magical thinking, because in a gold money system ONLY miners and refiners and coin minters actually "produce" money. Everybody else produces other economic goods and services, but they produce exactly zero money. How the money is to get into the hands of buyers and sellers in the non money-producing sectors of the economy is always glossed over and never explained coherently by Austrians and neoclassicals, for the very good reason that such a system CANNOT be made to work in an economy that does all of its "trading" via the medium of "money".  

In fact we do not "trade".  We do not "exchange goods values".   We buy and sell. That is the critical difference between an imaginary barter economy and real world money economies.

As long as money is merely a "representation" of goods values in a barter economy, as Adam Smith invited us to imagine, then arithmetic impossibility is not a binding constraint within our imaginary barter economy.  As is the wont of economists always and everywhere, we can simply "assume" the money to make our economic model 'work'.  But as soon as money is recognized as "real", then arithmetic reality kicks into play, and a fixed supply money system is seen to impose an absolute barrier to economic "growth", as well as making monetary "profit" impossible.

When the entire system contains a total fixed sum of 100 golden marbles, then you can redistribute possession of marbles so some get more while others have less, but "the economy" can never get "richer" in money, because by definition you have fixed the total supply of money at 100 golden marbles.  The economy could get richer "in economic goods" if people convert resources to economically useful goods and services. But the economy cannot get richer "in money".  That critical point is lost on the entire Austrian and neoclassical Schools of economics in their assumptions about money.

If the economy's capitalists possess all 100 marbles, and they "invest" their marble-money by hiring workers and buying supplies to produce economic goods and services, those capitalists "spend" 100 marbles into the economy, which becomes the economy's "earned income".  One person's "spending" of money becomes another person's "income".   Those 100 marbles are the "cost price" of all the productive output, and they are also the economy's total income.  

Now the capitalists want to sell all the stuff they produced at "profitable" prices, so they mark up the sale prices to 10% above cost.  It is clear that at 10% markup, there are now 10 more marbles of "prices" in the economy than there are actual "marbles".  Even if the economy spends all 100 of its earned marbles buying the output, the capitalists will find they have merely recovered their costs and have not earned any profits at all.  

They now once again have ALL the economy's money, and they have unsold goods still on their shelves. Neither the capitalists nor anyone else has any need of 10000 excess Ford Taurus door handles, so it's not as if the capitalists in our highly specialized economy can take their profits "in kind" rather than "in money".   Unsold goods are effectively 'worthless', if nobody who wants them has money to buy them.

But it gets worse.  In the real world some earners save a marble or two rather than spend it, so there are now only 90 marbles available for purchasing and consuming the output, which means the capitalists cannot even recover their costs let alone "make money" on their investments. There are only 90 marbles of "demand money" in this economy, but there are 110 marbles of "supply prices".  

Not only are all prices "denominated in" money as Austrians and classicals recognize; all buying is in fact accomplished by "spending" actual money.  And there CANNOT be enough income money generated by this system for all producers to sell all their outputs at profitable prices.  Only a fool would 'invest' his money into such a surefire loser equation, but a fool and his money are soon parted so it would be possible for some producers to profit if others lost enough. Nevertheless, you would rapidly run out of fools with money so this economic game would be short lived.

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I spent my working life as an independent small business owner/operator. My academic background is in philosophy and political economy. I began studying monetary systems and monetary history after the 1982 banking crash that was precipitated by (more...)
 

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Like the 1930s collapse, our current crisis is a p... by Derryl Hermanutz on Monday, Sep 26, 2011 at 10:48:35 AM
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