Archive for May, 2010

An Economic Parable

May 28, 2010

A group of individuals arrive at the shores of an assumed to be deserted land. Well, there may have been some a-priori occupants but they only have knives and the new group has guns. The earlier occupants are quickly dispatched. The new group settles onto the new land to begin an new economy. 

Some in the group are hunters, some are farmers. Some have a skill at turning clay into pots that store food stuffs for the long winters. Some have a skill at turning hides and furs into clothing to stay warm during those long cold winters. Others have a skill at turning trees into lumber and thence into shelter, yada yada yada, long cold winter. Some actually have little or no skill and lack the intellect to develop same, but they are able to provide value by their labors and assist the skilled individuals in their respective tasks. 

Early on the economy was a simple barter system. Furs for lumber, grain for leather, shelter for clay pots. Within the small group it was perfectly reasonable to maintain a book of ledgers to ensure the barter was fair (that is, bilaterally agreeable) and completed or fulfilled. Clearly the farmer may need some assistance while the crop was growing but before it was harvested. The laborer desired some record of their labors to trade for the future harvest. A record was needed to ensure such trade occurred. 

That barter exchange was recorded in the great ledger and the laborer was given the right to obtain some agreed upon amount of grain whence the harvest occurred. In like manner the hunter provided a fur credit to the timber person in exchange for future shelter. As the shelter was completed that barter credit was reduced. Should the shelter credit exceed the fur debit the hunter would be obliged to provide additional furs during the following hunting season. Ditto the farmer and potter and so on. 

Cleary one of, if not the first issue the group needed to settle was the barter level of exchange. How many furs, and of what type would be required for a shelter of some defined size. How much grain and fruit, what type, what condition, is equivalent to the farm laborer assistant for their labors. Only through much discussion, and some argument was the great barter book of ledgers (GBBL) developed. And it was never really a settled matter. As conditions and requirements varied so too did the individual barter levels between the various skill groups. It was a dynamic system, flexing with the winds of change. 

As the group procreates and their population grows new issues arise. New skill sets develop such as doctoring for the sick or injured. Caring for the children so others can be productive. Caring for the elderly. Maintaining the ever changing GBBL. Each of these new skills needed to be correlated with the original skills in the GBBL and again, as circumstances varied so too did the new skills values need to be adjusted. Too many individuals desiring to trade child care labor for grains and fruits reduced the value of that labor. Too many farmers and not enough hunters ensured full belly’s and cold backs. Again, the value of those individual labors and skills required constant adjustment in the GBBL. 

Enough the people cried. The GBBL is beyond recognition. The scribes cannot keep up with the population growth and the constant, daily variations of the barter exchange rates. We need a better system. One that permits rapid, individual adjustments on demand. So, computers were born? No, I’m kidding. Actually money was created. And so, in a massive group project the people spent one long cold winter converting the GBBL to a money system. Creating their money in one ducat denominations they laboriously converted their GBBL exchange rate to a ducat exchange rate. One that all agreed fairly represented the values of the different skills, labors and goods the community produced. 

But the people also understood, intuitively and literally, that the money being created must relate to the skills people possess, labors they provide and goods they create. Further, that new money can only be created in response to a new amount of goods being provided. Else the value of that money would decline and all would suffer. That is, assume the group creates 1000 ducats for the entire community economy. And that those ducats are distributed according to the skills, labors and goods based on the new money exchange rate system (MERS) which in turn was originally derived from the GBBL. 

Yet suppose one member (a thief working as a scribe) secretly forges another 20 ducats for their own purposes. The thief has reduced the value of everyone’s skills, labors and goods by 2%. Why? Because the thief – who provides no skills, no labors and no goods – quietly spends their 20 ducats to purchase a variety of goods and services that they would not otherwise possess. And that spending is in addition to the spending of the ducats legitimately acquired. Others in the community, desiring some of those same goods and services find a shortage and they begin to bid amongst themselves for the now scarce items raising the cost of such to equal the demand. The thief, amazed at the success of this nefarious deed, plots their next turn of fraudulent money creation. 

The difficulty for the group is that new money must be constantly created in response to new goods and services that are created. As a child matures to a productive adult they provide a service or create a good that did not and would not otherwise exist. To facilitate the integration of that item into the economy requires additional money creation but only in proportion to the goods and services being provided. As the new money is created the thief recognizes a marvelous, if opprobrious, opportunity. As the community creates new money in response to population growth the thief will forge a new batch as well. Indeed the thief rightly recognizes that as the money supply – along with population – grows the opportunity to quietly insert the forged ducats improves until it is hardly an issue for the thief at all. 

If the productive population grows at 5% per year (long cold winters, yada yada yada) it will double in some 14 years. [That assumes a population compounding; without compounding it will take about 20 years.] The economy would then have some 2000 legitimate ducats circulating due to the doubling of the productive members.  The thief meanwhile continues to forge 2% each year and adjusts for the growing money supply. Over the 14 years the thief actually creates some 392 ducats or some 20% of the total money supply (392 forged/1980 legitimate)! So a simple plan to steal just 2% per year results in a 20% theft over 14 years. Indeed, if one accurately counts the money in circulation and if the thief adroitly forges new ducats right alongside the valid ducats the actual money supply becomes not 2000 (1980 mathematically) ducats but 2400 ducats (or 2372 mathematically). The purchasing power of the legitimate and productive members of the community has been methodically reduced by some 20% in just one generation. 

The problem for the community is that some of the other scribes have observed that one of their brethren has been curiously non-productive yet continues to acquire a marvelous supply of community goods and services. On inspection they discover the ruse and confront the thief about the forgery. The scribes being largely unhappy at the lowly position they occupy in the MERS and recognizing their critical linkage in the maintenance of that MERS decide not to expose the thief but to emulate them. At least most of the scribes, uh, subscribe to that philosophy. The few remaining are either blissfully unaware or threatened into submission. 

Now the forgery begins apace. Each of the scribes committed to undermining the money system (SCUM) demands a share of the forgery. Indeed their demands are so great that the modest 2% theft rate is wholly insufficient. The SCUM decide to bump up their forgery rate to an obscene, but lucrative 10% each year. Awesome. But the scheme takes a coolly cynical and sinister turn. For the SCUM recognize that their new theft rate may be a bit obvious. As a group the SCUM decide to shower some their new found largesse to the benefit of a select few members of the community. The very members whose support is vitally necessary to the SCUM remaining in their positions as scribes. After all, the community may, if it so desires, change the individuals working as scribes. But by enlisting the support of key members of the community the SCUM ensure their positions and hence, their theft. 

What happens now is painfully obvious. The community is so large and diverse it is difficult for any one member or even a small group to understand what is happening in their midst. For while they seem to be prospering, they each have more ducats this year than last, they also seem to be trapped in an economic paradox. With each step of growing prosperity, more ducats, they seem less able to obtain the goods and services required. Indeed, it is only by committing their future service and goods that they are even able to maintain their current standard of living. It is a curious paradox indeed. 

At the new, higher, theft rate of 10% per year the SCUM reap vast rewards – as do their key supporters. Indeed, in just 10 short years even as the community economy grows apace at a compounded 5% annually the SCUM ravage enough of the new growth to effectively steal half of the community wealth. In just those 10 years the SCUM rise from having stolen 20% of the economy (as measured by the forged/legitimate money supply ratio) to having stolen an additional 83% of the economy. Combining both the original theft and the new theft the SCUM have stolen an amazing 95% of the community economy as measured by the forged/legitimate money supply ratio. 

And the people of the community are left with a conundrum. How can they continue to improve their economy with growing population and growing production of goods and services yet lose individual economic ground each year? True they each have vastly more ducats than just a few years prior but strangely those ducats just don’t purchase as many goods or services as they used to. Are the productive members really better off? Can they finally gather enough disenchantment with the SCUM to remove them from their high offices? Will they revolt against the key SCUM supporters? Or will they succumb to the temptation to join them?

100 Population Base   1000 Money Supply
5% Population/Money Rate   2% Old Thief’s Rate
        10% SCUM Rate  
  Population Money Thief      
1 105 1050 20      
2 110 1103 21      
3 116 1158 22      
4 122 1216 23      
5 128 1276 24      
6 134 1340 26      
7 141 1407 27      
8 148 1477 28      
9 155 1551 30      
10 163 1629 31      
11 171 1710 33      
12 180 1796 34      
13 189 1886 36 Total Thief Amount  
14 198 1980 38 392 20%  
15 208 2079 198      
16 218 2183 208      
17 229 2292 218      
18 241 2407 229      
19 253 2527 241      
20 265 2653 253      
21 279 2786 265      
22 293 2925 279      
23 307 3072 293      
24 323 3225 307 SCUM Thief Amount  
25 339 3386 323 2813 83%  
    Total Thief+SCUM 3205 95%  
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