Just in case you don't get a chance to read Economics for Helen here is a useful precis by Dr Jim Knotwell...
Economics is the study of wealth…What is wealth?
What wealth is NOT:
- Amount of money one is worth—even if no money, possessions still there
- What is possessed—it is not the possessions, but some quality or circumstance attached to them and gives them value
Formula 1:
Wealth is made up, not of things, but of economic values attaching to things.
Formula 2:
Wealth, for the purposes of economic study, means ONLY exchange values; that is, values against which other values will be given in exchange
Wealth is NOT the same as well-being
- Mixing these terms up has given rise to half the errors in economic science
- Making people happy is much more than Economics can pretend to do
The Production of Wealth
Changing things around you from a less useful to a more useful condition creates, and adds to, human wealth
- Part of which is Economic Wealth
- Not everything transformed has true EW, yet all EW is produced as part of this general process
Three great separate forces of wealth production—Land, Labor, and Capital
- Land—Natural Forces
- Creation of wealth does not really create anything
- This natural force is the foundation of the whole process—constitutes the place from which he uses all other natural forces.
- Includes vast numbers of things that are not “land” (soil, etc.) at all
- Water power
- Wind power
- Fertility of seed
- Force of electricity
- Thousands of other natural energies
- Labor—Human Energy
- Application of human energy to natural forces
- The natural forces contained in “Land” is not enough to produce wealth
- Human energy must be applied to reap harvest
- All wealth comes from the combination of LAND and LABOR…of natural forces and human energy
- Capital—Accumulated stores and implements
- Accumulation of already-made wealth, which is thus absolutely necessary to production
- Land and Labor alone are not sufficient to produce wealth in any appreciable amount
- Includes all kinds of wealth whatsoever which is used with object of producing further wealth
- Unlike Land and Labor—which all have or can access—capital can be controlled by very few
In the absence of any of these three, production of Wealth is impossible!
- Defining conditions of capital
- Almost any object can be used as capital, but no object is capital, however suitable, unless there is the intention present of using it as capital
- Capital is consumed in the process of using it to make more wealth, and as it is consumed it has to be replaced, or the process of production will cease
- The only way in which people can get capital is by doing without some immediate enjoyment of goods and putting them by to use them up in creating wealth in the future
- Even if the current owner of the capital never thinks of saving…the saving has been done by someone in the past, and saving must go on the whole time
Formula 3:
All production of wealth needs three things: a) natural forces, b) human energy, and c) and accumulation of wealth made in the past and used up in future production
Formula 4:
These three are called, for shortness: a) Land, b) Labor, and c) Capital
Formula 5:
The last, Capital, a) depends for its character on the intention of the user, b) is consumed in production, c) is always the result of saving
Everything done to increase the usefulness of an object right up to the moment when consumption begins is part of the production of wealth!
Formula 6:
Transport and Exchange, quite as much as actual work on the original material, form part of the Production of Wealth.
Formula 7:
All Wealth is ultimately consumed: that is, matter having been transposed by (wo)man from a condition where it is less to a condition where it is more useful to (her)himself, is dragged back from a condition where it is more to a condition where it is less useful to himself
3 Parts of Produced Wealth—Rent, Interest, Subsistence
This part of Economics has the greatest effect on human society…and the understanding of which is most essential to sound politics.
Must keep a clear distinction between:
- Economic law—necessary results of producing wealth
- Moral law—matter of right and wrong in distribution and use of wealth
The working of Economic Law is blind and indifferent to right and wrong
The Minimum Standard of Subsistence—“The Worthwhile of Labor”
- Every society has its own standard
- Societies will rather have people emigrate or die than fall below it
- The minimum standard is set somewhat above the mere necessity of keeping alive
- There must be an average production of this amount to keep society going at all
- Average because many, of course, produce nothing
- This standard is the basis of all production…it must be satisfied or production ceases!
Interest: The Minimum Profits of Capital—“The Worthwhile of Capital”
- Not to be confused with “interest on money,” which does not really exist
- It is either interest on real capital for which money is a symbol…
- Or it is usury—the claiming of profit which is not really there
- Remember: capital cannot come into existence unless somebody saves, and that the saving continue if production of wealth is to continue
- Capital can only be accumulated by doing without and putting off for a future time…requires restraint and sacrifice, which require some motive
- Motive is promise of larger future income…larger total income over time
- Future income tempered by Law of Diminishing Returns
- Given LDR, there comes a time when saver no longer thinks it worth their while to continue saving—this point marks the minimum profits of capital
- The saver will take no less than this…more? Sure…but not less
If the “worth-whiles” of both Labor and Capital are not satisfied…then labor stops working and capital stops accumulating, and production breaks down. So:
- Their must be enough production to satisfy the minimum standard of subsistence and enough to keep capital accumulating at the rate of whatever happens to be the amount of the minimum profits of capital
Profit (Interest) must always be present…no matter how the capital is owned and controlled…no matter who gets the profit!
Rent: the Margin of Production
- The worst conditions under which persons in a particular society will consent to produce wealth at all…if put under conditions still worse, they will not produce
- Rent is the surplus over and above the minimum required by labor and capital out of the total produce (e.g. production under conditions better than minimum delimiting the margin of production)
Summary on Rent, Interest, and Subsistence:
On the mass of all production there are three charges:
- First, the charge for the subsistence of labor
- Next, the charge for profits, or interest, for the reward of capital, that is, of saving
- Lastly, in varying amounts, rising from nothing at the margin of production, to larger and larger amounts under more favorable circumstances, the surplus value called Economic Rent
These three divisions are always present whenever wealth is produced!
- Same person may get all three, or openly paid to different persons they present everywhere and always
- This is a fixed economic law from which there is no getting away
Remember:
- These economic laws are in no way binding in a social sense…not laws, like moral laws, bound to be obeyed
- They are mathematical consequences which must be taken into account when social arrangements are made
- All economic science can tell us is how to distinguish between the divisions, and to remember they are inevitable and necessary…not cast judgement on the rightness or wrongness of who gets what.
Exchange
When the exchange of things is of advantage to both parties it creates wealth for both, therefore only the last step in the general production chain
- Characterized by taking a thing from a place where it has less value to a place where it has more value…thus adding value to the thing moved and creating wealth
- In the same transaction some other thing is brought back against it, which has more value in your own place than it the place it was taken from
Potentials for exchange come into existence by way of:
- differences in physical endowment from place to place
- differences in cultural habit from place to place
- differences in employment (concentrating on divisions of labor that suit you best
Exchange is present universally wherever there is active production of wealth
- but it must never acquire more importance than the whole process of production itself
- real test of a society’s prosperity is what it has power to consume, not what it manages to exchange
Formula 8:
There is potential of Exchange, that is, exchange tends to take place, when of two objects the proportionate values are different in two different communities.
Formula 9:
Goods do not directly exchange always one against the other, but usually in a much more complicated way, by what may be called Multiple Exchange
(requires a vehicle to facilitate this exchange…money)
Formula 10:
Other things being equal, the greatest freedom of exchange in any given area makes for the greatest amount of wealth in that area
If you left the whole world free to exchange the whole world would be the richer for it…right?
Yes…BUT… IT DOES NOT FOLLOW THAT EACH PART OF THE WORLD THUS MADE RICHER IS ITSELF ENRICHED!
Money
A common medium of exchange to facilitate the disposal of goods one against the other without the elaborate business of making special barters, after long search.
Over time…Gold and Silver have been found to work best because of the following qualities they possess:
- portability—large weight takes up little room
- easily divisible
- must not perish quickly
- must be of even quality
- must be more or less stable in value
Essentially used to make vast quantities of complicated exchanges possible
All things produced are fluctuating the whole time in value…but whatever the exchange value is in gold we call the price of the article
Value of the gold/currency (in other words—prices) is made up of two things:
- the amount of gold present to do the work of exchange (amount of currency)
- the amount of work you can make it do in exchange…or the pace at which you can get it to circulate (its “efficiency in circulation”)
If for any reason, the total amount of gold becomes suddenly smaller or suddenly larger, or if the pace at which it is used changes very quickly…then prices fluctuate violently.
- Suppose a great deal of gold were to disappear; prices would suddenly fall very rapidly; one can buy more things with the same amount of gold because it has become rarer and therefore more valuable against other things
- The result…a very rapid increase in the pace of circulation, and prices will gradually rise again—works like a sort of automatic governor, tending to keep prices fairly stable, but it cannot prevent gradual changes
With the beginnings of modern industry, a vastly greater number of things began to be made, and the corresponding number of exchanges multiplied…the stock of gold would have been unable to cope with this flood of new work, prices would have fallen very much had it not been for Paper Money, which increased the efficiency in circulation
Paper Money was a “promise to pay” the bearer of the note so much in gold…the note was exchangeable for gold…but because it was publicly known, people were willing to hold the note instead of the gold
- Because people were willing to be paid in paper instead of the actual gold, a large number of notes could be kept in circulation at any one time, and only a small amount of gold had to be kept in readiness at the Bank to redeem them
- This had the effect of increasing the total amount of the current medium in practice and greatly increasing its efficiency in circulation
So long as the promise to pay was promptly kept, the money remained good!
BUT…
Governments are under great temptation, especially with heavy expenses, to falsify the Currency—to put in less gold, more alloy and keep the stamp unchanged
- Called “Debasing the Currency”…a simple form of cheating and always effective because the user trusts the government to keep the coin genuine
- When these get into circulation, though, and people begin to test them and they find out, so…prices as measured in the new currency rise
- This continued over and over again…the last and worst form worked through a trick played with paper money
- Government stopped redeeming in gold, and, at the same time, did everything they could to get gold out of private people’s hands and make them use paper money instead
- People being so accustomed to thinking of the government guarantee readily used the new notes as money
- As long as the amount of paper money was printed as would have been printed when the notes were redeemable, no harm done…BUT
- By making more the government could pay for anything…at the cost of course of debasing more and more
This kind of money is called Fiat money as in Fiat = “let it be so” (its not gold, but I order that it is to be taken as gold…let it be so)
- This is the kind of money the whole world has today
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