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Assuming Money

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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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Derryl Hermanutz Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

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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