Saturday, 2 January 2010

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.

11 comments:

  1. eeh bah gum, bah 'eck, you got that well sorted, miss!

    There must surely be limits to growth, in fact we might well have hit them, in terms of the planet's simple ability to sustain levels of human population.

    But I don't think that necessarily means limits to the improvements to quality of life, whatever we might take that to mean.

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  2. Yes I have another theory about how now we all have our basic needs pretty much met in the western world we could/should be moving more quickly up Maslow's hierarchy of needs...and 'jobs' should start reflecting this...they are not though (and a lot of our jobs are still about helping others get off the first rung).

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  3. I need economics for really effin stupid simpletons. Please try to keep more within my venn diagram area. Thank you xxx

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  4. A few of us only need 1 pair of sandals, shoes, wellies & the minimum of clothes to suit all seasons; if everyone followed that style what then would happen to fashionistas & the support industry. I always buy a 2ndhand car & they are available because others buy new ones! Money like energy has to circulate to be of use; your friend appraised economics correctly.

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  5. Hey Molly, I like your metaphor. Economics, or rather, the mechanism of corporate capitalism is a VERY deep rabbit hole. Check out this splendid free .pdf book:

    http://www.hackcanada.com/canadian/freedom/mary_croft.pdf

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  6. It should be noted that Frudd's partner will almost certainly drive a 4x4 to school to drop the kids off, I'm with your dad on that one, big time.

    I could also go into immense and imaginative detail of my assessment of Frudd, his character, his self view, but I won't because it will just be very rude about "That type of person" and probably a bit dull.

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  7. OK...now to 4X4s!!! Yes it is bizarre that people drive them to ferry their kids round towns and cities. They
    *are potentially very dangerous to other car users/pedestrians/cyclist
    *use more fuel that average cars (although let s/he who is on the 'green' moral high ground cast the first stone) and
    *are a blatant 'show' of financial wealth that some people feel the need to show...

    Which bit is most irritating, one of these or something I haven't thought of?

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  8. What surprised me as I moaned to my Business wife about how big the new Range Rover Carnivore Sport was and what a daft car it was (he's a bit of a fan) he informed me it was an inch wider than my car, and 7 inches shorter... Oh.

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  9. Those bloody high cars taking up our skyline.....

    I would like a business wife to talk these things through with.

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  10. I was sent this...in response to this post....great stuff

    That is clever but unfortunately I work for a bakery in a bucolic village like Eck, and my particular niche in the chain there is "delivery guy" who takes it to the big city... which means I can't consider your example metaphorically. But I know some of these people...the Frudds I know though don't pay the baker more, they pay less--a 25% discount of the regular wholesale (not retail--we sell to stores) price. In the bakery biz there is no exclusivity to the market that allows them to triple the price and still sell successfully. (Our bread is pricey organic stuff, if the price was tripled it would be $15-22 a loaf!) So Beck the baker prefers to pay me to go flog the product at full price--we only sell to Frudd to cover markets we cannot logistically reach ourselves, because the return to us is so much lower. This keeps me employed by Beck the baker of Eck (his real name, ha!) while one of the Frudd brothers has gone bankrupt and the other writes postdated cheques which ain't a good sign...its not the most secure business being a middleman.

    Also, I don't know what kind of a math-loser your nameless baker is, but Beck the baker makes me pick up grain and other supplies in all the towns and cities I deliver to...if you expand from a local to a regional business model, you have to expect you won't be able to get all your supplies locally. Another reason to keep the delivery job in-house.

    (However I understand that the global trade in Scotch whisky is currently working pretty much as you describe the bread business in Eck & district--because there is a limited global supply of real Scotch, and it is not perishable, unless it is spotted in a room where me and my musician friends are.)

    The other matter is that bread like many other goods is perishable, and thus by the end of the week when it's stale, no one will buy it at the retail price, and not many at the 50% discount either. And I guess that is why gold costs $1100/oz today, and so does Scotch. Arrgh.

    Krodd hasn't done that well lately either. Prices don't go up in a straight line, and if they have been going up, (which attracts buyers' attention) they might be already too high and about to crash (too many Krodds have been running around), but next year when the price of broomsticks is a quarter of what she paid for a warehouse full of em, she might have to sell them anyway, cause she needs to eat and send her kids to the London School of Economics. Even if the price did go up, the value of her money has gone down due to inflation.

    Trigg however did very very very well...until the mob of angry Eckians arrived with their pitchforks and torches.
    Bill's dubious
    January 31, 2010 09:07 AM

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