Money as a Dynamic System

Economic analysis is almost always presented in the form of words and static pictures (graphs). Like all verbal descriptions it is limited to the extent that it presents a metaphor that does not fully describe the phenomenon. We attempt to derive some kind of meaning from countless graphs representing various aspects of the economic condition at various times. We track the gross national product, the unemployment rate, housing starts, pork belly prices, the interest rate and thousands of other metrics, many of which we have only the haziest idea of even what they represent. If the prices of stocks rise on the stock exchange or if the GNP increases we think these are good things, if they fall we become concerned. We tend to evaluate each set of numbers as a separate phenomenon only loosely related to the others. 

We tend to see money spent as being “lost”, so that it is no longer available as a resource. So public expenditures, for instance, are seen as a dead loss to the public in general. This stems from the false notion that money is itself a commodity. A commodity that has been used is no longer available for any other use, and we see money that has been spent as no longer being available for other use. This is a misleading view. Money that is spent is paid to someone, and the social benefit in the transaction depends greatly on where the money goes. Say the city council spends some money to fix potholes. Some of that money goes to pay workers, and will immediately be spent on their needs. Much of this money will be spent locally, and some of it will remain in the local economy through several subsequent transactions. The worker buys vegetables at the Famer’s Market, the farmer pays to have his boots repaired, the cobbler eats at a local restaurant, and so on. The same initial transaction turns into countless other instances of economic activity, each benefitting a new recipient. Money in this system is not a finite resource that is exhausted once used, but rather a catalyst that enables multiple transactions without itself undergoing any depletion in value. As long as it does not leave this system, it an continue to work its magic indefinitely.

The important part, the part that makes it all work for the local economy, is that each recipient spends the money quickly. Money that is simply held in an account and not used, ceases to enable fresh transactions. 

Some portion of the money will inevitably leave the local economy. Anything bought from a chain store, for instance, will contribute to the profits of the owning corporation. In this and countless other ways money passes up the chain to people who already have more than they need. This money will no longer pass from hand to hand and permit multiple transactions like the money spent locally. Instead it will join a vast pile of money that is used in a quite different way. When money passes to someone who already has more than is needed to fill his personal needs and desires, it is not used to buy something from someone, or pay someone to do something. Instead it is invested.

If this investment is in a new business that fills a hitherto unmet need or replaces something already in use with a better version, then this can be beneficial to society. Whether it is beneficial or not depends on how it is run. 

If the money is invested in government bonds of some kind, this can also beneficial to society. Whether or not it is beneficial depends on what the bonds finance. (These evaluations refer to the effects of the transactions themselves, not the resulting enrichment (or sometimes impoverishment) of the investor, which has its own effect on the health of society that will be examined elsewhere). 

Investments in stocks that yield dividends, and are held for their income value rather than their potential increase in capital value, are fairly neutral in their effect on society. Investment in the stock market for the purposes of speculation is gambling pure and simple, and adds no value to the economy, while sucking value out. It is entirely harmful to the health of society. Furthermore it seems like a form of pathology. A person has more money than he needs, so he gambles with it to gather to himself even more money. What will he do with the even more money? Why he will gamble with that to gather yet more money. This is like eating for the purpose of becoming as fat as possible.

The economy is a continuously functioning organism all of whose parts affect all the others. By observing the behaviors of those parts, and seeing clearly how those behaviors support or hinder the health of society as a whole, we can see which activities should be encouraged and which should be discouraged.

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