Ecological Economics: Principles and Applications Chapter 14: Money Herman E. Daly and Joshua Farley. Economics Joke about Money (because money is a funny thing…). It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted.
It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit.
On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.
The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.
The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.
The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.
The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the pub.
The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit.
The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.
The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.
At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.
And that, is how the bailout package works.
Is it “Money is the root of all evil.” or “The love of money is the root of all evil”
Use Value and Exchange Value
Transactions with and without money
Virtual Wealth and Fiduciary Issue
Creating Money - Money as a symbol
The Fractional Reserve System
Money as a Public Good
Money and Thermodynamics
“Anyone who is not confused by money probably hasn’t thought about it very much.”
A medium of exchange
A unit of account
A store of value
To measure exchange rate a unit is needed
and that unit must hold its value long enough
to effect both sides of the transaction.
Use value arises from the actual use of commodities. There is a physical limit to use value. Self limiting.
Exchange value is abstract, inheres in money and does not necessarily have any physical embodiment. No obvious limit to the accumulation of exchange value. Not self limiting.
Marginal utility &
the diamonds-water paradox
A function of scarcity. Total utility of
Water is enormous but we only pay
For water at its marginal utility.
C - C* Straight up bartering
C - M - C* Money as a medium. The goal is to increase use value.
M - C - M* “Capitalist circulation” Money makes commodity; commodity sells presumably for more money.
M* - M = ∆M Profit
A major transition from increasing use value to increasing exchange value.
Real wealth – commodities – obey the laws of thermodynamics. Money, a mere symbolic unit of account, can be created out of nothing and destroyed into nothing. There is a physical limit to the accumulation of use values. There is no obvious limit to the accumulation of exchange value. Fifty hammers are not much better than two (one and a spare) as far as use values are concerned. But in terms of exchange value, fifty hammers are much better than two, better yet in the form of fifty hammers worth of fungible money that be spent on anything, anywhere, anytime.
Frederick Soddy - “Wealth is the positive quantity to
be measured and money as the claim to wealth is a debt.”
Virtual Wealth - is the aggregate value of the real assets that the community voluntarily abstains from holding in order to hold money instead.
The value of a dollar is determined by the wealth of a community divided by however many dollars are in circulation.
In 1914 he was appointed to a chair at the University of Aberdeen, where he worked on research related to World War I. In 1919 he moved to Oxford University as Dr Lee's Professor of Chemistry, where, in the period up till 1936, he reorganized the laboratories and the syllabus in chemistry. He received the 1921 Nobel Prize in chemistry for his research in radioactive decay and particularly for his formulation of the theory of isotopes.
His work and essays popularizing the new understanding of radioactivity was the main inspiration for H. G. Wells's The World Set Free (1914), which features atomic bombs dropped from biplanes in a war set many years in the future. Wells's novel is also known as The Last War and imagines a peaceful world emerging from the chaos. In Wealth, Virtual Wealth and Debt Soddy praises Wells’s The World Set Free. He also says that radioactive processes probably power the stars.
In four books written from 1921 to 1934, Soddy carried on a "quixotic campaign for a radical restructuring of global monetary relationships", offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was "roundly dismissed as a crank". While most of his proposals - "to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort" - are now conventional practice, his critique of fractional-reserve banking still "remains outside the bounds of conventional wisdom".
10 minute Video on:
The Fractional Reserve Banking System
“Wealth is the positive quantity to be measured and money as the claim to wealth is a debt.”
The value of a dollar,
then, is the virtual
wealth of the community
divided by however many
dollars are in circulation
These ideas are why
Some people get
Wound up about the
If ‘r’ is the required reserve ratio, the
demand deposit multiplier is given by:
1 + (1-r) + (1-r)2 + …+ (1-r)n = 1/r
The monetary value of the token, the profit made to the issuer and creator of money is Seigniorage.
Question: Who gets the seigniorage?
Seigniorage from currency goes to the government. Seigniorage from demand deposits goes to the private sector, initially to commercial banks.
Money does not honor the laws of thermodynamics as it can be created and destroyed.
The Fractional Reserve System
Assuming just 10% reserve requirement
$100 of new cash deposit can create $900
In demand deposit.
$900 “new money”
In case we missed it: 10 minute Video on:
The Fractional Reserve Banking System
Money functions in some ways as a public good
Money is nonexcludable: in fact money only has value if everyone can use it Money is nonrival: a dollar spent does not decrease in value.
The virtual wealth of the community could be treated as a publicly owned resource. BUT money is not treated as a publicly owned resource. The money supply is privately loaned into existence at interest encouraging a strong growth bias with cyclical instability.
An alternative money supply system:
Government controlled supply system with money printing and taxing or by increasing or decreasing international payments balances.
Or local currencies and local Exchange Trading Systems
Money can be both created and destroyed thereby forgoing the laws of thermodynamics. The problem is that though money (the symbol) does not adhere to the laws of thermodynamics, wealth does.
Exponential growth of wealth
64 doublings of grain on a chess board
18,446,744,073,709,551,616: a quantity greater than 1,000 years of wheat production
The world can’t even handle 64 doublings of a grain of wheat
How many doublings can the world handle of populations? Of plastic waste?
How many times can we divide by half the number of species of plants and animals?
M - C - M* treats money as an end rather than a means
This drives innovation for making money rather than production.
Currency Speculation can be considered M-M*-M**
Limits to the growth of money:
As long as the production of real goods and services increases, more money is required to pursue them but this kind of growth cannot continue on a finite planet.
Growing financial assets grow driving the demand for money. Financial bubbles inevitably burst.
Speculation can serve to transfer resources from those who produce to those who merely speculate.These transfers are tied to the above two limits.
So money is not really exempt from the laws of thermodynamics…..