Sunday, August 7, 2011

What is the relationship of money to the production process (i.e., production of goods and services)?


The real issue in most discussions about money (MMT, debt, high powered money, fractional reserve money, gold standard, etc) is the question that is rarely fully discussed:

What is the relationship of money to the production process (i.e., production of goods and services)?

I believe this question needs to be answered fully and clearly and un-ambiguously by economics before "money" can be fully understood.

I will take a stab at this question here:

Just imagine in your mind entrepreneurs, factories and labor turning raw materials into finished goods (e.g., production of "loaves of bread"). How does currency relate to this picture. I would suggest to you that there are three primary relationships the production process has to currency.


They are:

1. By spending currency consumers generate demand. Demand is basically information (signals) which tells entrepreneurs what to produce and how much to produce (spending generates demand).

2. Currency allows efficient trading of raw materials, labor and finished goods and services between businesses and between businesses and consumers (this is trading).  Trading is exchanging one’s produced output for produced output of another person.

3. Entrepreneurs and labor can and do work and produce real goods and services just for acquiring currency itself with the expectation of purchasing real goods and services later (this is savings).


Item number one above (generation of demand) and two above (efficient trading) are not hard to understand. The last statement (savings) is where the confusion lies. Let us go back to the image of entrepreneurs, factories and labor turning raw materials into finished goods. Now with this image of production in mind what is savings?

Savings is that portion of production (excess "loaves of bread" produced) which is not consumed or traded for other real goods and services immediately. Notice, when it comes to savings the acquirer of currency (the saver) does not care whether it is freshly printed by the government or whether someone who previously saved it is giving it to them in exchange for real goods and services.

If these savings are not "used up" then we will have deflation. In this case deflation is a signal to producers to produce less (and thereby causing the economy to run below capacity).

This is where the philosophical divide exists. Should the government step in and spend money (borrowed or printed) to "use up" the excess productive capacity of the economy for social good?

The reverse is also true. If the economy heats up and private spending causes inflation should the government tax and destroy money and reign in inflation?

It seems to me that we as a society which cherishes private management of economic resources have not settled on the above two questions.

Why is printing money (via the FED) and "spending" it into the economy is a problem if unused capacity of the economy is being "used up" for social good?

In the end what really matters is productive capacity of the economy. Monetary system is an accounting and control system to manage the production system (i.e., the real economy).

Our monetary system is an accounting system in a sense it keeps track of (and limits) who is "allowed" to spend (i.e., "use-up") what portion of the available productive capacity. It is a control system because it can be used to "reign" in spending when spending outpaces production capacity (i.e., inflation ensues) via the FED's open market operations or we may even need to tax and "destroy" money in order to reign in inflation.

Yes. There is a lot of central planning involved in our "fiat" monetary system.

A factory does not care how much national debt exists or what our unfunded liabilities are or even how much private debt exists the factory is perfectly capable of producing "goods and services" no matter what all these accounting entries say.

Long term we have to teach humanity that in a money economy Say’s law is not true (or anywhere near it). What workers get paid and even what business owners make even if completely spent is not sufficient to use-up (liquidate) the production capacity of a modern economy.

That is what banks do they issue credit (new currency) to use-up this slack capacity of the economy. But there is no reason to have banks do this (this is what leads to recessions/depressions) as peak credit causes no more ability to borrow and lowered production of goods and services due to lowered demand (spending).

For centuries banks have propagated this lie. The proper thing to do is to come up with an acceptable way to measure inflation and let the government (not banks) use-up the slack capacity of the economy for social good which could include regular monthly checks to the citizenry.


6 comments:

joebhed said...

Monsoor

Just wanted to thank you for your commentary, both here and at NakedCapitalism on the subject, really, of what is wrong with this monetary economic picture.
I hope that you have also followd my links to GGerman Prof Dr. Bernd Senf:
http://blip.tv/file/4111596

Japanese monetary economist Dr, Kaoru Yamaguchi:
http://www.old.monetary.org/yamaguchipaper.pdf

and the new Bill by Dennis Kucinich..
http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf


Yours,
joe bongiovanni

feel free to contact me at joebhed@verizon.net.

Approved to Share said...

I'm thrilled that I stumbled upon your blog after typing "we need a new banking system" into google, and following a few links.

I'm quite interested on your take in regards to which direction the world is spinning, now with the Global Occupation Movement.

I'd love to talk, whether in email, vid conference or (preferably) in person. I'm a conscientious, international, multicultural, university student at The Kogod School of Business at American University in Washington DC.

My email is adungcs@gmail.com, I hope to hear from you.

Suceso financiero said...

Flaw..

off the bar you think deflation is bad. Do you prefer to pay more for goods and services? You may conveniently answer yes if you like.

Back to reality. The savings do not need to be stolen, I mean used up as you put it.

You are trying to defend the little guy by stealing from them. You also think stealing from producers will motivate them to produce more. Poor confused soul... Wake up man...

Suceso financiero said...

You got 1 point accurate. Savings are excess goods and services stores in the currency.

Leaving the savings to their rightful owners motivates production. The excess savings can be used to demand other goods and services.

Currency is nothing but cups holding the savings. The content in the cups will simply dilute by adding more cups.

How folks with advanced degrees cannot figure this out says much about our education system.

If adding more currency was an economic benefit, counterfeiting would be legal.

vic marcucci said...

The content in the savings cups will NOT dilute if the cups of mechanical efficiency can keep up, which in a modern economy is the reality.

It takes two to tango. Looking only at one thing as you do is an error. You have to look at both sides of the picture. As long as supply can keep up with demand there is no problem, actually it's a solution!

Suceso financiero said...

You are the one looking at one side. You think diluting keeps things going?


Than why has our output been falling year after year while the amount of currency expanded? Hint, people are not stupid morons and do not like being robbed.