Economics for Dummies

Column by Paul Hein.

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I don’t want to deceive you: I am not going to present a sort of Economics 101 for the benefit of the economically illiterate. In fact, I am myself among that number, never having studied economics. What I am suggesting is that, in the current financial crisis, economics may be, in my opinion, somewhat irrelevant. It may be foolish to think that there is an “economic” solution to our problems.

My dictionary says that economics is a social science (isn’t “social science” an oxymoron?) dealing with the production and distribution of goods and services. That definition, however, is based upon one colossal assumption: that there is a medium of exchange making the production and distribution possible. A sort of starting point for economics, therefore, is the belief that exchanges are possible on an equitable basis, exchanging one good for another of equivalent value; not a promise never to be kept, or an IOU never to be paid. Maybe that’s taking too much for granted.

At the beginning, therefore, it will be helpful to consider the subject of money, the existence of which is assumed by economists. That the nature of the money is important doesn’t seem to occur to them. For example, I recently read an article about California’s financial plight in which the author related, as an example of the state’s pitiful condition, the attempt by the state to pay its bills with IOUs instead of cash. But surely “cash” is simply an IOU, except that unlike your IOUs or mine, those of the government are never intended to be paid, but to circulate IN LIEU of money. No one would work--i.e., give a portion of his life--to get pieces of paper, all of the same size, quality, and weight, although some of them are, for example, 100 times more “valuable” than others! The only “value” of these paper devices is that, having traded your work for them, you can tender them--pass them--in lieu of payment for the goods and services you want. You could say, therefore, that they have an exchange value--based, some might say, upon deception--but no intrinsic value. For most people, this is good enough. I’ve been told on many occasions, “Hey, as long as I can get something for them, I don’t care about anything else.” That attitude has brought us to our present perilous condition. The counterfeiter operates on exactly the same premise: his output can be used to “get something,” and in that respect is every bit as good as the official “money,” except that the government, supporting the bank’s monopoly on money creation, declares it legal to tender its scrip, but a crime to tender that of the competition. And the government’s scrip comes into existence as a loan, whereas that of the counterfeiter is interest-free.

What if someone doesn’t want to “get something” for the pieces of paper? What if he wants to set them aside for future use? It may be that they are intended for the children’s education, decades in the future, or retirement, or as an eventual down payment on a home. Does the nature of the money matter in that case?

Suppose that the dollar was defined today--as it was in the past--as 373.25 grains of pure silver. There would be, therefore, no such thing as paper “money,” because money would be silver, and the dollar would be 373.25 grains of it. True, there would be convenient paper claim-checks for the money, but those would only be acceptable in trade if the recipient knew that he could take the bills to the bank and obtain the actual money. The shoemaker would not labor to produce a pair of shoes in return for a bill labeled “dollars,” unless he knew he could obtain the actual money for it. Otherwise, he might offer his customer a chit labeled “shoes” and let the hapless customer figure out how to wear them. This factor of redemption, especially if frequently used, would restrain the issuance of bills, less the issuer, having issued bills in excess of his ability to redeem them, be found out, and charged with the appropriate crime.

In such a situation, the supply of money would remain relatively constant, or very slow growing, because silver is not easily obtained. Much of it is a byproduct of other mining operations. As the supply of goods and services increased, probably faster than the supply of new silver, the general level of prices would fall, and conversely, the buying power of savings would increase. In the present situation, the supply of “money” is increasing faster than the supply of goods and services, and the result is constantly rising prices, which, unfortunately, are often interpreted as the result of greed on the part of businessmen and manufacturers, requiring, of course, government regulation. That, in turn, is possible because no one seems to care about the nature of the money.

Clearly, however, the organization--modern banking--which can counterfeit with government approval, can obtain everything for nothing, since the “cost” of creating the money, including the labor required, is paid for with the money itself. In return for the privilege of counterfeiting with impunity, the banks lend to the government with no thought of repayment, although the interest must be paid, thus perpetuating the debt, and the corresponding interest payments. A sweet deal for both parties: the banks collect interest forever, and the government can finance its unconstitutional programs, including that ever popular program, war.

Another advantage of solid, tangible money would be that, if pursuant to some contract, you are guaranteed payment of a number of dollars over several years, you would know exactly what you are going to receive. Presently, however, you will receive only numbers on paper, labeled “dollars,” although there is no definition of that term, and, in the absence of any definition, you cannot complain if the “dollars” you receive in the future will purchase far less than at the time you contracted to receive them. You cannot complain, in other words, that the “dollars” you receive in are not the same as the “dollars” at the time the contract was signed, because “dollar” is a term without specific meaning or definition, and no specific value is attached to it.

As a final injustice, consider how much greater is the proportion of your income demanded as tax if the income is 100,000 compared with 50,000, even if the larger number will buy less than the smaller number bought only a few years ago. In other words, a higher tax upon an income with the same, or less, buying power. This is the tax system our rulers invariably refer to as “fair”!

But if there is no concern about the nature of the money, there can be no complaints!

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Paul Hein's picture
Columns on STR: 150


Samarami's picture

This was written almost six months ago. I was still in the trucking business (Retired August 8th) and apparently let it slip by me. Since it is one of Paul's usual excellent articles I'll make a late comment -- not that folks appear to be standing in line here at STR to make comments these days. In fact, I'm truly surprised that nobody -- nobody -- took the time to congratulate Paul and make remarks on another exceptional essay.

It's a good commentary on "economics". For years I taught in the field of social science, and remember at times experiencing eerie feelings that I was teaching trifles when there were important things for college kids to discover. Only now do I grasp that "social science" is truly oxymoronic in nature -- pitiful tripe engineered to make certain that none of the undergrads would ask politically incorrect questions once they transitioned to the workplace from academe.

Appear to be all-knowing, sound erudite, and shut up. The essence of central planning and entry level management.

I had a lot more to say about this. But for now I'll head back into my cave.

Nice article, Paul.