Friday, August 03, 2012

Money, Prices, Value, etc

Recently I've been reading and watching a variety of fascinating explanations of what is wrong with our world and ideas of how its problems might be fixed.

One case in point is The Secret of Oz, a 1 1/2 hour documentary from 1996 which has some unique views and probably would have a lot of people say that it makes a lot of sense.

The problem with making sense, though, is that it isn't enough to make it work and the reason it wouldn't work is that it is missing an essential element, or at least is confusing two things which seem to be the same but are not.

My take on this is that many writers about economic matters confuse money with prices.  You hear statements like: "If the supply of money in a country drops the economy will fall into a depression."

I'm ready to concede that sometimes a depression and a decrease of money supply happen at the same time, but former is not the result of the latter.  A decrease in prices isn't a depression, even though prices often do decrease when there is a depression.  And just because people might earn less money, isn't necessarily a bad thing.

Now with that statement, I'm sure many people are laughing or saying that I've just proven that I'm completely out of my senses.  But, wait a moment and you may see that I'm not.

Suppose, for example that you lived in a world where there was only $1.00 and you had a bowl of rice which you sold for $1.00.  Now you have all the money in the world, but you have no shoes.  You look around and find someone who has a pair of shoes to sell and they want $1.00, so you buy them.

At this point you have no money and think that if you could figure out that it would be great to sell two bowls of rice, except that there's only $1.00 in the whole world, so what's the use?  If you sell both bowls you'd still have only $1.00 and you would have cut your income in half, effectively reducing the price of rice to $0.50 a bowl.  How could that possibly be good?

Well, with the ability to feed twice the number of people, you now have twice as many other potential products or services which you might buy but, in order to sell them, they too would end up lowering their prices so that everything that was wanted could be sold with the amount of money available.

As more and more products and services became available, and as the quantity of each thing increased, the prices would continue to keep dropping … exactly the opposite of what we have become accustomed to with continuing inflation.  

There is no one price which fits everything from a grain of rice up to a train locomotive, or a cruise liner because there are many complex elements involved in all of the myriad of things we buy and sell, but if the supply of money … whether it be dollars, gold bars, sea shells or whatever it might be is fixed, then as more and more things become available, and more and more people are consuming them, prices can only fall lower and lower.   If you could imagine that everything that was for sale were of equal value, then the simple way of finding out the price of each thing would be to simply divide the amount of money available by the number of things for sale and voila its price would be the answer.

At some time in our past we somehow came up with the notion that it was undesirable to have prices go down … especially if that "price" was what we received for our labor or services, but when you stop and think about it what difference does it make to you how much money you get for what you do, if you can get an equal or increasing amount of something you value in return?

This is the thing that I find difficult to swallow from The Secret of Oz … that it is necessary to control the amount of money to keep the economy going.  As long as people are getting value for their time and energy it really doesn't matter how much money is in the system, or whether prices stay the same, go up or go down.  And while there may be some validity in the idea that having the quantity of money being manipulated by private interests produces unwanted abuses, what guarantees are there that putting this into the hands of politicians or bureaucrats would be any better?

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