Category: Economics

CCLXVII – A Jumble of Thoughts on Currency

I finally found a good primer from Zippy regarding currency as Tax Vouchers. I decided to turn my accounting brain to the task of what it would take to create a balance sheet for the US Government. The answer I’ve arrived at feels like cheating so I invite a thorough critique from any and all readers.

The problem with fiat currency–I will call them fiat vouchers form hereon out to avoid confusing myself–started (for me anyway) with thinking of the creation of the fiat vouchers themselves.

Primer: DR = Debit, CR = Credit

Imagine the accounting process one follows when creating widgets. First, you buy the raw materials with cash: DR – Raw Materials Inventory (RMI), CR – Cash. Second, you process the raw materials into finished goods: This is an entry in two parts. Part 1, DR – Finished Goods, CR – RMI. Part 2, DR – Work in Process (WIP), CR – Cash. NB: The first part records the transformation of the product, the second part records the work being done on the transformation. Then, you sell the finished goods: DR – Cash, CR – Finished Goods; and you recognize the costs of what is sold: DR – Cost of Goods Sold (COGS), CR – WIP.

That is a lot of accounting jargon but I haven’t figured out a better way of illustrating this stuff in a blog format yet.

Now imagine creating fiat vouchers. They are printed on paper, but once complete they represent the unit of measure and not an item of inventory. When your widget inventory is $1,000, it means you have one-thousand dollars worth of widgets. You can’t have an inventory of one-thousand dollars worth of dollars–not in any sensible way.

Lets imagine this process was still with a gold coin. First you “buy” the raw gold (pay laborers to mine it): DR – RMI, CR – Gold Treasury. Second, you process the raw gold: Step 1 – DR – Gold treasury, CR – RMI; Step 2 – DR – COGS, CR – Gold Treasury. (NB: I’m simplifying Step 2 because you’re paying the minter to mint Gold coins, that is what is represented by COGS). This works because the Gold treasury is an inventory of actual Gold coins.

When you have a Gold-backed currency, it stays simple. The Gold treasury becomes one step removed, and instead you issue vouchers that are called “Gold Payable”. Issuing Gold-backed currency looks like this: DR – Some Expense, CR – Gold Payable.

So at our simplest form, we are dealing with a Gold Treasury as the inventory of the asset, Gold as the raw material being processed, and Gold Payable as the issuance of Gold-backed currency.

Fiat vouchers removes Gold from the equation. There is no Gold treasury because there is no asset aside from mere paper, but now even paper isn’t necessary. There is no asset so there is no material to process. So we are cutting out the WIP and COGS part of it and we are left with merely DR – Some expense, CR – Fiat Vouchers Payable.

The reason this doesn’t work is because Zippy’s point of view is that all liabilities represent claims on some asset. CR – Fiat Vouchers Payable is a liability, but there’s no underlying asset to claim against.

This is interesting to me because it feels as if the ideal currency is one which costs nothing to make, which was difficult before but is easy now. It literally represents free money. It makes sense why this would be the ideal and why society–or government–would move towards it. I wonder if the United States even goes through the formality of printing bills before sending money to banks, or if there’s not a computer algorithm somewhere that just adds zeros.

There is a way I could fudge the accounting without breaking accounting rules that would provide an asset that the fiat vouchers could claim against: Goodwill. When a company buys another company for more than their book value, the difference in valuation is referred to as goodwill, and will be amortized over some period of time since it doesn’t represent anything real. This does actually happen, even if it sounds nonsensical. Companies will pay a premium for a brand, or for access to a market, or access to a product. One could argue that the difference between real assets on the books and fiat vouchers payable is goodwill for the government. The government can retire fiat vouchers payable, and reduce it’s goodwill such that it’s assets approaches only its real value. Or the government can issue more fiat vouchers payable and increase its “goodwill”.

But again–it’s not really increasing goodwill in this case. And the operating arm of the government still needs to operate in dollar-denominated slips of paper.

Let’s see if we can simplify further by going back to the Sovereign and the Gold Treasury. If we look at the Sovereign as the owner of the state–not just the ruler, but he holds the title, the deed, for the state and the people and markets within it, then all money is a distribution from his personal reserve. So even with Gold, all money is “due” back to the sovereign anyway–it’s his, and he’s given it to you as a medium of exchange. This is all very simple with a unitary sovereign, but if we accept that the Liberal ideal is that the people is sovereign, collectively, then it becomes very muddled. Whose money is it?

Here’s another thought I had. Is it true that the ideal currency is one that is spontaneously created out of nothing? It wasn’t possible until the digital age, but now it is. It has no intrinsic value so serves exclusively the role of medium of exchange. A collection of currency represents your exchange power, and as long as everyone else accepts that medium, you can exchange the increments of nothing for hard assets.

In a sense, if you earn an income you are collecting “deferred assets” by collecting an income, and when you trade those “deferred assets” in for hard assets you move them around on your balance sheet. Taxes would then represent giving the Government as an organization some deferred assets.

Furthermore–if the ideal currency is spontaneously generated ex nihilo there would need to be some kind of meta entity responsible for generating and retiring currency, because an ex nihilo currency would need a single-sided accounting entry to just increase or decrease its supply. From the meta entity, accounting would proceed as normal but it takes the problem of currency out of the USG balance sheet and moves it to the meta-entity.

I’m going to need to take these ideas and clean them up a bit but I hope you can follow my train of thought.

AMDG

CCLXII – Further Thoughts on ZippyCatholic

This is a stream of consciousness article because I was reading Zippy again which is always a dangerous thing to do in front of a computer.

A troll-like gadfly would ask Zippy “what is the value of time?”. Zippy wouldn’t engage with trolls and refused to acknowledge this as a moral consideration for usury. The question stuck with me though, and since I am remote enough from Zippy I think I can attempt to answer without causing too much fuss.

One of the ways Zippy described himself was as a realist–a financial realist, among other kinds of realist. The question of the value of time can be broken down by thinking about barter exchanges. Can I give you my time? I can–by working for you. But then anything you pay me would be an exchange for my labor and not for my time. But I can give you money and you can hold it for me, and then give it back when I return. But in order to multiply that money it must be invested, traded profitably, as in the parable. Time is not a resource that can be exchanged either–it is infinitely available and nonexchangeable.

Really, what profitable interest is saying is “I could have spent this money in a better way and I want you to pay me for the difference”–but that’s not really a value add and that’s not really something you should be obligated to pay for, morally or contractually.

An important part of this discussion is talking about property. Zippy seemed to take the stance that property was not about unambiguous, unilateral control of a thing, but about responsibility. Because I own a china dish does not mean it is OK for me to smash it on the floor arbitrarily; I have a duty to use my possessions to their full potential, with prudence and justice. This is in line with believing that our bodies are given to us by God and we cannot treat them like they are ours to destroy and remake in our own image, and that our skills and talents must be applied to God’s glory as well.

There’s more to Zippy’s “submission to authority is voluntary. It is also mandatory” quip than i realized at first glance. Together they offer a picture of our ideal relationship to the sovereign. Just the first clause, taken alone, is liberalism. Just the second clause, taken alone, is totalitarianism. Both clauses, taken together, represent properly ordered moderation.

As a financial realist, Zippy liked to refer to currency as “tax vouchers”. I really like this because it cuts to the heart of fiat currency. I need to do more digging on his blog to really grok it but constructing my own explanation, it means that a dollar bill is “redeemable” to discharge one dollar of debt owed to the US Government. You get paid in tax vouchers and simultaneously the USG accrues a tax debt. You turn in the vouchers to discharge the debt. If you redeem too many vouchers then the USG will return some vouchers too you.

The tax vouchers can be exchanged for real property, like a house, a car, a couch, a pencil. These things have value but that value is measured in tax vouchers. My previous articles that used yap to approximate value is related to this. The worth of real property is measured in tax vouchers, the value to you is measured in yap.

Another Zippy-esque idea is that there’s no such thing as money. There is property and there are claims on that property. As an accountant his discussion of balance sheets was particularly edifying. Balance sheets show what real property you have, what liquidity you have in terms of unconverted tax vouchers, and what claims on your property are held by other entities–NB, balance sheets show this as of a point in time. Income statements show the change in property and claims against in a specified period.

Zippy said that the USG cannot have a balance sheet if you conceptualize money as vouchers in this way because it owns the measurement tool. A close analogy would be trying to measure how much flour was used in an already-baked cake–you can’t separate them.

Nevertheless this hasn’t stopped me from ruminating on the idea. Vouchers in corporate settings are kind of like gift cards, which are deferred revenue. But the vouchers as I described them are only redeemable to discharge tax debt. So the main unit of measure in this case would not be cash but debt-bucks. If I work for 10 hours and I owe as a result $10 to the USG in taxes, that means that you could theoretically correlate the hourly tax debt rate for every citizen and accrue a taxes receivable on the balance sheet measured in labor hours.

I think i’m crazy so I’ll come back to this idea. The main premise is that you can’t create financials for the sovereign without changing the unit of measure. I’ll have to do more research on what Zippy meant by vouchers.

AMDG

CCLV – Nothing Gold Can Stay

Wood over at his blog has an interesting post that referenced ZippyCatholic’s position on Gold. Regular readers are aware that I am an accountant by trade and am interested in financial topics. So I thought I would muse on the subject of Gold in Zippy’s memory and God willing I will have something to add to the discussion.

There are three areas that have come up as far as I can tell. 1- The Gold Standard; 2- Gold as an investment; 3- Gold as specie.

3- Gold as Specie

I sometimes do this thing where I start talking about my list backwards, so lets start with #3. In my article about Profit motive, I approach but do not arrive at an idea which Zippy came to in a post from 2016. Here’s me:

An important thing to note here is that Money is itself a resource, and is not a mere unit of measure, is not mere points. In a previous article I disambiguated a things value from its price. This allows us to do two things: Look at all transactions as bartering, and to look at all transactions as exchanges of value instead of exchanges of goods and services for money.

And here is Zippy:

All economic exchange is barter. If you get nothing else out of this post, take this one concept to the bank. All exchange is barter. (…) Attempts to segregate property bartered in marketplaces into ‘money’ versus ‘other property’ is one of those fuzzy social conventions which is fine as long as it isn’t taken too seriously. Taking ‘money’ as something categorically distinct from property in general distorts and obscures reality. Any property at all might be used as money (sunk in exchange); and even property conventionally thought of as “money” — coins, bills, and the like — can be displayed or put to other uses than exchange.

So thinking about Gold as Specie–as money, as a means of exchange–requires us to think about Gold as a resource qua exchange.

What gives a resource value? Remember: Value is different from worth. Worth is how much something is priced; value is how much you want it relative other things you own.

The short explanation is that things are valuable because you want them. Things are worth more when many people want the same thing. If I am the only person in the world who wants a bar of gold, I can get it for free, no one else wants it. It has some value to me, but it’s price is zero because it is serving a market of one. When that markets demand is met, the market goes away. This is true whether we are talking about a bar of gold, a video game, a bunch of bananas, or a fine suit.

Bitcoin is a great example of this. Bitcoin has no intrinsic value because it does not exist. Yet: people desire it. Because many people desire it, it’s worth (measured by it’s price) climbs through the roof. Who can say why people desire it, the only important thing is that it is desirable. It has some value to them.

Gold has some intrinsic value because it is made of something. More than that, it is made of something durable, scarce, that doesn’t tarnish or lose luster–therefore, something with long term usefulness. These are the reasons people desire it, but people also desire Bitcoin which doesn’t have any of those things, so their reasons don’t reveal anything intrinsic about the thing; just serve to justify the level of demand. It’s these attributes, plus it’s malleability, that made Gold great as a means of exchange but at root the reason it has worth is because many people desire it. People could just as easily have desired iron or quartz or wood tokens, but for some reason people desired Gold.

The root of this, and I believe what Zippy was getting at in one sense, is that there is nothing inherently stable about Gold as a means of exchange, so it is not inherently desirable to paper money or even digital money. All that matters is that there is a thing that many people want and will accept in a barter transaction for other goods or services.

2- Gold as an Investment

Our answer to #3 informs our answer to #2, regarding Gold as an investment. I did not find as much from Zippy about his thoughts here but if I am close to the mark at all in #3 I think #2 follows naturally. The key is to disambiguate the idea of Gold as an investment from the idea of investing in general.

Investing comes in three forms. (NB: These are not formal definitions, I am making them up on the spot based on my horse sense). Speculative investing, which is what the stock market is when you focus on the price. This is making a gamble that more people will demand a given thing in the future than they do today, and the way that you make that gamble is to purchase a ticket that entitles you to a fraction of that thing. Hard Investing is when instead of buying a ticket you buy the thing itself. This would be what people do when they buy Gold bouillon, collectible comic book action figures, hot-button Christmas toys, etc. You are gambling that the price you pay now for these things will be less than the price you can sell them for later; or rather, fewer people want this thing now than will want it later. Prospect Investing is when you invest for income. Investing in the stock market for dividends is a kind of Prospect investing, so is investing in businesses or sponsoring people–the gamble is that you expect a return of x+1 by giving some sum x for a given thing.

There is nothing intrinsic about Gold that makes it better or worse than any of these other things. The goal of investing is to multiply a given resource–not the resource you acquire, but the resource you use to acquire it. If you use US Dollars to buy stocks, the thing you are trying to multiply is US Dollars, not stocks. This is true whether you buy Gold or whether you invest in a business.

Gold tends to come up as an apocalypse investment where the idea is that when society collapses Gold will be the means of exchange again. What people really mean when they say this is that they are holding Gold as a Hard Investment, believing that more people will want it in the future than want it now. The delusion comes from the fact that the resource they are still trying to multiply is US Dollars. In an apocalypse scenario, where all exchange is barter, you have to have something other than gold assets to exchange. If all you have is that, but no other discernible skills, no one will trade with you because you offer nothing.

1- The Gold Standard

One of the advantages I noted above about Gold is that Gold is scarce. This is an important point: Gold is scarce. A Gold Standard means that whatever the Gold supply is, GDP cannot exceed that amount. Wealth cannot be created, but it can be lost. The Gold Standard puts a cap on the productive economy. Because population is always increasing, the demand for it will always go up, and either Gold will become unattainable to the everyman or it will become worthless to the everyman.

This has been a ramble on Gold based loosely on what Zippy had to say about it. I hope I made sense and did Zippy proud.

AMDG

CCXXIX – What is the Difference between Economics and a Gun?

I was on another philosophical sprint recently when Wood applied a much needed splash of reality to my enthusiasm. Following my article about Profit Motive, I wrote a snarky quick-take about “Evil Capitalists”. In that quick-take, I made the claim that “There is no economic system which is inherently good”. Wood’s counterargument was that Communism (as an economic system) is predicated on the the abrogation of private property, which Edward Feser has noted is contrary to Natural Law. A Communist system without that abrogation would cease to be communist, therefore a perfectly formed Catholic (PFC) could not operate a communist system without violating natural law.

This lines up with something I argued in my article on Divine Mercy that every action is either for or against God, everything can be reduced to some kind of Binary. This is what ZippyCatholic refers to in the article provided by Wood in the comments, that it is a fallacy that “formalisms and methods” can be metaphysically neutral, and is one of the lies of modernity.

So, with this preamble, lets tackle the question: What is the difference between Economics and a Gun?

A gun is neutral, because a gun exists apart from people who use guns. A gun can be used for good or evil, but only insofar as it’s operator is either good or evil. A gun thus takes on the character of it’s operator, after a fashion. A gun is evil in the hands of an evil man. A gun is good in the hands of a good man.

I have made the comparison between complex systems and tools because of the idea that a complex system is a kind of tool. Lets turn it into a gloss: Johnny uses the gun to protect his family. [Person A] uses [a tool] in order to [achieve some end]. The tool defines what ends are possible with that tool. “protect his family” is a valid end if the tool is a gun; “eat salad” is not a valid end if the tool is a gun, even if it is technically possible: that’s not what the gun is for.

If we suppose that “Capitalist systems” is a tool, then “public good” seems as valid as “public evil” as an end. The difference lies in the nature of the tool.

A gun is a discrete object that is both definite and actual. Capitalism is neither discrete, definite, nor actual as a thing. Capitalism does not exist apart from the people who are engaged in capitalist acts. Capitalism is almost better described as an emergent property of a barter market, rather than a thing unto itself. So saying that Johnny used Capitalist systems is as nonsensical as saying the gun voluntarily protected Johnnys family without any prompting from Johnny.

Capitalist Systems is more appropriately the subject of our gloss. If the gloss is [Person A] uses [a tool] in order to [achieve some end], then we can substitute in Capitalist Systems for Person A. The subject reduces the available tools, so we can say a tool available to Capitalist Systems is mortgage lending, and that reduces the available ends, so we can say the end of mortgage lending is to provide profit to a bank.

The tool is mortgage lending, mortgage lending is discrete, definite, and actual. Mortgage lending can be done in both Capitalist and communist systems. Mortgage lending can be performed by PFC’s.

Capitalist systems then are not inherently neutral, the reason they appeared that way is because they were in the wrong spot on my framework. Capitalist systems are a collection of agents, whose wills can be good or evil, and whose deeds follow the binary I described previously.

So with this in mind, the question I asked in my quick-take article was “Is there an economic system which is inherently good?” The answer is still no, but for a different reason. Capitalism, as a collection of capitalist agents, has no inherent property which is good or evil, the same way a person has no inherent property which is good or evil. A person makes good or evil choices, and capitalist agents can make good or evil choices, and so aggregated capitalist agents can effectuate good or evil outcomes through their collective actions.

The punchline still works too: If you condemn capitalism as evil, you are really condemning the culture that allows capitalist evil, which includes you. To change an evil culture requires doing non-evil acts, so I say again: Just don’t be evil.

AMDG

CCXXVIII – Profit Motive Does Not Imply Public Good

Wood over at his blog “Wood Faileth” has an article that connects to a thought I’ve had but haven’t known how to introduce. If you’ve read my recent Economics thought-sprint then go read Wood’s article and come back here, then I will try to complete my point. Another helpful pre-reading is my brief series on Public Good.

In my Economics series, I pointed out that when the units used to measure everything is dollars, you lose some nuance when you discuss the value of those things. Price is different from value.

In my Public Good series, I pointed out that Good implies proper order, and proper order implies pointing to God. That which is good is ordered to God; the Public Good is that which orders the public to God. There was a separate distinction though, that public good as it is used colloquially describes those things which society likes. So I will call socially approved things “Public Like” and things which are properly ordered to God “Public Good”.

In Wood’s article, he uses the example of Madison Avenue to point out the silliness of complaining about “Evil Capitalist Greed”. Madison Avenue is hardly the paragon of the social benefits of Capitalism, yet is a striking example of a some kind of order (I make no judgement on whether it is properly ordered or not–just that it reflects some order). People use Madison Avenue as a straw man because they think it is Evil–Wood accurately points out that most people these days hate beauty, and so hate order, and so reject that order; People use Madison Avenue as a straw man because they think it is Capitalist–Wood points out that it is hardly the best example of rampant capitalism available to us.

With that as preamble, we can now dig into some of the meat and potatoes of this article.

The First Law: Markets Are Efficient

A common defense of capitalism you may have heard is that profit motive accomplishes the public good. This is half true: Profit motive accomplishes the “Public Like”. When people say profit motive accomplishes public good, what they mean is that market forces will reward those people who help society, and will punish those people who harm society. Again: this is half true. In evidence, lets look at the fact that people pay money for pornography. The profit motive here is rewarding purveyors of sin. This is not good in any way; but this particular sin is currently not objected to by society, therefore falls within the “Public Like”, and is not prohibited. Profit motive of pornographers thereby advances that which society already approves. The sum of all things which society approves is it’s culture. Therefore profit motive perpetuates the culture in which the profit motive is deployed.

A rejoinder by the capitalist interlocutor may be that Profit Motive has many other benefits as well. Wood’s article points to one: plummeting prices through competition; I will add innovation and technological advancement as another. Profit motive leads to Entrepreneurial problem solving: If you can make money by doing something better, then eventually most people will do things better, until you can’t make any money doing that thing.

In my Economics Sprint, I pointed out that Entrepreneurial problem solving is a way of utilizing available resources to solve problems, and is not necessarily a way of benefitting society. Again: the first pornographer was using available resources (shamelessly sinful individuals) to solve the problem of satisfying demand for autoerotic voyeurism. Entrepreneurship is not inherently aligned with Public Good, but is aligned with monetizing resources in a way which society approves. Competition just means resources can be monetized in a way which is also accessible to society.

This is the first law they teach in economics classes: Markets are efficient, or Markets Work. This is absolutely true, but markets are not clearly defined. One person looking for pornography represents a market. If an entrepreneur thinks he can make money from it, he can enter that market and satisfy that demand. Markets are efficient, but markets are not inherently good.

Mining for Money

An important thing to note here is that Money is itself a resource, and is not a mere unit of measure, is not mere points. In a previous article I disambiguated a things value from its price. This allows us to do two things: Look at all transactions as bartering, and to look at all transactions as exchanges of value instead of exchanges of goods and services for money.

Looking at money as a resources explains a little bit of the American Venture Capital scene these days. There are huge sums of money being thrown around to start-ups, and the reason for this can be seen in my definition of Entrepreneurship: It is a way of utilizing available resources to solve problems. Money is a resource that, in the venture capital world, is abundant. Those who seek venture capital dollars are simply trying to find a problem which that resources can be deployed to address. Because the people who control that resource are members of society, that resource will only be deployed in ventures which align with the “Public Like”.

The Alternative

The reason the axiom “Profit motive = public good” has gone unexamined for so long is because it hints at a fundamental truth without actually arriving at it. Markets seek an equilibrium, and this line of economic thought is predicated on the idea that people make strictly equal exchanges: A given product is sold for the maximum price someone is willing to pay, and that must be no less than the amount it cost to create. The value, expressed in units yap, is always exchanged at a value gain, or a yap profit. The example I used previously was that a Canoe was on sale for $100 and I saw it, wanted it, and bought it. I like canoing, so the Canoe was 5 yap valuable to me, and in order to acquire that 5 yap value, I need only hand over one paper bill, which is only 2 yap valuable to me. The net exchange for me is +3 yap. For the seller, he does not want the canoe anymore, it is 1 yap valuable to him, but with a paper bill he could pay his rent, so the paper bill is 4 yap valuable to him: a net exchange of +3 yap.

This makes logical sense: If the canoe was more valuable to the seller than the money he would get for it, he would not make the exchange. If the money were more valuable to me than the canoe I would get for it, then I would not make the exchange.

However, we cannot stop here and say simply that “Value motive = public good”. The value scenario can still accommodate a person seeking and buying pornography, instead of a canoe. This digression about Value thus is interesting and descriptive but doesn’t change the results of our analysis. We must apply additional steps to arrive at some economic activity which truly implies public good.

Can I Exchange Rai Stones for Public Good?

Public Like can be anything, Public Good can only be that which points to God. The true issue at hand is cultural, and not economic. Can economics be used to wag the dog and change a culture from one that approves of pornography to one that condemns pornography?

Regulation is not the answer, because Laws follow that which a society already believes. Economics can only be leveraged to solve economic problems, and because the Public Like currently includes sin and godlessness, that is a social–and so cultural–problem. Culture can only be changed on generational timescales, and is less of a marketplace and more of a war. One culture must dominate and destroy another in order to replace it. The alternatives are only cultural victory, cultural secession, or cultural death.

So the answer is that there is no economic motive that promotes the public good unless the culture is already aligned to God. The levers for changing culture are to either outwit or outlast the dominant culture: Outwit through conversion, or outlast through having many children.

TL;DR: Profit Motive does not imply public good, therefore have lots of kids.

AMDG

CCXXIV – The Necessity of Meeting Demand

Here is a better way of talking about the concept I’ve been refining over the last few articles: Before a country can export internationally in a healthy way, it’s domestic demands must be met. I want to talk about reasons why this is good, and one reason why not doing this is bad.

Maslow’s Hierarchy of Needs is a great reference for human necessities. I won’t vouch for it as a scientific framework but as a rule of thumb I’ve gone back to it multiple times. We can expand this model to apply to entire nations. For a nation to be stable, it must first be meeting the physiological needs of its people: A geographical region with no potable water will not sustain a people, for example. Water sources, food supply, a means of constructing shelter, some healthy family culture, these are basics for a given people to form a cultural bond, and for that people to live in a given geographical area. Next up the hierarchy is safety: A people must be able to defend themselves, and the geography must be suitable for the purpose too. One of the reasons Poland has had such a hard time historically is because it’s geography is not conducive to defense: It has mountains in the south and plains in the north and no obstructions between the superpowers that have occupied it’s east and west. Safety also implies security–economic security, employment, some mechanism for personal property, some means of exchange. Everything above this point has a lot to do with attitudes and at a macro-scale, cultural cohesion: Love and belonging implying a sense of patriotism, Esteem implying a sense of self respect, and finally Self Actualization implying a sense of fulfilled purpose.

For a developing country, physiological needs are obviously fundamental. We frequently hear stories of people in some countries traveling for miles to get clean water, or going days without a meal. We have already talked about means at our disposal to assist with this problem: We can lend a people money, if they have a profit motive to provide these necessities; we can give a people the necessities themselves and let them focus on their other needs; we can provide a safety net so a given people don’t have to worry about exigencies; or we can train them in skill sets conducive to satisfying the necessities in their community. There are ways each of these can work and each of these can fall short. I propose that the best mechanism is to find a way to assist a people to acquire the skills or tools required to exploit their own resources to satisfy their own needs.

Let me expand on that for a moment. If I bring food from outside a given country and deliver it inside a given country and feed people, this creates dependency. No one has developed skills of providing food, and when the external supply of food goes away the population reverts to it’s original foodless condition. Any food production resources available go unexploited when the skills or tools are not available to that population.

This same paradigm is true for every demand of a given society. If there is a demand somewhere that is not being met, that nations own resources must be used to satisfy it, so that the knowledge is retained by that nation, the tools are developed by that nation, the costs are borne by that nation and the rewards are retained by that nation. People can be trained to mine gold, but if people are starving in the streets then what good would that do? Demand for food is prior to demand for gold. When physiological economic demands are met within a nation, then the quality of life and standard of living have improved and the country can ascend Maslow’s Hierarchy.

Consistent effort along this line of thought, over time, ensures that all of a nations demands are met, and eventually that nation will begin producing a surplus. This surplus can be exported and used to meet demands in other countries. Again: If a country is mining gold and selling it internationally, what good is that if people are starving in the streets?

In previous articles the way I have said this is that value must be extracted, transformed, and retained by a nation first before it makes its way to secondary export markets. Value, by definition, is something that is demanded, something which is valuable to someone else. Gold is not valuable to people who don’t have food. So if value is being produced in a given nation, by definition demand is being met. The retention of value necessarily improves standard of living and quality of life. If value is exported first, then that is satisfying demand external to the nation in question, and so not helpful.

This is a good point to talk about why Corporate Imperialism and/or exporting resources first is a bad thing. In my graduate program, I took a class about international supply chains. I had to write a short paper about the textile industry and their operations in Bangladesh. The specific firm in question sends American cotton to a Bangladeshi factory to be turned into American shirts to be sold in America. The value exchange here is Bangladesh supplies cheap labor and money flows into Bangladesh from America. Bangladesh has no need for the shirts, does not get the benefit of the cotton, if they produce cotton in Bangladesh it is not one of their primary industries. Add on top of this the fact that race-to-the-bottom cost competition leads to enormous mills being created with slapdash safety standards, which lead to a national tragedy in 2013. So in other words, Bangladesh bears the risks of manufacture, while America gets all the benefits. American farmers sell the cotton, American consumers get the shirts, Bangladesh gets money. No value is being generated by Bangladesh for Bangladesh in this example.

There are some cases where the core resource is provided by the host country, which is worse still. If Bangladesh produced the cotton, for example, then that Cotton would be extracted and not used for the satisfaction of demand in Bangladesh, and so deplete the country of resources in exchange for mere dollars. This whole paradigm is a bit like asking your neighbors to paint your fence, but asking them to buy the paint and brush and also to build the fence. You get all the benefit, but your neighbors must bear the costs. The paradigm relies on your neighbors wanting your money more than you want the fence.

If there was a single concept which captures all scenarios I’m talking about here, it’s the idea of Custodial Majority. It is the responsibility of those in the majority or those with plenty to care for in a beneficent way those in the minority or those with scarcity. The developed world, as such, has a responsibility to care for and go to the aid of the developing world–not in a careless way, but in a way that seeks to raise up their neighbors. The only way to raise up ones neighbors is to find out what they need, the best way to get them what they need is to help them get it themselves.

AMDG

CCXXIII – The Problem of Money

We’ve got some new ideas to add to an old article that talks about economics and money. In the old article I used Rai Stones from the island of Yap as a metaphor for corporate equity. I described it in this way:

In the original scenario, Rai Stones are a tangible asset. Physical possession of the Rai Stones are desirable, and so people will pay some amount of money to go see them. The Rai Stones are worth what people are willing to pay for them, but what they are is different from what they are worth. In the beginning, people would pay [$1] to be able to see the stones, but eventually people would pay [$5] for the same privilege. The core thing that is desired has not changed: The stones are the same stones. But the value has changed based on the demand.

This is the important distinction I would like to explore: What makes a thing valuable is different from what it is worth. Said more precisely, using the definitions I set down previously: A resource has some value, and a resource has some worth, and those two concepts are not the same.

There is a lot of confusion because we don’t have a good way of talking about value in a different way than we talk about worth: we use money to measure everything. Economists have tried to create a unit known as utils to measure the utility of things but utility is different from value, too.

I am going to coin the unit yap to differentiate value from worth. I am not going to define a conversion rate because then it will turn units yap into dollars and then be the same as money. That’s not what this is. Units yap represents the object economically desired, and is not standard per thing but is standard per desirer. In other words, if I see a canoe, and I am in the market for a canoe, then it would be valuable for me to buy that canoe. The canoe has a value of 5 yap to me, which is only meaningful in comparison to you: You hate water and canoes but could probably use that canoe as a decorative feature in your garden, so it has a value of 1 yap to you. This tells you that the canoe is more valuable (5 times more valuable, even) to me than it is to you. The price of the canoe is $100. Because the canoe is more valuable to me, I might be willing to pay more money for it than you would. The difference in value has a correlation with difference in willingness to pay. Economists over simplify this by saying that if you pay $100 for a canoe, the canoe is valued at $100 and is worth the $100 you paid for it. That loses some nuance, even if it is logically correct.

What something is worth is different still, but can be expressed in terms of money without losing nuance. The canoe is valued at 5 yap to me, but priced at $100. I will buy it if I believe it is worth more than $100. If something is more valuable to me than the money it requires to get it, then I will buy it–this is because Money has value too, it’s just negligible. $100 maybe has a value of 2 yap to me because of my financial situation and general attitude towards money. The canoe is priced at $100, my money has a face value of $100, but I am exchanging 2 yap for 5 yap. Because I view myself as acquiring value, even if I have made a fair exchange in price, I will make the exchange. Worth can be expressed as the list price at which the yap value of the money (or means of exchange) equals the yap value of the item being purchased. If, for me, $100 has a value of 2 yap, we can extrapolate that maybe $250 has a value of 5 yap. This means the canoe is worth $250 to me, but I can get it at $100. If it was priced at $300, but it is only worth $250 to me, it would not be worth the price, because the canoe is only 5 yap valuable to me.

So you can see that yap is only useful as a means of comparison between items or a means of comparison between attitudes, but is not itself an objective measure of anything.

Because we do not use yap to talk about value, we substitute considerations of money and refer to value in terms of dollars. This makes us think of price, and puts us in a frame of mind to talk about transactions. My discussions of economic development involve the idea that we want to maximize yap contained within developing countries, and not maximize money. By maximizing yap, the economic situation of a country will slowly make use of that value, and compound the benefits of that value. Money itself has negligible value because it cannot be used for anything other than as a means of exchange. Maximizing money merely maximizes potential for exchange. Maximizing value provides an actual benefit from that value.

AMDG

CCXXII – You Can’t Live In A Pile Of Cash

The hypothesis that I have arrived at over the course of this latest economics series is that for a given country to prosper it’s resources must be extracted, transformed, and exchanged domestically, before any consideration of export. I gave a simplistic example but now let’s add some dimensions to that example.

Lets talk about a fictional country, lets call it Scootland. Scootland is known for it’s abundance of gold mines. Joes Raw Material Co purchased the rights to one such mine, and is currently engaged in mining the Gold. A rival mine on the opposite end of the country called Bob’s Gold Shack has also purchased the rights to a mine, and is mining the gold.

Joes Raw Material Co has to date extracted one-thousand ounces of Gold, and has warehoused it to sell. Jimothy’s Jewelers has contracted with JRMC to purchase all one-thousand ounces at the current market price of $1,500 per ounce. JRMC receives $1.5 million from Jimothy’s Jewelers, which JRMC uses to cover costs of operations, such as miner salaries, equipment costs, and other overhead. At the end of the day, JRMC makes a profit of 10%, so $150,000.

Jimothy’s Jewelers specializes in processing raw gold and turning it into jewelry. The one-thousand ounces they purchased they plan to refine into 0.5oz gold rings and sell for $800 apiece. Jimothy’s Jewelers successfully sells all 2,000 rings and makes $1.6 million. After costs, overhead, etc, Jimothy’s Jewelers makes a profit of 10%, so $10,000.

Tim the Plumber wanted to buy a fancy gift for his sweetheart, so he bought one of the 0.5oz rings. She loves the gift and keeps it, and they plan to pass it on to their kids.

In this example, internal to Scootland, the country has seen raw gold turned into gold rings, has added profit of $150,000 to JRMC, $10,000 to JJ, and a bunch of gold rings kept in jewelry boxes around the country. Scootland has seen the benefit of this mining activity kept within Scootland. If Scootland has a 1% tax on profits, then Scootland as a country has earned $1,600 for this activity.

Lets look at the rival, Bob’s Gold Shack. Bob has to date extracted one-thousand ounces of gold, and warehoused it to sell. International Gold Conglomerate has contracted with BGS to purchase all one-thousand ounces at the current market price of $1,500 per ounce. BGS receives $1.5 million from International Gold Conglomerate, which Bob’s Gold Shack uses to cover costs of operations, such as miner salaries, equipment costs, and other overhead. At the end of the day, BGS makes a profit of 10%, so $150,000

International Gold Conglomerate is a global firm headquartered in Hambonia. IGC is in the business of making 0.5oz gold rings which it sells for $800 apiece. International Gold Conglomerate sells these rings all over the world, makes $1.6 million for the effort. After costs, IGC makes a profit of 10%, or $10,000.

In this example, Scootland exported 1,000 oz of gold, which was refined and spread all around the world. This brought a profit of $150,000 to Bob’s Gold Shack. The $10,000 profit went to Hambonia, who are also the primary customers of International Gold Conglomerate. The net result is 1,000 oz of Gold leaving Scootland, 1,000 oz of processed gold arriving in Hambonia, and $10,000 flowing into Hambonia.

The key here is that raw materials are departing and in exchange they are getting Cash. “Hard” assets have been converted into liquid assets, which do not have the same value. In the first example, there is no net loss of raw material and there is a net profit of $160,000 generated from the transactions. In the second example, there is a net loss of raw material and there is a net profit of $150,000. If we factor in the market value of the raw material, there is a definite outflow to Scootland as a nation.

There are two natural questions from this: Why is it important that the raw materials stay in the country if the gold rings don’t help anyone once they are sold to customers; and how does keeping the finished goods actually help a country?

Keeping the raw materials in the country ensures that the economy can support the activity in the first place. If there is no demand for gold rings, effort should not be spent on making gold rings. Finding the best utilization of the raw gold–satisfying the biggest demand–is what is important, because then an economic niche is satisfied. Local mines should sell to local manufacturers, local manufacturers should sell to local buyers. If a local mine is selling to an international manufacturer to meet international demand, then some domestic demand remains unmet. An efficient economy meets all domestic demands, a prosperous economy exceeds domestic demands. If there are unmet demands in the economy, every effort should be made to satisfy them first.

As for the finished goods, they help a country by storing value. The more stored value that exists in a nation, the more “hidden value” that population has, and so the higher the potential economic activity. You can live in a house, but you can’t live in a pile of cash: the house is useful to you and stores value over time, the pile of cash is not useful the same way a house is useful, and is only worth what it says its worth. If someone sells a big house to downsize into a small house, they extract a portion of their equity and turn it into cash and thereby increase their economic power. So that means “hidden value” or “potential value” represents future economic activity. The more future economic activity that is stored, the stronger an economy can be.

So, in order to most help a developing nation achieve economic strength and prosperity, the priority must be on converting raw materials into assets which store value over a long period of time, and for which there is a definite unmet demand.

AMDG

CCXXI – Almsgiving For Dummies (and Economists)

All this high-minded talk about the economics of improving the standard of living and quality of life in developing nations is well and good, but what can I, Scoot, do to make a difference?

To think about this I want to talk about some different models for service in the developing world.

Example 1 – Lending

Lending to the poor is often called “Microfinance”. The idea is that those in poverty can leverage an entrepreneurial spirit to turn some influx of cash into more cash by pursuing some transformation activity for profit. This model does not work without that entrepreneurial element–the recipients of loans need some means of turning this money into more money. Charging profitable interest on loans to the poor is fraught with moral peril. Lending was originally conceived as charity, with the interest (if any) serving as a de minimis compensation to the lender when the recipient is financially rehabilitated. “Hi, thanks for helping me get on my feet, here is your money back, plus a little for the trouble.”

Many micro-lenders think only about the short term liquidity component, or income smoothing. Income smoothing can indeed be helpful, but if poverty is about more than money, then giving the poor money won’t help structurally change their circumstances. A society needs the ability to transform resources, and individuals need some means of participating in that transformation for circumstances to really begin to change.

Income smoothing and micro-lending can work but it requires deliberate effort on the part of the lender to make sure it is being put to good use.

Example 2 – Almsgiving

Ok, so lending adds complexity, lets remove the complexity and stick with the basics: Lets just give money or food or other material support to the poor. The different species of giving have different effects. Money doesn’t do anything substantial, other than provide liquidity. This is effectively the same result as income smoothing. How the money is used can have a big impact on how helpful it is: buying food will have more impact than, say, buying a chair.

The Romans had a good model for supporting a population of poor. The way I heard it described is that “for most of human history, most people spent most of their money on food”. Their solution for this was the Grain Dole–a program of subsidizing grain and giving it to the poorest citizens (who registered for the privilege). By removing their largest expense, it helped increase class mobility. The video linked above describes a problem where wealthy citizens who a generation prior had been poor still had their names on the Grain Dole and so still received subsidized grain, which they should not have–this speaks to the effectiveness of the program, and the difficulty in controlling it. Giving food can have the same impact, but it requires consistency and predictability. Just making food available may help some, but providing regular, predictable support helps the poor structure their lives and focus on other important concerns. Food has the added benefit of only being able to be used for food.

This tells us that certain varieties of Almsgiving can be effective but again requires deliberate effort to provide the best variety of alms and to provide it in a predictable way.

Example 3 – Necessity Support

Necessity Support is the provision of services rather than tangible goods. Removing added costs of unforeseen events, like medical care or housing after a disaster, this provides stability and can help return a person in poverty back to some level of normalcy faster than otherwise. Adding medical costs to an already thin income can be ruinous, likewise if a home is destroyed by a storm or a fire. These services provide a safety net, but do not provide a proactive measure of relief. This is important but cannot be a primary means of reducing poverty.

Example 4 – Skills Training

Skills training involves giving those in poverty new skills which they can use to improve or supplement their income. Skills necessarily involves learning how to provide some kind of productive transformation. Skills training accomplishes two things in this way: It encourages the transformation of potential value into actual value in an individuals community, and gives them access to income. The skills learned must be relevant and applicable. This is a variety of assistance that is very difficult to provide and very effective once provisioned.

These are ways of helping the poor, but now we must return to the original question: what can I, Scoot, do? Actually, I can do any of these things: what should I do? The most effective giving requires understanding what community needs some variety of assistance, what challenges are facing specific individuals, and devising a mechanism for providing assistance which targets those challenges effectively. The best thing is to go hyper-personal and find something that helps one specific person, and expand from there if it is effective. Service must be specifically targeted to be most effective.

Food for thought!

AMDG