Monday, October 21, 2013

The veil of money

One of the simplest ways to think of John Maynard Keynes revolutionary idea of increasing aggregate demand to end a recession is to forget about money and just think about people working and consuming.

Keynes rejected the classical idea that unwanted unemployment only came from two sources: Workers were unwilling to work for the wages offered and workers had trouble finding the jobs that were out there. He proposed the idea that there could be more unemployed workers than jobs available to them, and his solution was to have the government create more jobs for the unemployed.

That's the basics right there, with no calculations about money. I find this is an effective way to think about economics, as money brings needless complexity that confuses and intimidates people who are new to economics. Money is just a proxy for resources and my advice for novice economic thinkers is to strip away the veil of money and concentrate on the activities in the economy: What workers are doing, what technology is helping them along, how much they are consuming and how much they are producing.

I've long argued that Jared Diamond's Guns, Germs and Steel is a great place to start when thinking of how economies work. Diamond spoke of a primitive tribe where five people labor to feed five people and the tribe never advances. However, a tribe in a fertile land where four people can work to feed five people leaves that extra worker to build, research, invent or craft other things. Another society will have three people work to feed five people and see more advances. Our current society has gone very far on that same spectrum and needs two people to feed 100.

Sure, those 98 people who are not producing food need some way to get the other two to give them food. In modern times we recognize that that comes from money, credit, trade, sharing, charity and welfare payments, but those concepts are part of the veil that can be stripped away.

When trying to think about economies, try forgetting about money and many things will start to make sense. Conversely, needlessly including money can lead to many fallacies, such as the fabled free lunch myth.

1 comment:

  1. I'm not sure that I agree that money is a needless complexity, I think that currency is the needless complexity.

    Keynes actually suggests, not that the government create jobs, but that the governments use inflation to all but force people to start spending*. What is the joke? The government turns on the spigot to get things flowing again but forgets to turn it off again? Words to that effect.

    *you have $10 you aren't spending, the government takes some of it via inflation and spends it for you, which should in turn make you spend that $10 before any more of it is inflated away.