What is money - An extract from The Tyrants Handbook of Economics

It takes effort and time to produce something. Not everything that is produced is immediately consumed: houses, food etc.. Therefore it is saved - even if for only short periods although the latter are only cash-flow savings and only as a national aggregate do they amount to savings. But savings, properly so-called, from a few months but mostly from a few years to many years are what we are considering here. These are savings that could be called surplus labour; labour that has produced goods beyond what is immediately required for sustenance, be it personal or business sustenance.
Savings considered as Surplus Production

Savings are therefore surplus labour - of time and production above normal requirements. This can be in houses, cows, bottles of beer, biscuits etc. All these things can be exchanged. They are surplus only in the sense that they exist and are not going to be immediately consumed. Thus I may have to eat my last biscuit now or I may exchange it for a chocolate. While it still exists it is surplus. If it is eaten it ceases to be surplus and clearly cannot be exchanged and it is no longer a saving.

For the present money can, in its simplest form, be described as saved production, in this case Biscuits. (Yes the purist will argue that money can exist before it is saved, which of course it can, but that diverts us from what we are now considering - a simple consideration of what money is).

Savings

If I do not spend all I produce then what is left over is called savings - provided the government does not take it in which case it is called Tax. If I am living in a very primitive society I could keep these extra biscuits under my bed. In that way the tax gatherer will not know about them. In overtaxed societies the intelligent individual tries to find a home for his savings which is unknown to the tax authorities. In S Africa it is estimated that about 30% of savings have been moved out of the country for this reason.

What are savings?

Savings are labour/production that is stored up for use another day. Thus if I cannot produce any Biscuits tomorrow because I am ill, I can live off my savings of Biscuits. Savings are a way of keeping previous hard work for use at another time. Savings are therefore surplus earnings - never mind what the Marxists may call them.

They are surplus because they are not immediately required. But what is surplus? For most people enough is never enough! A great theologian, not widely know for his economic insight. observed that the ear is not satisfied with hearing nor the eye with seeing. They spend all they have - (The poor are notorious for doing this, as are governments and this is probably why governments always claim to have no money); In reality (something economists don't often think about) there is a basic standard of living to which people aspire and once they have achieved this they are able to save.

This varies from society to society and the actual standard is based on socio-psychological and cultural perceptions. A rich man in an Indian village would be considered poor by an American automobile mechanic. Basically, once the basic needs of eating, clothing and shelter have been met a person is able so save if he so chooses. In modern society, known as the Consumer Society, the basic needs are really no longer basic at all and there is an attitude of eat, drink and be merry for tomorrow we die - or inflation will overtake us. Savings in Western society could be substantially higher than they are.

A certain amount of savings is desirable and necessary for old age, illness etc. So we can confidently say that wealth lies in savings (provided they are profitably invested and not hoarded) and that savings are surplus to our immediate requirements. To produce a surplus we have to be able to work efficiently enough to produce more than we immediately require.

More about the Nature of Economics

At this point it is necessary to remind you about what I said about money in the paragraph “a Definition of Economics”. That is that economics is the study of human behaviour not the study of money itself.

Economics is the study of people and how they react to money - which is a very different thing. A$100 dollar note lying on the pavement has no life of its own. It is quite incapable of jumping up into your pocket. You have to bend down and pick it up. Therefore economics is the study of human behaviour in relation to money. It has been found over a long period of time that most people react in fairly similar ways to money and economics is based on these broad principles. Economics can therefore never be an exact science because it is impossible to know always and under all circumstances how people will react to it. Economics is based on the almost universal observation that 99% of people will pick up the $100 dollar note - but some won’t!

Hindus entertain the unreasonable idea that cows are in some way sacred - so India is not an ideal place for cattle ranching.

In Ireland, it was recently reliably reported that in the County of Kerry, a number of citizens fell out with their local bank and were determined to drive the bank from the town or into insolvency. One of these Kerrymen had read a book on economics in which he was informed that every bank note issued was a credit owed to the bank and therefore an asset of the bank (which indeed it is and which we shall discuss in more detail later). With this knowledge they determined to destroy the assets of the bank by destroying their own bank notes which they did in a large bond-fire. I mention all this not to call attention to the intellectual superiority of the Irish (of which I am one) but to show the irrationality to which all men are inclined.

Economic behaviour, or the so-called behaviour of money, will only be rational insofar as the people who handle it are rational.

Inflation and A W Philips

Both Keynesian and Monetarist economists were primarily concerned with the demand side of the economy - how to stimulate demand and thereby production and concomitantly expenditure. So along came A W Philips.

Philips got the notion that a high rate of unemployment is usually accompanied by a low rate of inflation, and vice versa. (Full employment accompanied by high rate of inflation). Consequently it was thought that if you deliberately caused inflation you could wipe out or reduce unemployment. This is fallacious reasoning. It is obvious that printing money will for a short period cause high employment. You can provide money for gangs of men to make clothes pegs and then throw them away- the problem comes when you have to pay for them.

If the money was used to produce something useful and that could be sold at a profit, then although t there would indeed be a rise in the price of the wood and wire to make the pegs (because of the extra demand) but such increase would be repaid when the pegs were sold.

Furthermore, the demand for pegs, schools and airports is usually fictitious. No money is generated by their construction and therefore the loans cannot be repaid. Real inflation now starts when the money supply is again increased to repay these borrowings. So Philips is partly right - if you increase the money supply to stimulate useful production and provided it is repaid, higher employment can be achieved.

The problem is that Governments think they know better than businessmen what to produce. Business men (and women) have to repay their debts or suffer for their mistakes. Governments can simply print more money. But in the end even they become nervous at the rising inflation: the merry-go-round is abruptly stopped, the workers fired. Now unemployment increases and it is expected that inflation will come down -but it doesn’t. It does not come down because the money supply has not been curbed and debts paid out of real money.

Moneterist theory continued from part 1

Investment in plant and machinery will tend to reduce unemployment because after the machinery has been made someone is required to operate it. If money is spent on non-productive infrastructure, like a grand highway leading up to the president’s palace, or building the palace itself, employment will cease as soon as the project is completed. In such cases the money borrowed was not used to increase real production, it merely increased activity.

It is the difference between building an airport near a small town in the desert and building a factory.

It is important to understand the difference between increasing the money supply and increasing expenditure in one area whilst decreasing it in another place. In the latter instance there has been no increase in the total amount of money in the economy.

If the government wants to reduce unemployment by spending money this must be done from the existing supply of money, then inflation cannot occur. But government projects are usually notoriously bad investments. They are one-off indulgences which involve no continuing process of profitable production.

Investment is generally better left to businessmen. The government can assist by freeing the economy from beaurocratic restraints and allowing the entrepreneur to get on with the job.

Governments initiate the cycle of inflation by directing and encouraging the production of useless goods with borrowed money which has to be repaid. When the project is completed only the debt remains; there is no asset only a liability.

 How is the liability paid? By further increasing the money supply, this time not to produce but to repay the debt. The reason why Keynesian policy appeared to work after the Depression but does not work now is that the spending increase then was mostly on productive goods with real value. This led to full employment and inflation was limited because borrowings were repaid out of the profits of production generated.

The fact is that the monetarist approach also worked for a while to reduce inflation without causing noticeable unemployment. Unemployment did exist but nobody cared because everyone else was doing so well. When this became an embarrassment the monetary policy was relaxed (which means that useless government-led production was entered into and borrowings were not repaid) and of course unemployment declined for a moment.

As we have already seen, borrowing for useless production decreased unemployment while the money is being spent but as soon as the non-producing asset has to be repaid more money is released into the economy which now causes inflation.

Ultimately inflation is caused by refusing to acknowledge and therefore to pay your debts. I do not think that simply increasing the money supply on a one-off basis is in itself highly inflationary but real inflation occurs when further increases in the money supply are made necessary to repay the borrowed money and a vicious cycle ensues.

An occasional and judicious increase in the money supply may be useful to induce a shock to stimulate the economy during a depression but as a continuing policy is fraught with danger. It is too often used to put off the evil day of resolving fundamental weaknesses in an economy.

It is probably true (although no politician would dare admit it) that full employment can only be achieved in theory but never in practice. This is because demand for labour never exactly fits the labour available. This is brought about because of constant changes in labour requirements as production techniques change. People trained for one kind of job may be unsuited to the changed technological requirements of ten years later.

Also it must not be forgotten (although never publicly admitted) that some people are simply unemployable, totally uneducated, shiftless, dishonest or of too low an intellect to be employed in a modern economy.

The number of these people is likely to increase - not because more people are becoming dumber - but because the intellectual demands of technology are becoming greater and out of reach of more people. The gap can to some extent be reduced but never entirely closed by appropriate, market-driven educational policies.

Economics - Moneterist Theory

Moneterist theory placed the blame for the Depression on the wrong monetary policy and believed that it was the duty of government to ensure that inflation was controlled by following a strict monetary policy which would restrict the supply of money to an acceptable rate of growth.

Monetarist economics believes that the supply of money, as opposed to other ideas such as taxation, government intervention etc. is the key to understanding and solving all economic policies. The basic idea of Monetarist economics is that increases in the money supply are a necessary and sufficient condition for inflation.

Monetarism has two doctrines based on the belief that changes in the money supply have a substantial effect on aggregate demand but little effect on interest rates. The first holds that if you dropped ten pound notes over England, the local yocals would rush out and spend it thus driving up prices and stimulating aggregate demand. (Aggregate Demand is a fancy way of talking about all the things people in a society need).

Interest rates would only fall a little as a small amount would find its way into savings. This drop in interest rates would encourage further business expansion. Another school of Monetarists holds that an increase in the supply of money has a dramatic impact on interest rates as there is always the possibility that all or most of these notes would be saved. If this happened there would be a dramatic fall in interest rates. Furthermore, cheaper money (lower interest rates) may not always encourage business expansion.

 Much depends on the mood of the nation. Thus it is argued by the opponents of Monetarism that all that happens from expanding the money supply is that interest rates drop, and people hold more cash, without spending it. This implies that the speed with which cash circulates has merely slowed down to offset the extra cash.

The second belief of Monetarists is that any increase in aggregate demand caused by increasing the supply of money will lead to higher prices and not a demand for increased production. This, I think, a too purist view. There will certainly be inflationary price increases but to say that there will be no increase in aggregate demand is possibly an overstatement.

It seems to me that the monetarist policy is the correct one provided that national psychological and psycho/historical factors are taken into account. Because the latter is often forgotten, economists often appear more like theologians than scientists. Monetarists have traditionally been associated with the conservative and capitalist elements in society whereas the Keynesians are associated with state intervention which stems from a distrust of the functioning of the market mechanism.

Both Monetarist and Keynesian models are primarily concerned with the demand/expenditure side of the economy and for a long time both schools believed that inflation and unemployment could not occur simultaneously because the eradication of the one seemed to cause the other.

THE KEYNESIAN ECONOMIC MODEL

John Maynard Keynes was born in 1883 and died in 1946; he was educated at Eton and studied mathematics at Cambridge as well as taking courses in philosophy and economics.

This Model arose because after the depression full employment did not return. Of course it could be argued that they did not wait long enough or that the Classical Model was attenuated by constant interference with the liaise fare principles on which it rested.

 Keynes posited that total expenditure must be raised to adequate levels to cause full employment. However, it seems to me that total expenditure is already total and axiomatically cannot be increased - another case of Economese.

In any case what are adequate levels? If government spends more by increasing taxation it follows that the public will spend less and therefore no increase in total expenditure can take place. There will only be increases in relative and favoured production at the expense of other things.

In reality, to increase expenditure must mean rather to increase production and this can surely only be done by borrowing - hopefully for productive investment. If the government attempts to do this without fiscal (tax) interference it then must borrow by creating a deficit in its budget and causing an increase in the supply of money and thereby inflation. This led to the old chestnut or conundrum you cannot have full employment and no inflation at the same time.

Keyne’s critics pointed out that focusing on increasing expenditure is like flogging the wagon instead of the horse, or to extend the analogy, it is using the stick instead of the carrot. For expenditure to increase (and hopefully thereby to soak up unemployment) there must be savings available to be borrowed - together with incentives such as a drop in interest rates.

This expectation can be realised up to a point but when that point is reached, and savings have been all invested, and it is then found (as it was found during the depression) that these savings were hopelessly insufficient, the momentum could only be carried forward by borrowing or creating more funny money. (We will return to Funny money later)

This is likely to be expensive and will tend to force interest rates up rather than down (as one of the incentives demands). The exchange rate will also go down, particularly if the borrowing is done from abroad, adding further to the cost of money and thereby once again putting upward pressure on interest rates. This will have the consequence of stopping further spending - the exact opposite of what Keynes hoped for. Thus the Keynesian Model is contradictory. It is of course implicit that by increasing expenditure borrowing must be increased beyond what is naturally available.

None of this seemed to bother Lord Keynes. Real increase in expenditure requires borrowing and foreign borrowing introduces more money into the economic system which causes inflation. Alternatively the government Monetizes its own debt which increases the money supply, and because this happened, and we should not be surprised by it, an impatience began to develop with Keynesian fiscal policy after the war. This led to a new theory of Monetarist Economics, developed by Milton Friedman.

Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management. 

This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C 

Pixels versus Paper - The Future of Academic Books - Unisa Books

Real books versus E-books for Unisa Students - Pixels Versus Paper

Practicality

E-books, and E-book readers are slowly but surely becoming increasingly popular. It is easy enough to read a book for pleasure or leisure on a computer screen or e-book reader but how practical is it for student’s to study from these?

Reading an academic book on a P.C or laptop does allow you to open a word document and then toggle between this screen and that displaying your e-book. This would be done for the purposes of taking your own notes. This process is only feasible if you are a proficient typist. While reading your E-book on p.c or e-reader you can take notes the old fashioned way (with pen and paper).

Costs

The cost of e-books themselves is definitely cheaper than that of real books but then the cost of the e-book reader must be factored in. The current price of an E-book reader like the Amazon Kindle is around R2000. The average price of an ebook is around $7 U.S.D.If one is to buy a Kindle or similar device only for the purposes of study, it does not seem cost effective. Yet, if you are an avid reader the cost of the e-reader will, over time be offset against the cheaper price of e-books.

2. E-books can not be resold which means that you can not recover any cost once you are finished with the book.

Unisa Alumni - Famous and Infamous

As one of the largest correspondence universities in the world it is no surprise that Unisa boasts its fare share of famous alumni. The infamous, however, also form part of the vast number of Unisa graduates. The difference between fame and infamy is sometimes difficult to distinguish and is somewhat subjective. Two Unisa Alumni seem to personify fame and infamy respectively. A comparison between Nelson Mandella and Robert Mugabe clarifies the difference between the two (fame & infamy)

There are also many other very well know Unisa graduates. These include: Kevin Pietersen ( England Cricketer), Tokyo Sexwale and Desmond Tutu, to name but a few.

The opinions expressed in this post are not necessarily those held by Armstrong's Unisa Books.

Let us know what you think of this post. Please comment Below. 

Disclaimer: The views expressed in this article are not necessarily those of L.J Armstrong Booksellers C.C. , its owners, staff or management. 

This blog is managed and maintained by Express Eloquence (Pty) Ltd. on behalf of L.J Armstrong Booksellers C.C