Tuesday, May 21, 2013

The Multiplier Theory of Marbles

"I learned long ago that if you take money out of the marbles game and put them into a pile on the side they aren't being used in the game."

Judith, the Hairdresser

That was very impressive to hear!  It was The Multiplier Theory of Marbles!

This weekend I had occasion to go to the hairdresser.  No, not for me.  I went to spend some of the business profits that I am paid and call discretionary money.

As the benevolent capitalist in my family, I go into the market place every day to apply and multiply my talents in favor of pecuniary return, which I call profit.  I was asked if we could spend some of that profit on the family hair.  Being a capitalist, but a benevolent one, I agreed.  And was dragged along to the hairdresser as we had more than one thing to do.

The salon had eight chairs, and only one was being used.

As the members of my family were waiting to be helped, the first in line to receive us was a hairdresser named Judith.  Judith was older than any of the other employees in the salon, 50s I guessed, and not festooned with the same flamboyancy of hair or dress.  Interestingly, the youngest member of our group liked Judith immediately and sat down.

In such circumstances I like to poke my beak into the nest to see how things are going.  Since there were other chairs available, I waited a while and then pulled one up and sat down.

Judith was very pleasant and I began talking with her.  I asked my favorite question - "How's business for you Judith?"  (I like to use the person's name - it was on her name tag.)

She frowned.  "People don't have as much money as they used to.  So much is being taken from us we are all having a hard time just living.  Fewer people show up like you have.  I learned long ago that if you take money out of the marbles game and put them into a pile on the side they aren't being used in the game."

Wow!  I had never heard the economy referred to as that before!  Here she is struggling in a micro-economic circumstance, with her many empty chairs, and simplifying the macro economy down to a game of marbles!

She went on.  "When so many marbles are taken out of the game, the game slows down, fewer people are interested in playing.  And it's harder to win the marbles that are left.  And that pile on the side no longer used in the game isn't helping it at all.  I don't care what they say, things aren't getting much better."  

That is pretty astute economic analysis!  I said, "Do you know what that is called in economic terms?"  She did not.  I said that when money is left in the economy it has its own velocity as it travels around the economy, used for this and that.  It is used for basic economic activity.  People have more to be able to spend more, people invest more, and people use it to start businesses.  More money for investment leaves banks with more to lend.  As they lend, and that money gets used in business start ups, it is called the "multiplier theory of money."  The money creates activity which creates more money which creates wealth.  The economy grows.  The money is essentially multiplied!  

Removing so much from the economy, or the game of marbles as you put it, there is less floating around and less for economic wealth creation.  There is less money for people to get their hair done.  And the money is negatively multiplied.  Less is created.  The economy slows down.  There are, as you say, fewer marbles left.  And yet they want to make the pile on the side even larger!

"Isn't that the truth!  You really explained it to me!"

No, Judith, you explained it about as well as I have ever heard!  She understands and explained 


Here we have a nondescript hairdresser in a nondescript hair salon understanding macroeconomics in a way few do.  She has woken up.  Small business truly is the engine of the economy.  Judith wants the engine to make things go.

I think more and more people are beginning to wake up to free enterprise.  Is it in time?

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