Friday, June 16, 2017

Wealth is a Micro/Macro-Economic Concept

I am still thinking about the concepts expressed in this post by Jason Smith (including my comments). Maybe I am thinking out loud (as I write this).

Income and consumption are first of all "micro-economic concepts". On the other hand, "wealth" is easily seen as a "macro-economic" concept for the simple reason that wealth is always a relative term. This difference needs a little explaining.

We can write

Individual wealth equals individual income less individual consumption.

This is clearly a micro-economic concept. It would only have broader macro-economic meaning if the wealth term was compared to other individuals who may or may not also have wealth.

We could also write

entire economy wealth equals sum of individual wealth

which is clearly a macro-economic concept.

The two concepts converge at the formula level except for one thing. What is the unit of measurement?

Of course, we use "money" as the measurement tool. In both formulas the units of money are counted as if money was a physical object.

Now if money really is a physical object, it must have a physical creation and a mechanism of destruction. Bank loans are the usual mechanism assigned to accomplish this task when physical money is allowed into theory.

Further, if money is physical, it is subject to capture. To illustrate this concept, we need to ask where money may reside (among many individual potential owners) at each measurement point in time? Will the same owners have control at every measuring point?

The answers to these two question will have an influence on the concept of wealth itself. I would expect that in a capitalist system, nearly all the money would be under private control. In an oligarch system, nearly all the money would be found under the control of a few "wealthy" private groups. In a communist style of government, nearly all the money would be found to be under government control (in one way or another). No doubt, there would be many flavors of monetary distribution.

Returning to the question of the physical nature of money, money may come from banks but what gives it value? We have already recognized that wealth is relative to the wealth of others. Is money also valued as relative to something?

I would answer "yes". I would suggest that when an individual accepts payment for labor in the form of money, he is accepting whatever currency has been borrowed to make the payment possible. With currency in hand, it becomes the responsibility of the new owner to gain maximum value for the currency from the next exchange.

Why (the reader may ask) would anyone take currency unless they knew the value of that currency? Well, if a person was unemployed, would he seriously consider working for a store owner who offered to pay in the form of "gift certificates"?  If  the person trusted the store owner, no doubt the answer would be "yes". Gift certificates earned in this fashion would have the same physical character as money so long as they were used (finally) in the issuing store.

When money is considered as if it were a gift certificate (issued on the national level) the concepts expressed herein begin to flow into a very understandable context.

Can we fit the concepts expressed here into the data found in the National Income and Product Accounts of the United States (NIPA)? Only with difficulty. The NIPA data is filled with imputed information that detracts from the strict monetary measures suggested here. It would take considerable research to sort the available data into the classifications that are suggested herein. We would also need to sort money created by borrowing into the categories of money-newly-created and money-previously-created-borrowed-again.

"Weath" (as a guiding concept) may be a useful bridge between micro and macro economics, worthy of additional study.

Friday, May 26, 2017

S = I + (G-T) and National Gift Certificates

Brian Romanchuk was discussing general equilibrium and the discussion wandered into the creation of money.  Joe Leote offered a comment that tied savings to the system of general accounts. His comment included the equation I support in the following comments. (The following quote is my return comment to Joe Leote.)

"@Joe Leote
"S = I + (G - T)"

I completely agree with your equation.

One method for supporting the logic behind the equation is to apply it to the accounting for a locally issued gift certificate. Ownership of a gift certificate is identical to owning money so long as we are shopping in the issuing store. We can call the gift certificate "mercantile money".

What happens if a merchant issues a gift certificate in exchange for electrical repair labor? New mercantile money has entered the economy.

The merchant had better account for the claim he just issued on the goods in his store. (A gift certificate (or mercantile money) is a claim on goods, limited to the amount of value on the certificate.) The merchant should record "investment = value of the electrical repair" and, in a second entry for double accounting, "savings = value of the gift certificate issued".

The savings value was created right out of the blue. Labor was performed and, at least for a while, was paid for by newly issued savings.

Now who owns the savings? I think the merchant owns the savings until the gift certificate is finally satisfied. However, one could also make the argument that the electrical worker owns the savings. The worker is richer because he has the ability to claim goods at any time. The worker also has savings.

So we see that both merchant and worker can claim to be richer because mercantile money was issued and electrical repairs were made.

"S = I + (G - T)" allows us to see that savings are created by people working for government and receiving National Gift Certificates in payment."

The final quoted paragraph is a little cryptic. The link between money and mercantile money prompts us to compare gift certificates (merchant issued) and National Gift Certificates (money issued by the national government). 

I think the parallels are very complelling.

Tuesday, May 16, 2017

A Crisp Definition of Money

The blog "The Epoch Times" had a post by Valentin Schmid "The Economic School You've Never Heard Of". I wrote the following comment:
I have not yet seen where "Austrian economics" recognizes how government spending violates the "trade-for-trade" (Note one) rule. To understand this concept, we must recognize that government never produces a product--government can only produce money to pay for a product.
Where does government get money to pay for a product? Taxation is one method but tax (in the form of money) is only collected if someone first produces products that can be traded for money. Government spending financed by taxation is following the "trade-for-trade" rule.
The second source for government spending may not follow the "trade-for-trade" rule. Government can borrow money for future spending.
Government has two sources of lenders; one follows the "trade-for-trade" rule, one does not. Government can borrow from private lenders who do follow the "trade-for-trade" rule. Government can also borrow from itself by borrowing from the central bank. THIS SECOND SOURCE OF BORROWED MONEY VIOLATES THE "TRADE-FOR-TRADE" RULE (because no-one ever worked to first earn the money marked for future government spending.
*Note one: "People come together to voluntarily engage in commerce with one another for their mutual benefit." I sum this phrase with the term "trade-for-trade". As an entity (not a productive individual) government has no ability to be creative. Government can only work in terms of monetary exchange. Hence, the source of money for government exchange becomes crucial.
In reply to my comment, Richard wrote:
 In order for your comment to have greater validity, wouldn't it help to define the concept "money", to include its purpose and source of creation? Of course everyone uses the term 'money' without giving it a moment of thought as to what it is and how it springs into existence. 
         I suggest a thorough reading of E.C.Riegel

In reply to Richard's comment, I wrote:
Yes, it would help to have a crisp definition of money.
I used a birthday gift certificate a few days ago. As I wandered the store (which issued the certificate), I realized that, so long as I was in the store, the certificate had equal value to the "money" i had in wallet or national credit card.
"Is money just a National Gift Certificate?" I wondered. That thought led me to think deeper into the idea of "merchant money", which is money issued by merchants and commonly known as "gift certificates". How does the merchant issuing certificates account for the certificates, print them, and redeem them? Can "merchant money" be traded or issued as payment for services rendered?
The answers to these questions (and more) seems to be parallel with our expectations from our everyday money. Our everyday money seems to be "merchant money" traded on an international scale.
To integrate this idea with my previous comment, think of the Central Bank acting as an arm of Government, issuing "National Merchant Money" or "National Gift Certificates". It all seems to fit together quite well.

These comments tie with my blog post  "The NGC Model, Banking and the Creation of Money" The recent comments contain an new idea, which is to identify "gift certificates" as "merchant money". The term "merchant money" translates easily to the money we handle on a daily basis and seems to convey an accurate impression.

Maybe "mercantile money" would be a better term, more general than "merchant money"?

Richard is right. We (as economist) need a crisp conception of money, and how it is created and destroyed. A crisp analog seems to be available in "mercantile money" commonly known as "gift certificates". This "mercantile money" must be created by the merchant, be properly accounted for, be used in trade, and have the possibility of direct dissemination by the merchant in exchange for goods and services.

Our crisp definition for "money" is "Money is a National Gift Certificate". An analog of "money" is "mercantile money", commonly known as a "gift certificate".

I think the crisp definition  and analog work.

Monday, February 6, 2017

The Natural Monetary Chart

Here at the Mechanical Money blog site, the philosophy is to make the monetary system as mechanical as possible. This requires each monetary concept fit seamlessly into the next concept.

Our Questions

A question that frequently arises in basic monetary discussions is the initial pricing of the reference item. How do we decide if the initial price is 100 units or just 10 units?

The second question is a follow-up of the first. Knowing the first price, what is a second item worth?

Some Background

Now assume that we have no monetary system at all. How do we select the first price? Logical deduction supplies no answer. We must simply pick a beginning point.

Wait! Pick a point? Where in the mechanical world might that be?

Let's assume that our model society understands arithmetic. They would understand a measuring stick that was scaled between zero and some commonly used maximum measure. An example would be a 'yard stick' that is measured in inches, having a maximum scale of 36.

Our Monetary Scale

We can build a monetary scale that begins with zero and expands to infinity. The width of each unit is completely arbitrary. We will call this imaginary line "The Natural Monetary Scale".  It can drawn onto paper but we don't  yet have scaling units. Scaling will follow after we introduce another concept.

More Background

The reason we are considering the money concept is because we would like to theoretically move past the barter system. In barter trade, dissimilar objects change ownership group-by-group. For example, five arrowheads could trade for one elk antler. This is very inconvenient if the antler owner, wanting to not break his elk antler, wants only one arrowhead. Money is a standardized physical object (some claim an "abstract or non-existent" object), available in very small sizes that can easily be aggregated and stored. The use of money (if he had some) would simplify the antler owner's trade decision.

The Value Question

The problem faced by the antler owner is faced by every owner of every item. The value of the item is not the same as the item potentially purchased. Money does not solve this problem. Money is just another item (whether physical or abstract). Money has it's own valuation problem.

Further complicating the value question, the value of any item varies in the eyes of the trading persons. The person owning eight arrowheads will have a different unique value assigned compared to the person owning just one arrowhead. A red arrowhead will have a different value than a black arrowhead.

If we expect to value property, it will need to ranked and scaled just like money needs to be scaled. The money scale will have one advantage--it will be a scale with uniform steps.

The Chart

With this background in mind, we can draw Figure 1, the Natural Money Chart.

Figure 1. The Natural Monetary Chart. The uniformly increasing numbers on the x-axis constitute the Natural Monetary Scale.                                
We use the Natural Money Chart by entering the item-of-interest onto the vertical axis. In Figure 1, we see that several apples are worth about 3 units on the Natural Money Scale. Gold is more valuable but not yet evaluated. One apple is less valuable than several apples but (again) not evaluated.

The Natural Money Chart is a purely arbitrary chart. The Money Scale is arbitrary. The single factor that makes it  (the scale) physically real is the decision to relate several apples to a point on the scale. In Figure 1, several apples translate into 3 natural money units.

We will need to add more items into our Natural Money Chart. To do this, find agreement on the relative value of any other item. A single apple is an easy example. Assume that several apples are counted to be seven individual apples. We would calculate that when seven apples are valued at 3 units, one apple would be worth 3/7 money units. Draw the connecting lines to 0.42857 on the Natural Money Scale. One apple is worth 0.42857 units of money. [We already assumed that our society understood arithmetic.]

There is a second way to set the scale units on the Natural Money Scale.  Any two dissimilar items can be picked and assigned an arbitrary value [preferably an evenly scaled value such as when the more valuable has seven times the value of the less valuable]. To make the chart, place the physical items on the vertical line and the arbitrary values on the horizontal line. Following the scale lines, establish a reference line with the correct intersecting slope.


Once we have monetary units, we can begin bookkeeping.

The Natural Money Chart allows a seamless transition from physical property to money-as-a-physical-object. It is immaterial whether money is considered as abstract or physical; all that is important is that a seamless translation from socially acceptable value to a uniformly scaled number be made.