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Re: Austrian & Keynesian Theories Vs. Mathematical Facts

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  • Sun, Apr 18, 2010 - 06:24pm

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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=Thomas Hedin]Who do you want to be the creators of money and under what principles will this money function?[/quote]

[quote=goes211]There you go on about banks again.  If your mind is so closed that the only thing you can imagine is a system of banks loaning money into existence, I don’t see a point in trying to awaken you to other possibilities.[/quote]

Goes211, I believe you and I are on the same page, and  I can see the frustration and I have stayed out of the discussion trying to figure out how to word this as to not be confrontational.

DrKrbyLuv and Thomas Hedin, from my view it appears that you both view money as a item that is different than all other goods/services.  That money is something that must be created/managed by some central authority.  That view I think makes it difficult to see the points being raised by Goes211.

Let go back to barter and see how money comes into existence and I think this might help.

Bob, a baker, bakes bread and exchanges it for eggs from Farmer Brown everyday, but one day Farmer Brown drops his eggs on the way to trade them with Bob the baker, but he really needs the bread to eat.  So when he meets up with Bob, he says “I don’t have any eggs today, but if you give me the bread I will give you more eggs in the future and here is a piece of paper (an IOU, a contract) that says this is our agreement.

So what is that piece of paper?  It’s money.  It’s a debt to Farmer Brown, and wealth to Bob the Baker. You can say it either represents effort that Farmer Brown has promised to generate, or it represents the work Bob has already done.  As the crash course put’s it:

[quote=Crash Course Chapter 6, What is Money]

Money is a claim on human labor.

With a very few minor exceptions, pretty much anything you can think of that you might spend your money on will involve human labor to bring it there. I say it’s a claim rather than a store, because the human labor in question might have happened in the past, or it might not have happened yet.

[/quote]

So, one day Bob the baker meets up with Fred the milkman, and he says, I don’t have any Bread to trade today, but I have this IOU from Farmer Brown for some eggs, would you trade Milk for it instead of bread? So they exchange the “money”.  Note: no banks or central planner has been involved in this example, yet we have money.

[quote=Crash Course Chapter 6, What is Money]Money is an essential human creation, and, were all money to disappear, a new form of money would spontaneously arise in its place,[/quote]

The only problem is that all the people involved must know and trust each other.  It requires that they all trust that that piece of paper will be honored for the goods it promises.  They also have to trust that Bob the baker didn’t simply make up a note promising eggs from Farmer Brown.

One day, Mike the miner comes to town with some shiny pieces of metal (gold) that he wants to trade.  Just like the bread, eggs, milk, the gold represents effort expended by Mike.  Overtime Mike trades his gold for other goods/services (or IOUS)  from the towns people.  At some point the towns people realize that just like the IOUs, the gold can be used instead of IOUs.  While like all the other goods, it has some properties that make it nice for use as money:

  • Durable – doesn’t rot or degrade.
  • Uniform – doesn’t vary from one sample to the next.
  • Easily divisible -one can trade a smaller amount for an egg versus a loaf of bread.
  • Is valuable – represents a lot of human effort to create/obtain.
  • Can’t be forged – elemental and can’t be created from other materials (at least not yet)

Eventually people use Mike’s gold (or any other gold) instead of trading IOU as money because of the above properties.  Mike gets paid with goods for his efforts and is providing a valuable service to the towns people.  So now, does the gold have any special powers? No, it’s just a convenient representation of the effort of humans to be traded.  Precious metals are valuable because they have the properties listed above, not because of decree.  That is humans need money because barter is cumbersome and requires close proximity for exchanges.

So, eventually those that produce far more than they use, begin to have a surplus of money (gold) and wish to store it someplace safe.  Along comes a banker, who will expend effort and built a vault, maybe put a few guards around it, and in exchange for storing the gold and keeping it safe, will take a portion of it.  Nothing wrong with this, the banker is expending effort and providing a service.

Eventually the banker say’s to his clients, we can loan out this gold to others to build bigger/better things.  That is we can invest the money (capital – stored labor) and in return we take a cut and you get paid back more from those that borrow (interest).  Again, nothing wrong with this either.  The banker is managing risk by putting in effort to analyze the borrower, setting up the deals, etc. 

Note, at this point, people are creating money and giving it value by their labor.  While the miners are obtaining the gold, they don’t actually create the monetary value of the metal.  The value is in the labor that is being represented by the gold, not the gold itself.  It’s simply a convenient representation.

Now we can answer your question:

[quote=Thomas Hedin]Who do you want to be the creators of money and under what principles will this money function?[/quote]

Answer: Anyone!  The money will function when it is trusted as a medium of exchange.  There may be many forms of money and can be many currencies in use at a time, but it is left to the individual and the market to create and determine what works.  Not a government or central planner.

Does this help?