Ok, as anybody who’s a regular reader knows, I’m not an economist so I can’t possibly explain how the economy works. Of course, like most people on the internet these days, a lack of formal qualifications doesn’t stop me from having all sorts of opinions about all sorts of things based on something I read somewhere. But the sources of my opinions aren’t limited to dodgy internet sites. From time to time, I read books, as well as listening to what some guy down at the pub told me about what someone who really knows his stuff said.
So when it comes to economics, I’m just as qualified as the next bloke to put in my two cents worth. Of course, two cents won’t get you much these days. And not just because there isn’t a two-cent coin any more. No, it’s because economists have wasted a lot of time studying at universities, only to discover that nobody values their opinion unless they first charge a lot of money.
Having thus established why I’m just as qualified as the next bloke to talk about economics, I’d like to explain a few little things about money which people fail to grasp.
Let’s start with expression, “Money doesn’t grow on trees”. For many years we had paper money, and this led to a lot of confusion because people obviously believed that, as money was paper, it therefore was a paper product. Of course, the paper money wasn’t anything more than a symbol of the money and the actual money was… well, I think that this is where people grow confused. The actual money was just a concept.
Money is, was and always will be just a measurement tool.
I know that this is a bit hard to grasp, so let me quote Yanis Varoufakis, who you may remember as the Greek Treasurer who had to resign because he had a degree in Economics and his understanding of what was going on, was interfering with the negotiations when the world was concerned that Greece would default on its loan. In his book, “Talking To My Daughter About The Economy” he explains that in early societies they rarely used actual coinage. As he explains:
“For example, the accounting log would note, ‘Mr Nabuk has received grain valued at three metal coins,’ even though those metal coins had not been minted yet and might not be for many, many years. In a sense, this imagined form of money, used to facilitate real exchanges, was a virtual currency. So, when people tell you that today’s economy is very different to the economy of the past, citing the virtual payments made possible by digital technologies, tell them that is nothing new; that virtual money has existed ever since the economy was invented, following the agricultural revolution twelve thousand years ago and the creation of the first surplus.”
People look at physical things like coins and notes and gold bars and just presume that these are what constitutes money. But that’s a bit like looking at a tape measure and thinking that’s what constitutes a metre. And like a metre or a yard, money remains an abstract concept. Creating more tape measures won’t lead to their being any more land, of course. But it may lead to more land being divided up or shared, if the shortage of tape measures was holding up the process. This could be compared to pump priming the economy, but the analogy is already a little stretched and once one stretches a tape measure then its value is debatable.
In essence, money is merely a way of expressing debts. Physical money, unlike informal debts between individuals or notations in a ledger, is simply guaranteed by the sovereign or government of the day. And, it’s a simple way of settling the debt, because it’s guaranteed by the power structure of the time.
Of course, should the government be toppled, or issue too much money, then the money attached to that state loses its value. Physical coins, naturally, can be melted down for whatever and paper money can used to light fires, but while we have confidence in the government, the money is worth it’s face value, notwithstanding inflation or deflation, which merely means that the value of the money is fluctuating relative to the value of goods and services.
And, of course, there are all sorts of guarantees in this world. Take the National Energy Guarantee, for example. Just today, Josh Frydenberg told us that he was “confident” that this plan would lead to lower energy prices but that wasn’t part of the guarantee. What, in fact, they’re guaranteeing is that we’ll have coal providing our power for as long as they can possibly drag it out.
Then there was the Google guarantee. Or rather their slogan/motto/mission statement? Whatever it was, “Don’t Be Evil” had a nice ring to it even it was expressed in the negative. Why not, “Be Good”? Or did they just mess up the order and was it meant to read: “Don’t Believe”? (Ok, I added an extra “e”) When they first started, we were told that it would be the wisdom of the crowds which determined the top-ranked sites, but before long, it was the ads that were the first thing we saw. I guess that’s ok, because everybody has to earn a dollar. Of course, there’s no way anybody should expect them to pay tax on that dollar because that must be evil.
Whatever, the point is that there’s really nothing all that modern about Modern Money Theory. And if anybody out there believes that their money is worthless, they’re probably right and I’ll be more than happy to take it off them.
What we need is more imagination on how to use this virtual tool – relying on economists, accountants, lawyers, politicians and others who aspire to bean counting is limiting the possibilities – for us – while keeping the aforementioned remunerated.
Forgot to mention there is one economist I do listen to (turns up regularly on Phillip Adams):
Yanis Varoufakis.
Top mention, Rossleigh.
Actually, John Quiggin and Paul Krugman are quite interesting too, diannaart.
http://johnquiggin.com
https://krugman.blogs.nytimes.com
I also refrained from the old joke about if you ask five economists for the answer to a problem, you’ll get six answers.
Neither did I express the view that an economist is someone who is paid a large amount of money to explain why their forecast was inaccurate!
I’m getting restrained in my dotage.
Money is a bit like a supply of one metre wooden rulers, where the masters of the rulers shave a bit from the collective length every time someone borrows a ruler in order to make a measurement.
This means the increments of milimeters keep getting bunched ever closer together, and a one metre ruler just never seems to measure quite as far as it used to..
Meanwhile, the masters of the rulers collect the wood-shavings and use them to assemble more stock of ‘new’ rulers of ever shorter length for us to borrow for measuring.our ‘metres’.
The funny thing is, whilst the measure of a metre keeps getting shorter, and the masters of the rulers keep accumulating more stock, the amount of wood available remains roughly the same.
Rossleigh
Had forgotten about Paul Krugman – use to read him quite regularly and am having a senior’s moment regarding John Quiggan.
Restrained? Rossleigh? Perhaps you are simply aware that yours truly is no spring chicken and likely to have heard the old joke before.
Who give a rat’s arse about the economy as long as we have money.
Yes the value of money moves around a bit. A few years ago an Australian Dollar could be exchanged for150 Sri Lankan Rupees (LKR). Currently, if you are silly enough to covert your dollars to rupees at the Brisbane airport, the exchange rate will only give you 101.2 (LKR). A bank in Sri Lanka will give you (approx.) 115 LKR but you must show them your passport – while tour guides will give you 120 LKR with no passport required. (They can’t seem to get enough Australian dollars. Perhaps they are saving up to pay a people smuggler?)
To get a visa (known as an Electronic Travel Authorization (ETA), the cost is $35 US if you apply and pay before you arrive. Failing that, an ETA costs $40 US at the airport. Accommodation costs are also usually expressed in US dollars (plus three taxes which amount to 30.4%. – it can be a trap.) While ‘plastic’ can be used at large stores, cash is required to buy alcohol and most every day items.
Exchange transactions – from A$ to LKR to US$ to SGD$ are a great money earner for financial institutions with Australian Banks always keen to clip the ticket – both coming and going.
There are two things wrong with “our” money. First it is only representing itself and not the goods and services we use to pay for. Second, since it’s always scarce it must continually grow profit, hence the growth problem.
Rossleigh: You actually understand MMT better than most, and your humorous explanation is pretty good. You didn’t mention Bill Mitchell, perhaps on purpose. Sneaky fellow!
Wam: you can have all the money you like, but what it will buy is determined by what state “the economy” is in. I’m sure you know that already.
Rossleigh
You also omitted Money is the root of all evil.
Totaram, well said but I am on a houseboat on the murray outnumbered 3:1 with rabbottians plus one friend that has under great sufference shifted to slimy X and unless there is a slogan the economy doesn’t get a mention. They are frightened of foreign language and no idea of currency.
Frustration set in sorry.
ps
Money is good it is the love of money that is the root of all evil.
Still on Sri Lanka. They (apparently) have a fiat currency. Yet they believe they can’t afford to build highways or ports and any other number of examples of desirable infrastructure. There’s one ‘highway’ (a toll road) between Galle and the capitol. It was built using Chinese money and the toll money is used to used to repay the Chinese and that arrangement will apparently continue for ever and a day.
Now have a new port in the south, also built with Chinese money. The locals told me that the Chinese knew that the Sri Lankan government had no capacity to repay the Chinese and therefore they were prepared to grant the Chinese a 100 year lease because they felt there was no other option.
Could MMT theorists explain why it was not possible for the Sri Lankan government to go it alone given there’s an abundance of (desperate) labour power, available technology .. and so on?
Or are they under the same ‘delusion’ as we are?
Matters Not: You guessed it. They are under the same delusion, and it benefits a stronger economy if you remain under that delusion. However, there may be extenuating factors in some cases for developing countries. They may require imported goods for which they have to pay in other currencies. If they used chinese steel for example, the chinese would not accept the Sri Lankan rupee in payment.
Once you accept that the govt. is like a household and “must live within its means” and all that rubbish, you are finished.
@MN,
Let US ‘Help’ You!
Sri Lanka (SL) is a great example of how disaster capitalism should work out for the benefit of the one percent. All that’s needed is a physical catastrophe or financial disaster, in the case of SL that was the 2004 Boxing Day tsunami.
To rebuild Sri Lanka, the govt opened itself up to foreign ‘benefactors’ – grants, concessional loans, 99 year leases, land grabs, etc swirled around. In a sign of the times, the SL govt gave up on its people, forcing survivors of the tsunami (for their own safety) to move 2 km inland, resulting in the prime real estate held by locals becoming tourist resorts for crony capitalists.
China ‘Help’
More recently, the Chinese have been actively involved. As part of the One Belt One Road initiative, China made loans for various infrastructures, including a port development at Hambantota. The port appears to have been designed as a loss-making lemon from day 1, eventually forcing the SL govt to hand over 80 per cent of ownership to the Chinese. Foreign debt repayment for infrastructures is now 95 per cent of govt revenue.
This is where the world’s going, nations embroiled in a modern-day system of tribune via debt repayments, paying homage to Beijing and Wall Street corporations.
In an interesting TED talk, Anna Heringer explained the problem really well. She wanted to build a school for the locals in Bangladesh. She had two choices, either buy materials, equipment, and labor from foreign companies, or else use local materials and local labor.
She chose the second option which, as she explained, not only builds local pride and capability, but supports the locals and keeps the money in the community, boosting all kinds of local business.
If she’d chosen the first option it would have bled money out of the local community, the people would have learned little, and they wouldn’t regard the structure with the same pride.
It’s a wonderful talk:
(Incidentally, TED have changed the way you download videos, which is really annoying. It’s hiding under the “Share” button. I’m close to deaf so require subtitles, but unfortunately they “burn” them into the video itself. I much prefer separate .srt subtitles so I can read the text. They do let you download a transcript, but it doesn’t have the detailed timing info .srt subtitles do.)
Miriam
Building locally with local materials keeps the big hand of corporate ‘charity’ out of the equation. We need similar for Australia’s own disadvantaged regional people – their direct involvement, decision making and ability to to change, approve or veto.