Wednesday, August 28, 2013

What Is Money?

"Money is not an invention of the state.  It is not the product of a legislative act."

Carl Menger (1840 - 1921)
Founder of the Austrian School of Economics

What is money?  We all know that the classic definition of money is something used as a medium of exchange, such as coin and paper.

But those coins and paper can only be used when they are accepted by both parties in the transaction.  If I write "$ One Dollar $ " on a piece of paper and try to spend it, it could act as money only if it was to be accepted by the other party.

In addition to his recognition as the founder of the Austrian School of Economics, he is also known for two other contributions.

First, he developed the "marginal utility of goods" theory.  This is how he resolved Adam Smith's paradox of water and diamonds.  What bothered Smith was why diamonds have greater value than water when water is obviously necessary for life and diamonds are not?

This is where Menger's "subjective theory of value" comes into play.  When water is needed, say to water a garden, the first buckets are more valuable than subsequent buckets.  The more buckets that come into play successively reduces the value of each one.  A thousand buckets will not have equal value as the last many hundreds might not be needed.

Diamonds have value because of what economists call "derived demand."  Diamonds are valuable because of the degree of importance of wants they satisfy.  The derived satisfaction from a beautiful diamond creates value and demand.

Menger used this "subjective theory of value" to propone one of the most valuable insights in economics:  that both sides benefit from an exchange.  People will exchange something of lesser value for something they consider to be of more value.

This led Menger to his second big contribution in money and banking to explain how money came into being.

A man on the corner with a sign that reads, "Will work for food," is offering himself as money to pay for a meal.  He might clean a garage or rake a yard and is fed for his work.  That is a form of money.  It could be considered barter.

But why, considered Menger, does not barter simply become the accepted exchange we call money? 

My wife has a lot of shoes.  You shake your head yes, of course.  But it is unlikely she could trade those shoes straight up for a car.  She might be able to barter those shoes for something else, and that again for something else.  Over time, conceivably she might, after lots of exchanges, actually derive the ability to trade for a car.  But this is tedious!  It is uncertain!  It is very cumbersome, much more so than selling them for a more acceptable means of exchange, like paper money.  If she had enough shoes to sell, perhaps, she could buy that car more easily!

The value of those shoes is "subjective."  What is a car worth?  What someone is willing to pay for it, and what a seller is willing to let it go for.


My wife's shoes, LOTS of shoes, become a form of money, insofar as she can sell them for a medium of exchange.

Any good that is widely accepted can become money.  Roman soldiers were paid in salt.  We derive the word "SALary" from the Latin word for salt.  A blog on this concept can be read here:  The Salt Of The Earth.  Indeed, our word "pecuniary," which means relating to money, comes from the Latin word "pecus," meaning "cattle."  In some societies, cattle, for a time, served as money (and accepted as marriage dowries).

What is not money? 

Banks and lending institutions create money through lending.  They have money available to lend and advertise an interest rate which is charged to borrow.  The bank is required to retain a percentage in "reserve" to back the amount being lent.  As this lent money is paid back, more is returned to the bank than was originally lent, and more money has been created over time in the transaction.

Is money created when a central bank pumps huge amounts of money into a stock and bond market?  

When conventional monetary policy became ineffective an idea was created and implemented.  Disingenuously called "quantitative easing," this policy "injects" electronic transfers into the system through the purchase of stocks and bonds.  This has sent the stock market to historic highs.  But it's a house of cards.  As it does so existing stocks and bonds in retirement policies, and the value of the currency itself, are devalued.  It is a back door way of doing to the economy what the government of Greece tried to do front door when they announced their desire to tax bank accounts.  The subsequent uproar forced them to back down.  Quantitative easing does pretty much the same thing, but it is not so in the face and accepted by an economically-ignorant populace.

Remember Menger's quote above - money is not the creation of the state. 

Notice how the stock market has reacted in the past few weeks to the "news" that a "tapering" of such central bank quantitative easing is imminent.

Is money created when the gubment spends itself broke (again and again) and decides, with back door "continuing resolutions," to increase its "ability" to spend outside of any Constitutionally-required budgetary process?
Does this "legislative" act to borrow more actually create money?  Or does it simply create more debt which will have to be repaid by future generations via higher taxes and a lower standard of living?  The answer to that is obvious.  Peter is not paying Paul, in this case Peter is robbing Paul.  And of course it's unsustainable.  And intentional.

Remember Menger's quote above - money is not the product of a legislative act.

There would be subjective value to this should both sides benefit from the action.  But they do not.



Tuesday, August 20, 2013

What Would Sennholz Say Now?

"If we cannot return to fiscal integrity because the public prefers profusion and prodigality over balanced budgets, we cannot escape paying the price, which is ever lower incomes and standards of living for all."

Hans Sennholz (1922-2007)

The hard-to-understand, but perfect, word prodigality is derived from the word prodigal, as in the Parable of the Prodigal Son, and refers to lavishness.

Well, lavishness has certainly been the order of the day these past few years!

Despite tweaking statistics with measurements heretofore unknown to try to make things look better, we are in an era of unprecedented spending and deficits, debt and unemployment.  More Americans have been and are unemployed for longer than 12 months than in any time in US history.  And 300,000 or more file for new unemployment claims each week, seemingly unknown to the "public" Sennholz refers to above.  More Americans live below the poverty line, despite, again, tweaking the numbers to try to improve the statistics, than ever before in history.  And the beat goes on. 

This will, as Sennholz states above, have a price and that price will be lower incomes and standards of living for all.

Best known for his work in money and banking, Dr. Sennholz has been an under-appreciated member of the Austrian School of Economics.  His ability to propagate economic thinking among the economic under-educated is legendary.  His ability to teach with his economic rhetoric rivals any in economic thought and history.

In 2005 he wrote an analysis called "The Economics of Jimmy Carter," in which he dubs Carter "the worst president ever."  The paper's position is simple.  He says that Carter was "unaware of the inexorable economic principles that direct and determine economic life."  And further, and this gets to the teaching and economic rhetoric that makes him so understandable, "Consumers determine not only the prices of consumer goods, but also those of the factors of production, that is, land, labor, and capital.  They determine and pay the wages of every worker.  Carter never tires of expounding his displeasure and irritability about the income and wealth of many capitalists and about government policies that seem to favor the rich."

Um, sorry to state the obvious, but who does that sound like now?

Carter policies crushed consumption and then went before Americans to accuse us of a "malaise."  And then he said we needed to get over it and get to work! 

What he failed to understand, and what the current regime fails to understand, is that the consumer drives the economy.  And, further, the small business drives the economy as well.  If policy does things to impede the development or continuance of the small business, surely a malaise will follow, incomes will lower and standards of living will not improve.

But "they" already know that!  And yet "they" persist in trying to shove "their" doctrine down our throats.  And we see it unfolding exactly as Orwell said in Animal Farm, "All animals are equal, but some animals are more equal than others." 

Notice how our "leaders" always say - do as we say but not as we do.  They walk, after all, on two legs...  The rest of us?  Well...

Given our current international, legislative and economic situations and the continuing devolution of our society and way of life, I wonder, gee, I wonder, how Sennholz would define the worst president now?

Sunday, August 11, 2013

Five Entrepreneurial Skills

"The five essential entrepreneurial skills for success are concentration, discrimination, organization, innovation and communication."

Michael Faraday (1791-1867)

The well respected British scientist Michael Faraday would know about all those characteristics of an entrepreneur.

Despite little formal education, he became one of the most influential scientists in history.  Albert Einstein is said to have had a picture of Faraday in his study.  His contributions to the fields of electromagnetism, electrolysis and electrochemistry are well known and held in the highest regard.

Even though his mathematical abilities only approached the simplest algebra, he was able to simply and clearly explain his ideas.  Later it took James Clerk Maxwell and Albert Einstein to describe his work mathematically.  They both stated that Faraday was in reality a mathematician of the highest order, saying that future mathematicians would benefit from Faraday's mind.  That must have been a thought not considered by Faraday in his time! 

The international unit of capacitance called a farad, and the Faraday Constant are named in his honor.

Having various labs and working with many people, Faraday developed many principles and inventions.  We use his electric design called the Faraday Cage as a means of enclosing and shielding microwaves safely inside boxes in our kitchens that we use to cook with.  His work in what scientists call "field theory" lead in part to the later development of microwaves.

He knew something of concentration, discrimination (not in the modern "political" sense - he was foreign to our current use of the word), organization, innovation and concentration.  And he was familiar with entrepreneurship.  His work lead to breakthroughs in electromagnetism and electric rotary devices, chemistry and gases, and education of the same to young and old people alike in the form of fun Christmas lectures.  

Faraday said, "The lecturer should give the audience full reason to believe that all his powers have been exerted for their pleasure and instruction."  THAT should be the basis for education itself!

During one of his popular Christmas Lectures Faraday suggested to William Gladstone that his work was only appreciated by the British gubment because they found ways to tax it.  Then he turned down that same gubment when they wanted him to use what he discovered regarding chlorine gas to develop chemical weapons for use in the Crimean War in the 1850s.  His ethics prevented him!  He said he wanted his work and his behavior to be consistent with "the laws of nature." 

To be a successful entrepreneur one must be consistent with the laws of nature.

The laws of politics rarely are.

Friday, August 2, 2013

Leadership Exploits Opportunities

"Results are obtained by exploiting opportunities, not by solving problems."

Peter Drucker (1909-2005)

Exploit is a good word.  Often used in a negative context, it is not a negative word at all.

Oxford says exploit means "to make good use of a resource."  It comes from the Latin word explicare, meaning "to unfold, to progress."

So, if there are difficulties, even the kind of planned chaos and difficulties as we are experiencing now, we need to unfold a better way, and progress through the exploitation of opportunities.

We need leadership that is not "I" oriented, does not flatter certain groups and besmirch others, does not portray an illusory personality that is contrived and generated by handlers, or speaks only words written by others. 

Leadership has vision and lifts the vision of others to higher levels.  Leadership has a core and attracts others to its principles and values.  Leadership is experienced and seasoned and raises the performance of others.  

Leadership has built its own personality beyond the normal limits and such that others want to emulate it.


Leadership does not encourage and expand dependency.  It does not worship inefficient and costly energy "sources" (wind and solar) in favor of what is super abundant and obtainable in a way that expands the economy (oil and nuclear).  It does not waste land use to produce destructive ethanol, or kill real energy resources with government mismanagement, unending taxation, regulation and litigation.  It does not create water "rights" that favor pretended species preservation over the human species, encourage education debt loads that rob the talent of youth, depreciate the military with disarmament, or change banking with zero interest rates and favoring the monopolistic creation of huge entities over small, community-oriented institutions.  Leadership is not buoyed by a sycophantic press that week after week after week for years says, "Woohoo!  Only 340,000 new applications for unemployment benefits last week!"  And then three days later that number is adjusted upwards and it claims that unemployment went down...  It does not unconstitutionally seek to acquire and store huge, huge, huge data on American citizens for political use later.  Once that is woken up to it will be too late.

I could go on.  For the first time in what, forever (?), there is true capital flight from the United States, a damaged credit rating and a high-technology, brain-drain emigration that is frightening.

Economics says that the concept of "free" will always be abused.  Simply put, when "free" is introduced, demand grows and supply is crushed.  How long does the free tray of cake last in the morning at Costco?

"Free" health care (cough) will encourage the entitlement of general hypochondria, discourage innovation, and become so NOT affordable so quickly that euthanasia will be the ultimate "solution."

"Free" drugs will mean addiction, real or imagined, the alteration of brain function, and create a society that cannot get by without a little help from its "friend."

"Free" money with zero interest rates is leading to crony capitalism on scales not before experienced!  Again, I could go on.

But none of this benefits the society in general.  Or lifts its vision.  Or attracts the whole to worthy principles and values.  Or increases the performance of individuals and groups.  Or builds the personality of a nation that has always sought to lead and shine.

So, what should be exploited?  Capitalism and free-market, supply-side economics on a scale and with a ferocity that was experienced in the 80s.  What was created from the vision proposed then?  Over nearly 20 years, about $77 trillion in private assets, 45 million jobs that weren't part time but real, the influx of competent, smart, high-tech, thinking, educated people who were interested in creativity and entrepreneurship, and waves of tremendous foreign capital introduction.

It was the opposite of "malaise."