Monday, January 26, 2009

Trading Wealth for Trusting God

Every single piece of American currency I handle has the following four words on it: In God We Trust. I’m sure I’ve been through this mental exercise before, but the more I think about it, the clearer it becomes. So, let me start from the beginning and see if I can unclutter the thinking around economics.

I’m not an economist, but what I’ve been able to learn from studying economic theories is that they are built on principles that are not fully understood by economists. It’s like a physicist trying to figure out why Newtonian physics don’t apply to quantum mechanics. Quantum mechanics determine macroscopic physical behavior, but our trust in the physical world is all in the macroscopic. But physical properties in the quantum world are rather bizarre to macroscopic creatures.

Likewise, people use their money based on observed economic rewards and macroscopic speculations rather than quantum economic principles that are rarely, if ever, discussed in the economic quarter.

So lets think through this…

If I want to eat, I need food. So, I hunt or plant a garden or raise livestock. After the plants are grown and the animals are killed, I need to prepare the food for storage. Growing season only happens seasonally and whole animals are usually too large for me to eat in one sitting. They need to be prepared for storage. This ensures that my livestock and I can eat when the garden lays fallow. Then, the food needs to be processed and prepared for eating when mealtime comes around. At every step of the way, I require tools and I have to spend some time making and maintaining my tools.

All of this takes a lot of work and I would spend my whole life focused on food. But if I have some new and improved tools then can do more work with less effort. I can even have an abundance of food with some time left over for other activities like building a house to live in or making clothes to wear. Those things take tool and better tools could leave me with the capacity to make houses or clothing for others as well as share my food with them and still have some time left over for some leisure.

My grandfather was a farmer in the Midwest. He organized one of the first farming co-ops in the area where farmers pooled their resources together, purchased equipment that none of them could afford on their own and helped each other out for significant gains on their productivity.

My grandfather didn’t have to concern himself with preparing daily meals or making clothing. My grandmother did that. She didn’t have to concern herself with working in the fields. My grandfather did that. Together, they were able to trade what each did for the services of the other. Grandpa brought the food and an grandma prepared it. Grandpa made sure they had a house to live in with furnishings and grandma adorned it and them with available materials.

But they required materials that they didn’t produce on the farm. Grandpa produced much more food than he needed. He sold the abundance for money and used the money to purchase those things they didn’t produce on the farm. Essentially, he traded his abundance for what he needed. Someone else out there was producing what he needed without producing food.

So, work produces things we need or want. We’ll define this as wealth. The creation of wealth happens when people produce something that can be used, exchanged or traded for something else.

There are some things that we don’t produce that we need. Land is an example. The value of land is increased by doing work to it to the ends of being able to make it more productive or by building things on it that people need, like houses or places of business.

There are other things that we don’t produce that we don’t need that we otherwise attach arbitrary value to. These are things like gold. Sure, work goes into the mining and refining of it, but gold itself is worthless as something that can be used to sustain life.

As tools are developed and employed to help us produce things we need, this frees up people to produce things we don’t need. As such, we create various types of art and other diversions for the time we have freed up for ourselves.

Here’s a simple graph:



There are other factors such as changes in value over time that would turn this into a multi-dimensional graph.

The reason I investigate this is so that we can begin to see the relationship between the creation of wealth and trade.

The problem with hyper-macroscopic theories of economy is that they focus only on trade patterns as indicators and fail to distinguish between needs and wants in the creation of wealth.

So, what is the stock market all about? Unless you are carrying money around in your pocket or it’s in the safes and cash drawers at various places of business, all money is placed in accounts that are used to pay various operating expenses of corporations. The people whose money is paying these expenses are the owners of these corporations. Their level of ownership is determined by how much of their money is in each corporation. The method of accounting for this is called stock.

So, where basic trade is simply trading one needed thing for another and currency allows a certain flexibility in doing this, the stock market takes trade to a new level. Now, inasmuch as corporations can rise or fall in value, the ownership of these corporations can be traded for profit. But where does the profit really come from? If the corporation makes its money on manufacturing where real wealth is being created, then the value of the corporation comes from the marketability of the corporation’s product. If the corporation is making things that cannot be sold for whatever reason, then the value of the corporation is reduced to the property of the corporation: the tangible assets. If the corporation is able to sell what they make at a profit and their value doesn’t change, then at least the profit increases the wealth of the stockholders. If the company is able to increase profits over a period of time, then stock can easily be bought and resold at a profit.

But one other factor is almost ridiculous. That is the fact that if stock can be sold for more than it’s really worth, then stockholders can make a profit off the stock aside from how well the corporation actually performs. This is called a bubble. The true value of stock appears to be what the stock is sold for when the true value of stock is actually how well the corporation performs. If the true value is revealed, then the bubble bursts and stockholders lose money. The money went to the former owners who sold the stock for more than it was worth.

Confused yet? It gets worse. Suppose that a corporation doesn’t create wealth, but rather makes profits by trading. This would be something like an insurance company. Some of their profits come from their clients who pay premiums for insurance coverage. On the whole, a client base may pay more than they receive, but the company takes the money and invests it in such things as the stock market.

Other things that get traded are things like gold. The only thing that gives gold its lasting value is what other people are willing to pay for it. It’s like a perpetual bubble. The thing is, it’s been traded for so long it’s a relatively stable bubble. That doesn’t mean it can’t bust, however. If people get to the point where they won’t buy gold for what they once bought it, then gold will decrease in value.

But what are most important are two relationships I don’t see discussed much. First is the ratio between the rate of production and the rate of trade. Second is the percent of production co-opted by extraneous traders. And these two relationships are related.

Lets get back to the farm. Farmer Ralph is working his combine off and bringing in the grain fast enough to feed everyone in the town for the whole year. So, no one else in town needs to grow grain because Farmer Ralph has enough for everyone. Farmer Ralph needs electricity so he exchanges some grain on a regular basis for it thereby feeding the people at the electrical plant and gaining grain for himself. However, one year a drought plagues the farm and for that year, he doesn’t have enough grain to pay for the electricity. Ideally, the value of the grain he was able to harvest went up because he had les of it and there has to be a way to spread around the grain evenly throughout all the people in the town. However, no one is keeping track well enough and now the people who make electricity don’t have anything to eat. They have to stop making electricity so they can go out and find a way to bring in food. The rate of production and the rate of trade have both decreased.

Money is worthless if it’s not being spent. If it’s spent too slowly things like Farmer Ralph’s grain goes to waste and production is made worthless. If it’s spent too quickly, Farmer Ralph either runs out of grain and doesn’t have enough left to trade for the things he needs or the value of his grain goes up and he’s not motivated to make as much grain as he must in order for everyone in the whole town to eat.

You see, the value of such things as land, gold or art is worthless without the creation of new wealth. The creation of new wealth is worthless if it’s not used. And because of specialization and the division of labor, in order for it to be used, it has to be traded.

So, a healthy economy requires a healthy rate of the creation of wealth with a healthy rate of trade.

If healthy trade is compromised by too many or too large bubbles, then when the bubbles start to burst, the rate of trade is significantly diminished and subsequently diminishes the means for maintaining the rate of the creation of wealth.

To put it simply: If no one works, no one gets paid. If no one gets paid, no one works.

It’s not my intent to go into the reason why the big bubbles happened. Suffice it to say that there became more leaches on the trade side than workers on the creation side. And the government has seen fit to reward the leeches for the purpose of bringing about socialism in the United States. After all, what happens when the economy fails? It’s time for the government to hit the reset button.

When the reset button is hit, the argument will be that capitalism has failed. There will be substituted for it a thing that looks like severely regulated capitalism. It’s socialism in disguise. The government has been slowly being reconfigured to manage the rate of the creation of wealth as well as the rate of trade. We’ve already had subsidies and interest rate control. There will be more.

The problem with socialism is that with a guaranteed paycheck, few are motivated to work efficiently. That’s why socialist governments breed some of the poorest countries. People allowed to earn what they can make by working effectively and efficiently will be motivated to create plenty of wealth and an economy can thrive.

Once again, the point of this article: If no one works, no one gets paid. If no one gets paid, no one works.

In a socialist state, people get paid a pittance regardless of the work they do. They will therefore labor to produce only a pittance. Since they only produce a pittance, the government can only afford to pay them a pittance.

It’s coming.

And the only way out is to trust God. Because money is increasingly worthless.

(It brings a depth of meaning to the rich young man in Matthew 19. No?)

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3 Comments:

Blogger Chris Knight said...

JP for president!

Tue Jan 27, 10:36:00 PM GMT-5  
Blogger Jim Pemberton said...

Why, thank you, Chris! I figure me and Sarah Palin could be on the same ticket.

Tue Jan 27, 11:11:00 PM GMT-5  
Anonymous Cash Matrix said...

Hey , I finally decided to write a comment on your blog . I just wanted to say good job . I really enjoy reading your posts.

Wed Jan 28, 05:58:00 AM GMT-5  

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