An intellectual's review

[nbarclay]

Originally posted by Unimatrix11

In the fishery example: Okay now the guy is in agreement with every single actor on stage and they all say: "We will only fish what will grow back". Normally with that the problem would be solved pretty much. But not in capitalism - it must grow. Our fishing community will not be able to live sustainable for long, because some company will buy them out; just because it needs profitable application for its capital. And - schwups- we are back in the competition cycle of companies - the biggest pig will eat them all.

The key question is how the regulations would be defined. If the regulations create a race to catch as many fish as possible before the total number that everyone has caught reaches the limit, there is a serious problem because the system rewards fishing techniques that are fast but wasteful. But if the regulations are based on a concept such as selling licenses to catch such-and-such number of fish, the only way an investor could make money by putting the fishing village out of business would be if the investor has a way of fishing that is genuinely more efficient.

It isn't pretty when people are displaced from their jobs, or especially from a traditional way of life that they would like to keep, by advances in technology. But if it hadn't been for new technologies displacing people, we would still live in a world where a large majority of the population is needed just to keep everyone fed. (The food increase with Biology in Civ IV reflects advances in the amount of food that modern societies can produce, but not the advances in how few people it takes to produce the food.)

[Blake]

Originally posted by wodan11
See now you're the one confusing money and capital. You can't have it both ways. Decide whether your definition of the word "money" is equivalent to the dictionary definition of "capital", or whether you want "money" to be a subset of capital (and closer to the dictionary definition of money).

Good grief man.

Money is a medium of exchange!!!

Here is the difference:

Money can't create wealth or do anything useful. You have a stack of notes, what are they good for? Maybe you could burn them to boil some water or something, but they're not terribly useful.

What can a number saying $42 in a bank account do? Nothing. That number can create no new wealth.

That is money. It can do nothing useful.

And then there is capital.

An Axe is capital. You can use an axe to multiply your work. A factory is capital, the factory can extract more work from the laborers. A school of fish is capital, you can extract fish from it.

Capital has real value. As in value you can put in your mouth or hold in your hands.

Money has no real value. The only value money has is the value that people assign to it.

Okay lets say you own a car. It's worth $5000. That doesn't mean the car is $5000.

You go to the bank and ask for a loan. "Do you have collateral?". Yes, my car, it's worth $5000.

The bank makes the loan. The bank now owns your car, and you have some paper to which people assign to the value of $5000, you can't actually do anything with this paper except give it to someone else in exchange for something.

Finally you do some stuff with the money, make some more money, and buy your car back from the bank. The bank uncreates the $5000 and you own your car again.

Stage 1: You own your car, there is no money.
Stage 2: The bank owns your car. The bank creates $5000 of new money which is backed by the car, you may spend this money.
Stage 3: You return the $5000 (+interest). You own your car again, the money no longer exists.

What do I mean by "owns"?

Ownership, means you can sell it.

When you own your car, you can sell it, the bank can't sell it.

When the bank owns your car, the bank can sell it, you can't sell it. But you could also transfer both the car and the loan to someone else, or you could have the loan backed by something else instead.


Note carefully what goes on, where the money comes into existence.

There is a difference between selling your car to someone else and getting $5000 for it and letting the bank take ownership of your car and being given a $5000 loan. When you sell your car, no new money is created. When you get a bank loan, new money is created.

That is the special feature of banks. Banks are allowed to create new money. That's what banks can do what normal people and businesses can't do. Technically, a normal person could for example take a piece of paper and write on it:
"Whoever holds this piece of paper, owns the right to my bed, which is worth $200", and try to use that piece of paper as a medium of exchange. That would be money, it just wouldn't be widely accepted.
But the money which banks create, is widely accepted. That's what banks can do. They can create new money which is accepted throughout society.


Money is stuff with no practical value, pieces of paper and 1's and 0's in a computer. In the case where money does have practical value - such as a minted gold coin, it loses the status of money once the value is realized (ie you melt it into a ring).

Capital is stuff with practical value.

Those are the definitions I use and are the most useful definitions.

It is true that capital in an accounting sense does include money, but accounting is the most boring thing in the world to talk about, so lets refrain.

So the acid test for whether something is money or capital:

If it's money, it has no value to someone stranded on a desert island.
If it's capital, it has some value to someone stranded on a desert island.

You get my idea anyway. Money only has value as a medium of exchange, the only useful thing you can do with money is give it to someone else in exchange for something.

[Wittlich]

Are you an Economics Major by any chance Blake?

By the way, great explanation concerning the comparison of "money" to "capital"!

[Blake]

Thanks. And no, as it happens I almost despise both economics and economists.

But that doesn't mean I refuse to understand it anyway.

My understanding mostly comes from some reading, and A LOT of thinking about how it actually works, basically simulating the process in my head :P.

If I explain it well, that means I understand it well, and that comes from understanding it for myself, not from repeating what I read in economics texts. So sources for what I say? ME!

Some people say economics isn't a science. I don't agree. Economics is the science of filling economists heads with nonsense so they can happily think about meaningless numbers instead of people and lives.

[wodan11]

Good grief, Blake. You just got done saying that banks use money to create new money. Now you say that money has no practical value and cannot create new wealth.

What is wealth? Another word for money? Another word for capital? What?

Here's my point. The moment the human race allowed banks to create new money, that's the moment that money became more than a medium of exchange.

Wodan

[nbarclay]

Originally posted by Blake

That is the special feature of banks. Banks are allowed to create new money. That's what banks can do what normal people and businesses can't do. Technically, a normal person could for example take a piece of paper and write on it:
"Whoever holds this piece of paper, owns the right to my bed, which is worth $200", and try to use that piece of paper as a medium of exchange. That would be money, it just wouldn't be widely accepted.
But the money which banks create, is widely accepted. That's what banks can do. They can create new money which is accepted throughout society.

What really happens is that banks and borrowers work together to create negotiable instruments that, collectively, function as the basis for a medium of exchange. Ordinary citizens can't create negotiable instruments that would be broadly accepted as a medium of exchange without banks. But banks can only create money to the extent that borrowers are willing to back the money up with their assets or reputations. And it is the borrowers, not the banks, that end up with the power to spend the newly created money to buy things.

The way the system works is actually surprisingly similar to your idea of warehouses issuing money backed by a "basket" of commodities. Banks put the collateral on secured loans and the reputations of people who take out unsecured loans together into a basket that most of society trusts to hold its value even if some of the borrowers default on their loans. This is analogous to the way that money backed by goods in thousands of warehouses could be trusted to remain essentially stable even if one or two of the warehouses burns or is robbed. The "basket" mechanism enables businesses to have the trust they need to accept checks or electronic transfers backed by the banks as a medium of exchange. But it is ultimately the borrowers' assets and reputations that back up the value of the medium of exchange.

It would be accurate to say that banks create money (using the "medium of exchange" definition) out of the collective assets and reputations of their borrowers. But it is not accurate to say that banks create money out of thin air, because without the collective assets and reputations of borrowers, any money that banks might try to create would be worthless.

[Wittlich]

Actually, since the US left the gold standard (ie, backing-up the greenback with gold in Fort Knox) - US money's worth is what people "think" it is worth. Has anyone ever wondered why the world's Oil supply is traded under what currency?...The US Dollar. but I digress. Carry on with the civ conversation.

[Blake]

And it is the borrowers, not the banks, that end up with the power to spend the newly created money to buy things.

Now we're getting somewhere!

And the problem is, the banks charge interest for this "service", of allowing people to spend money backed by the person's own goods. And they charge A LOT of interest for this service. And they almost-arbitrarily give some of that interest to other people.

So here's my question for you.

Now we agree that banks create new money, and they create money when it's backed by collateral of that value - that it's the collateral which enables the loan, not the presence of other peoples savings, why not just create money and charge 0% interest for it? Only charge the service fee. It's backed by the collateral, after all.

Why not?

[Wittlich]

I would say that it would lead to run-away inflation - which in itself would make the money virtually worthless (Brazil's past monetary crisis comes to my mind).

[nbarclay]

Originally posted by Blake

So here's my question for you.

Now we agree that banks create new money, and they create money when it's backed by collateral of that value - that it's the collateral which enables the loan, not the presence of other peoples savings, why not just create money and charge 0% interest for it? Only charge the service fee. It's backed by the collateral, after all.

Why not?

Because if money moves out of a bank faster than it moves in, the bank becomes insolvent. Your idea that banks can loan out money by creating money instead of by getting it from depositors has a very important limitation. When banks create money, the balance between deposits and loans is only maintained for as long as the money remains deposited in the bank that created it. If the newly created money is withdrawn from the bank, that creates an imbalance that undermines the bank's solvency. So the only way the bank can remain solvent is if it obtains other money to replace what was withdrawn, either by attracting deposits or by selling some of its assets (such as some of its loans).

If a bank wants to attract deposits, or even just to keep the deposits it already has, it has to offer interest or other inducements to depositors. With small checking accounts, the inducements are often nothing more than free services - for example, being able to write checks without having to pay the bank to process them. But those services do cost the bank money. With savings accounts, people expect to be paid interest. And with certificates of deposit, where people commit to keeping money in a bank for a particular period of time with penalties for early withdrawal, customers expect even higher rates of interest.

A similar problem exists if banks try to replace money that is withdrawn by selling loans. In a society where other forms of investment, such as government bonds, offer a promise of both safety and profit, there is no way that anyone in his right mind would buy a zero-interest loan at face value. The only way a bank can expect to be able to sell a loan if it needs to without losing money is if it can offer the buyer a promise of being able to make money by collecting interest on the loan.

So no matter how a bank plans to go about keeping its deposits in balance with its loans, the bank has to charge borrowers interest. The only alternative would be to guarantee that the money the bank creates can never actually leave the bank, which would mean that the money would not provide a reliable medium of exchange - especially at face value. Edit: More precisely, the money could be allowed to leave the bank in the form of bank-issued currency, since that would be merely pieces of paper representing portions of what is in the bank, but not as any other type of money.

Also note that even if zero interest were possible, it would almost certainly cause hyperinflation because people would have more borrowing power than society can create products and services to absorb. As inflation keeps spinning, the value of the collateral would keep going up, enabling people to borrow still more money. And a lot of the new products created could serve as collateral for even more borrowing. There are good reasons why the Federal Reserve and similar bodies manipulate interest rates in order to control the rate at which banks create money.


Aren't you glad the operation of banks in Civ isn't as complicated as the operation of real-world banks?

[Unimatrix11]

Originally posted by Wittlich
...Has anyone ever wondered why the world's Oil supply is traded under what currency?...The US Dollar...

Actually i did. Because its desastrous. It makes it cheap. The dollar is mighty weak at the moment, because the US is running a bubble economy, the government spending billions on weapons and oil (which produce no value) on loan. At least for us over here in Europe that makes oil (comperatvely) cheap. The price per barrel is about 100$ right now, the euro will be at 1.50$ soon - that makes the barrel cost just about 67 Euro for us. Thats about 30% less than back in the day, when dollar and euro were about equal. The devalueation of the dollar eats up the rising cost of the depleting ressource. Since this is widely unknown to the public, it doesnt mean, our gas prises dont rise with every price-raise for the barrel - they do not drop though, when the dollar drops - we are still on record levels for gas prises. ca-ching... - at the same time, european goods are hard to export to the states, because they are so expensive. Well, if oil was traded in euro, the maintainance cost of the US-army and its operations would be that much more expensive and would get more and more expensive as they continue to a) lower the oil-reserves and b) raise the national defecit. When oil is traded in dollar, a) and b) cancel each other out to some extent.

I wonder: What are they yearly inflation rates in the states lately ? For externally, the dollar is in rapid decline. If the internal value goes down as quick as its external, you should have inflation rates close to 10% yearly. I doubt you do tho, and being no economist i wonder about the mechanism that prevent this from happening...

A little humoric sidenote: About 1-2 years ago, a friend of mine and I had a discussion about global economy. When i told him, that about 1 Trillion is moved around the globe each day, it turned out, that he seemed to believe, that every transaction had to be actually paid with money (notes). He imagined big ships traveling the oceans loaded with banknotes. I laughed soooo hard. Now that i learned that only about 10% (in the states) or 3.4% (in UK) of the money is in actual existence (did i get that right ?), i find it even more funny...


Yeah, okay, so capital is of course not only money - it is also the form the money takes once it is spent to make more money. I differ there a nuiance from blakes definition, because a school of fish in my eyes is not nessecarily capital. Namely when it is fished only for personal consumtion and not to sell, then it is not capital in my book. And even if you sell some, in order to buy something that you will consume yourself, say burning wood, it is still not capital really. When you sell the fish, in order to buy a bigger net, to catch more fish, in order to sell them and thus establish a circle of profit, then it becomes capital. Sell-buy-sell makes money capital. The house that you own and live in, is not capital, the house that you own and rent out to others is. Every bank-account is (though you dont really have a choice there). It kinda reflects the difference between a good for consumption and a trading good - first is not capital, last is. Maybe Capital is to money, like energy is to work - the potential of the former to make some of the later - like with energy there are various forms...

[Unimatrix11]

I just wanted to point out another bad thing about the credit system: While it is true, that the over-fishing could happen also without it, it is also true, that the big wars of the last century, and a lot of others, could not have been fought without it (not for very long at least):

"Six to eight weeks of war had come and gone and had stretched to more than twenty, and still there was no decision, and not likely to be one in the foreseeable future. All of the prognosticators had been proven false. The one who had come closest to reality, Ivan Bloch, had been mistaken when he said that the interlocked world economy would prevent a long war. It was true that governments, had they had to spend only what the possessed, would already be feeling the pinch of near-bankruptcy. However, the tremendous burst of patriiotism and nationalistic fervor that had greeted the war had also unlocked the spirngs of credit. Government bond issues were subscribed and oversubscribed within hours of their offering, and, contrary to Bloch´s ideas, the world did not dissolve in financial panic. Instead, there was an incredible surge of business and investment prosperity. For everyone from prostitutes to munitions manufacturers to retirees with pension funds to invest, the war was a source of potential profit. In spite of the stupefying casualty lists, by the start of 1915 the iron had not yet sunk into europe´s heart."
("A short history of World War I", James L. Stokesbury, p.90)

So capitalism, nationalism and the credit system made what is nowadays considered the arch-catastrophe of the 20th century look like a good thing in the eyes of many who lived through it (of course again those who were to realize the profits did get little for it, except a miserable death in some barbed wire or being ground to dust by a shell maybe). Now - was value created ?

"The carnegie Endowment for international peace in 1920 stated that the war had cost, directly and indirectly, a total of $337,980,579,560." (page 309, same book)

The insanity really reached its high with this:

"For example, the compilers had to assign some monetary value to lives; they decided an American life was worth $4,720, a French life $2,900, a Russian life $2,020. The compilers were American and others might disagree with their assessment, though they were based as carefully as might be managed on the productive capacity of on individual balanced against the amount he would consume in his estimated lifetime." (p. 309f)

How sick is that ?! To give a monetary value to a human life is sick all on its own, but to say one life is worth more than another is actually so sick, it can only derive from a capitalistic mind-set. I do not dare to define, wherein the value of a human life really lies, but i am detemined to say that it is not his/her (production - consumtion). This just fites nicely with what Blake said about the science of economy. As soon as people become a function of economy instead the economy being a function of the people, and this is exactly what capitalism does, humanity turns to beastility, reason becomes wickedness. A worker in a modern factory doesnt use the machine as his tool - rather the machine uses the worker. In German this is nicely reflected by the word for it: "Eine Maschine bedienen" (To SERVE a machine). A tool us being used by a worker, as his instrument, a machine uses the worker as its instrument. The person becomes a function of the machine, thus work becomes inhumane. Well for the sake of enhanced productivity one might say "well so be it... we can take this for a couple of hours each day - afterall its worth it". The problem is: As soon as one starts with this, by the laws of the free market, he/she forces all other to subjugate themselves to the machines, as well. The choice is gone and freedom is lost.

And it doesnt stop there. Machines replace workers. The portion of capital the machines represent (the constant part) is ever increasing, while the part spent on workers (the variable capital) is declining - if not absolutely, then at least its ratio to the constant capital. This puts ever more pressure on the worker to suit the machines needs. Before, in the manufactoring period and prior to that, the instrument had to suit the worker. It is THE characteristicum of modern times, that the worker has to suit the machine. Thus the world turns into one dominated by machines (or: the constant capital). Only this way can one explain, why humans actually got themselves into situations like this:

"The guns were the idols of the First World War. Day and night, night and day, they poked their ugly snouts into the heavens and coughed up death for men on earth. Around them in the blazing sun or the frigid night toiled their priests and servants, from the gunnery officers with their soft voices and their precision instruments that told them the slight adjustment of life and death, to the hustling, cursing gunners, manhandling their huge loads, shells and explosive, working wth a frenzied precision that had all trhe coordination of a ballet and a hell lot more purpose. For two weeks the infantry listened to the mutter or shriek of the guns, both sides knowing full well what they portended." (p.241)
Obviously men had to be conditioned in order to stand this kind of machine made hell on earth (this passage actually reminds me of the "terminator"-movies). How free can a man possibly be, when he spents his best years and looses his young life in a sea of mud and steel ?

Nationalism explains things like this:

"The French called it [the supply road to the verdum battle] la voie sacrée, "the sacred way" and it aroused the same emotions as those ceremonail paths by which the ancients led their sacrifices toward the altar; indeed it served the same purpose" (p. 146)

BTW: British national debt rose from 625,000,000 pounds in 1914 to 7,809,000,000 in 1918 - who could doubt that banks of a massive interest in wars ?

So, i say: Nationalism and Capitalism have descreditated themselves by their history a lot more than any other ideology ever. They prooved their tendency to produce catastrophies on unprecented scales and continue to do so. The credit system is what links the former to the later.

[couerdelion]

Because the example you give of a bank creating $100,000 in an account for someone to spend is of no use unless that person can take the “money” out of the bank. Until that point it has an asset (a debt from the borrower) and a liability (the $100,000 in the account). But when the money moves out of the bank there will be some other bank involved. If we talk in simple terms of IOUs then the first bank effectively owes money to the second bank and will pay interest on this.

Which leads us to capital adequacy and the credit-worthiness of the bank. If the bank is simply creating money out of thin air, then it is all but printing it. But the level interest it would have to pay to another bank would depend on its own credit-worthiness which will be effected by its overall capital adequacy (I think you refer to this as fractional reserve banking). For banks that maintain a suitable margin of capital, the interest charge would be lower than one with a low level of capital and at some point, it would be impossible for the bank to borrow.

So the idea of a bank free of capital constraints is not consistent with the way banks work these days.

As nbarclay states, the problem breaks down when the money leaves the bank and even more so when it “physically” leaves the bank. This happens when those the bank owes want to replace their “IOUs” with real money – or something they consider valuable. If all this happens at the same time then the bank goes bust.

Note that where a bank really does print money (i.e. Federal Reserve, Bank of England) the “value” of the money that it prints is related to the amount of money printed. Political and economic interests will be adversely hit if it just prints money. In this sense, the idea of currency as having a fixed value is itself misleading because, like all money, its value, to use Blake’s words, is only in the rate at which it can be exchanged for things. In short, if the central banks print lots of money, then the money itself will be worth less (that’s short-hand for inflation + devaluation)

In much the same way, where a bank “creates” money in the way Blake describes, it can only do so within the constraints of the banking community. Individual banks still rely heavily on the reserve currency and also on their ability to borrow from other banks. Banks that run will low capital simply find that their own currency (in the hypothetical sense) is devalued and they then find themselves paying more to borrow or even being unable to borrow. For a bank, credibility is everything.

Finally, banks do not simply create money and then charge interest on this. The example Blake gave was where a bank generated an offsetting asset and liability and both receive interest. For the loan the bank charges interest plus a margin. For the deposit, the bank pays interest less a margin. The profit earned by the bank is the difference between its borrowing and lending rate reflecting credit risk, capital charges and administration costs. The idea of creating money out of thin air and then charging interest for this is not the real model of the banking business.

And I would fall back again to my other argument that the business model itself is not one in which banks can make “excessive” profits because other banks would emerge and charge lower margins.

I would also disagree on the question of money creating capital in saying that it CAN create capital. Although I agree that capital is not created by the creation of a loan, it is the purpose for which the loan is used that makes the capital. Let’s say I own a granary valued at $100,000.

Stage 1: I own $100,000 of capital
Stage 2: I get a loan secured on the granary of $100,000. I still have $100,000 of capital made up of

a) A granary worth $100,000 (note here that the terms of the loan does not mean that the bank OWNS the granary. It just means that I cannot sell it without altering the terms of the loan with the bank.
b) $100,000 of money – at the moment this is in a bank account
c) $100,000 of debt to the bank (or minus $100,000 of capital)

Stage 3: I use that money to invest something, let’s say I build a market. Whatever it is does not really matter but the result is that I have something new which we will say is worth $200,000. However, I have spent the $100,000 so I now have

a) A granary worth $100,000
b) A market worth $200,000
c) A debt of $100,000

So now I have $200,000 which is the result of me using the money I raised on the granary. At what point my original $100,000 becomes $200,000 is not entirely clear but the process has certainly created wealth or capital.

And this could work for many things other than purely physical things. Values can also be attached to ideas or inventions (particularly those which can be patented) even when there is no tangible asset. Education, for example, is a way of developing knowledge capital which clearly has value in the modern world even though there is no physical evidence of that capital. In fact anything which you could effectively sell to someone else has value.

Blake’s final test is too arbitrary and contradicts his statement that capital is something that has practical value. Money clearly has this quality because it can easily be exchanged for another thing of practical value. Since we do nothing in this single transactions, their values must be equivalent. Whether it is of any use to someone on a desert island is irrelevant. After all, would a toy factory or a hospital be much use there either?

[couerdelion]

Originally posted by Unimatrix11
I just wanted to point out another bad thing about the credit system: While it is true, that the over-fishing could happen also without it, it is also true, that the big wars of the last century, and a lot of others, could not have been fought without it (not for very long at least):

.....

The insanity really reached its high with this:

"For example, the compilers had to assign some monetary value to lives; they decided an American life was worth $4,720, a French life $2,900, a Russian life $2,020. The compilers were American and others might disagree with their assessment, though they were based as carefully as might be managed on the productive capacity of on individual balanced against the amount he would consume in his estimated lifetime." (p. 309f)

But before everyone had advanced credit systems, it was those with the more developed systems that had a huge competitive advantage. In particular, British military success over France in the period 1700-1815 was in large part a result of its ability to finance a war long after the French had been forced to the negotiating table.

But can you blame the banks for the war? No. It would really be no different from food supplies and the capacity of a self-sufficient nation to extend wars.

Regarding the economic value of lives lost, I often wonder why it is such a leap of faith to place numbers on these sorts of factors. I can perhaps understand why people might instinctive feel it morally wrong to do so but, in reality, everyone does this every day when they make their own economic choices.

Maybe I should ask a simple question:

“Would you give all your money so that some random person in the world would live?”

The answer is almost certainly “No”. If you cannot say yes to this, indeed if you do not instantly give pretty much any money you have now to keep as many others alive as possible that you are guilty of placing a finite value on life. And energy or time spent pursuing personal goals which could otherwise we spent keeping people alive devalues those lives. And yet to mention this is considered a heresy are great as any blasphemy you could used these days to insult any religion you might choose (you have a choice of seven)

If, however, you are innocent of all these failings, then you might be able to consider life to be of measureless value that could be exchange for absolutely nothing of finite value

[couerdelion]

Originally posted by Unimatrix11


Actually i did. Because its desastrous. It makes it cheap. The dollar is mighty weak at the moment

A cheap dollar does not mean oil is cheap. All things being equal, a fall in the dollar should, more or less, be balanced by an increase in the price of oil.