Economics by a simpleton

'Money is energy' my brother once said to me when I was bad mouthing it. He was right of course. The flow of money makes things happen. When money flows quickly, we are in a boom, when it flows slowly, we are in a recession.

I know very little about economics and what I do know was mostly taught to me by a 15 year old called Vivienne Dinham in 1984. She told me her understanding of economics - in a nutshell- gained through revising for an O-level in it! She more or less said it was an unpredictable beast and that no amount of studying could guarantee a correct prediction about the future of any economy or any of its components. I assume that's because it's a huge, complicated, inter-related 'system' that just takes a little lack of confidence somewhere to spark off no end of chaotic and panicked responses. She also told me that every boom tends to be followed by a recession of about the same intensity so a wise government therefore does all it can to prevent an extreme boom because of the inevitable backlash. A healthy economy, she said, fluctuates but not too severely.

I also remember reading or discussing that out of every recession comes new innovations because businesses have to come up with new ideas to start making money again.

That's all I know. So I have to simplify it to help me understand.....

The village of Eck

In the simple village of Eck people swapped goods and services. A loaf of bread, for example could be swapped for a bag of carrots, or a window clean or a haircut. This worked pretty well, except for one time when one loaf of bread had travelled around the village in exchange for so many goods and services that it had gone stale and nobody wanted to eat it. The bread no was no longer fit to serve it's original purpose and had become a token that kept being used to 'pay' for things. A bright chap in the village: called Broff said that the bread was too big to keep carrying round and he suggested it be replaced by a small, metal, circular token. That way the token could be used instead of the bread as an 'I owe you'. A token could be 'spent' by giving it to someone in exchange for goods or a service and the person that received the token could then use it to pay for other good and services. The tokens would save us having to remember who owes who and mean that swaps no longer had to be simply two way. Someone with lots of tokens was owed lots, someone with hardly any needed to start 'giving' if they were to keep receiving. This would keep the village working and in balance with respect to giving and receiving. 'Let's call the tokens money and keep them in a purse,' said Broff. Simple - like a babysitting circle. It worked well.

Now a lazy but canny person called Frudd came to Eck. He had no goods or skills to offer but he saw a way to make some tokens. He went to the Eck's only baker and persuaded her to loan him some loaves of bread. He promised her that he'd pay her back. She eventually gave Frudd some loaves (he was very charming and persuasive). This made the baker's bread a bit thin on the ground that day and once the baker had run out of bread, Frudd started selling his loaves for 3 tokens each. After all the bread was sold, Frudd gave 1 1/2 tokens to the baker and kept 1 1/2 for himself. The baker was happy about this as she got more for each loaf. Eventually she handed all her bread over to Frudd and let him do the selling so she could get on with more baking. Sadly though, the price of bread had gone up. This made others wonder if they too should charge more for their goods. Thus inflation started.

Another clever person: Trigg found a stash of tokens. She went to Eck and told people they could borrow her tokens if they promised to pay her back and pay a little extra than the the amount loaned, for her lending. She called this lending fee 'interest' because she did indeed find it very interesting. Quite a few people borrowed her tokens - especially as the price of bread had gone up.

Krodd was also clever. She saw that prices went up so she bought things and waited for their prices to go up before selling them.

Soon Frudd, Trigg and Krodd were the richest people in Eck. Others saw their lifestyle and wished to live the way they did. So they started making more goods and offering more services - partly to attain such a lifestyle but also to pay Krodd's interest and to help with the higher prices of everything. The baker for example baked more and more loaves and started selling them to neighbouring villages. Eventually the wheat from the harvest ran out - long before the next harvest. This had never happened before.I will stop the metaphor before I go mad but say that an economy that is based on increased production of goods (spurred on by those creaming off the top) surely cannot be sustained.

I have no interest in economics but I think I might have made a point.