The problem of finances

[Bill_Powers1]

[From Bill Powers (2012.01.29.0935 MST)]

Just some thoughts.

For years I'm been having uneasy thoughts about the financial system, and in general about the role of money in the economy. When people talk about the invention of money and the advantages it confers on the system, I believe they are making sense. Money enables everyone to trade services and goods for all kinds of goods and services, instead of just those few available locally. It gives us a common scale for comparing values of very different goods and services. I'm sure that a person more familiar with this subject could offer many more ways in which money provides advantages.

In macroeconomics, one fact that seems to be accepted by people in many different positions is that there is a circular flow of money in one direction, and goods and services in the opposite direction. In a healthy economy, this flow is unimpeded and precisely balanced. In their role as workers and managers, people and institutions receive money for their work from individual or institutional producers of goods and services. As consumers, they spend what they receive in order to buy and consume -- now or in the future -- the entire product of their own labors. Enough money must be available to balance the equations in both directions.

Circulating money, therefore, serves as a kind of lubricant for continuous and uninterrupted trade. It's here to stay.

However, money as currently conceived and used is also a point of vulnerability in any economic system. A store of money is a store of buying power, a claim on future goods and services. It's something that can be traded as a commodity, as any asset can be traded. That idea probably followed the invention of money very quickly if not instantly.

If money becomes a commodity, the role of money changes. We have to ask, what is now the measure of relative value? I think it boils down to control. Possession of money is valuable to the degree that it allows a person to control what happens to that person. That is essentially the same measure by which, ultimately, we judge the value of all goods and services.

Since money can be traded for any kind of good or service, it is an especially potent means for gaining control. It can be valued higher than any particular good or service. Those who see it that way, therefore, have good reason to acquire as much of this valuable commodity as they can. And therein lies the vulnerability of the system.

Those who use goods and services as a means of acquiring as much money as possible are not interested in using the money right now to purchase other goods and services. They use the money to purchase control, now and in the future. They can use the money without spending it by investing it or lending it at interest, which gives them more money in the future without involving a trade for any goods or services, and at the same time gives them power and influence even without being spent. The promise of spending it, or maintenance of a symbolic low level of spending, is enough.

Acquiring more money becomes an end in itself, the relationship of money to goods and services fading into the background. The value of money itself is in enhancing control rather than maintenance and improvement of life, and that becomes the paramount use of it. The role of money as a lubricant for trade becomes secondary or is ignored altogether.

This change results in disrupting the precise balance of the circular flow of money. The bookkeeping of transactions no longer balances, because instead of continuing the flow, the money is siphoned off into ever-increasing private stores that are held or invested for monetary gain instead of being spent and sent back into circulation.

And perhaps even more important, this siphoned-off money is used to increase the control by the people with the most money of the people with less of it. Money buys laws and lawmakers, legal and paralegal enforcers, self-serving loyalty and support from those with less money who also want more of it. Money buys the power to make the rules.

The love of money, it has been said, is the root of all evil. Perhaps "all" is an exaggeration, but the growth of a money-oriented society is also the growth of a power and control-of-others oriented society, a society that has been persuaded to admire the causes of its own eventual downfall.

The cure for this situation is obvious: ban "gaming the system" for the sole purpose of acquiring money and power. A ban is not strictly necessary, but it will prevent an enormous amount of suffering compared to simply letting this inherently-flawed approach to money play out to its logical conclusion. This does not mean banning the management of large amounts of money, a necessary function that requires the same level of knowledge and skill that many other important jobs require. It just means not skimming, using for private gain part of the money being managed. It means viewing the accumulation of private fortunes as embezzlement of money that is needed by everyone, not just a few.

Of course such a reform would be very difficult to put into practice: money also buys protection against those who rock the boat. And the competitive attitudes that the acquisitional society develops will not disappear overnight. It will take a long time for admiration of the "rags to riches" saga to turn into distaste, and for some degree of humane concern for the losers of competitions to start appearing.

Best,

Bill P.

[FredNickols]

[From Fred Nickols (2012.01.29.1246 AZT)]

Bill:

I can sum up my reactions to your post in a single word: "Neat!"

Fred Nickols

From: Control Systems Group Network (CSGnet)
[mailto:CSGNET@LISTSERV.ILLINOIS.EDU] On Behalf Of Bill Powers
Sent: Sunday, January 29, 2012 11:41 AM
To: CSGNET@LISTSERV.ILLINOIS.EDU
Subject: The problem of finances

[From Bill Powers (2012.01.29.0935 MST)]

Just some thoughts.

For years I'm been having uneasy thoughts about the financial system, and

in

general about the role of money in the economy. When people talk about
the invention of money and the advantages it confers on the system, I
believe they are making sense. Money enables everyone to trade services
and goods for all kinds of goods and services, instead of just those few
available locally. It gives us a common scale for comparing values of very
different goods and services. I'm sure that a person more familiar with

this

subject could offer many more ways in which money provides advantages.

In macroeconomics, one fact that seems to be accepted by people in many
different positions is that there is a circular flow of money in one

direction,

and goods and services in the opposite direction. In a healthy economy,

this

flow is unimpeded and precisely balanced. In their role as workers and
managers, people and institutions receive money for their work from
individual or institutional producers of goods and services. As consumers,
they spend what they receive in order to buy and consume -- now or in the
future -- the entire product of their own labors. Enough money must be
available to balance the equations in both directions.

Circulating money, therefore, serves as a kind of lubricant for continuous

and

uninterrupted trade. It's here to stay.

However, money as currently conceived and used is also a point of
vulnerability in any economic system. A store of money is a store of

buying

power, a claim on future goods and services. It's something that can be
traded as a commodity, as any asset can be traded. That idea probably
followed the invention of money very quickly if not instantly.

If money becomes a commodity, the role of money changes. We have to ask,
what is now the measure of relative value? I think it boils down to

control.

Possession of money is valuable to the degree that it allows a person to
control what happens to that person. That is essentially the same measure
by which, ultimately, we judge the value of all goods and services.

Since money can be traded for any kind of good or service, it is an

especially

potent means for gaining control. It can be valued higher than any

particular

good or service. Those who see it that way, therefore, have good reason to
acquire as much of this valuable commodity as they can. And therein lies

the

vulnerability of the system.

Those who use goods and services as a means of acquiring as much money as
possible are not interested in using the money right now to purchase other
goods and services. They use the money to purchase control, now and in the
future. They can use the money without spending it by investing it or

lending

it at interest, which gives them more money in the future without

involving a

trade for any goods or services, and at the same time gives them power and
influence even without being spent. The promise of spending it, or
maintenance of a symbolic low level of spending, is enough.

Acquiring more money becomes an end in itself, the relationship of money
to goods and services fading into the background. The value of money

itself

is in enhancing control rather than maintenance and improvement of life,
and that becomes the paramount use of it. The role of money as a lubricant
for trade becomes secondary or is ignored altogether.

This change results in disrupting the precise balance of the circular flow

of

money. The bookkeeping of transactions no longer balances, because
instead of continuing the flow, the money is siphoned off into ever-
increasing private stores that are held or invested for monetary gain

instead

of being spent and sent back into circulation.

And perhaps even more important, this siphoned-off money is used to
increase the control by the people with the most money of the people with
less of it. Money buys laws and lawmakers, legal and paralegal enforcers,
self-serving loyalty and support from those with less money who also want
more of it. Money buys the power to make the rules.

The love of money, it has been said, is the root of all evil. Perhaps

"all" is an

exaggeration, but the growth of a money-oriented society is also the

growth

of a power and control-of-others oriented society, a society that has been
persuaded to admire the causes of its own eventual downfall.

The cure for this situation is obvious: ban "gaming the system" for the

sole

purpose of acquiring money and power. A ban is not strictly necessary, but

it

will prevent an enormous amount of suffering compared to simply letting
this inherently-flawed approach to money play out to its logical

conclusion.

This does not mean banning the management of large amounts of money, a
necessary function that requires the same level of knowledge and skill

that

many other important jobs require. It just means not skimming, using for
private gain part of the money being managed. It means viewing the
accumulation of private fortunes as embezzlement of money that is needed
by everyone, not just a few.

Of course such a reform would be very difficult to put into practice:
money also buys protection against those who rock the boat. And the
competitive attitudes that the acquisitional society develops will not
disappear overnight. It will take a long time for admiration of the "rags

to

···

-----Original Message-----
riches" saga to turn into distaste, and for some degree of humane concern
for the losers of competitions to start appearing.

Best,

Bill P.

[Martin_Lewitt]

[Martin Lewitt 2012 Jan 29 13:21 MST]

A good way to tax those who hoard money is to print it. It probably wouldn't hit the people you think. It is a myth that the rich have much money, most have stocks, bonds, capital equipment and other property. Only the cash, bonds, CDs, checking accounts, demand deposits and other dollar denominated assets would be hit by the "tax" of printing money. The benefit of newly "printed" money flows to those that get first access to it. Why shouldn't that be the people instead of whomever is getting it now?

-- Martin L

···

On 1/29/2012 11:41 AM, Bill Powers wrote:

[From Bill Powers (2012.01.29.0935 MST)]

Just some thoughts.

For years I'm been having uneasy thoughts about the financial system, and in general about the role of money in the economy. When people talk about the invention of money and the advantages it confers on the system, I believe they are making sense. Money enables everyone to trade services and goods for all kinds of goods and services, instead of just those few available locally. It gives us a common scale for comparing values of very different goods and services. I'm sure that a person more familiar with this subject could offer many more ways in which money provides advantages.

In macroeconomics, one fact that seems to be accepted by people in many different positions is that there is a circular flow of money in one direction, and goods and services in the opposite direction. In a healthy economy, this flow is unimpeded and precisely balanced. In their role as workers and managers, people and institutions receive money for their work from individual or institutional producers of goods and services. As consumers, they spend what they receive in order to buy and consume -- now or in the future -- the entire product of their own labors. Enough money must be available to balance the equations in both directions.

Circulating money, therefore, serves as a kind of lubricant for continuous and uninterrupted trade. It's here to stay.

However, money as currently conceived and used is also a point of vulnerability in any economic system. A store of money is a store of buying power, a claim on future goods and services. It's something that can be traded as a commodity, as any asset can be traded. That idea probably followed the invention of money very quickly if not instantly.

If money becomes a commodity, the role of money changes. We have to ask, what is now the measure of relative value? I think it boils down to control. Possession of money is valuable to the degree that it allows a person to control what happens to that person. That is essentially the same measure by which, ultimately, we judge the value of all goods and services.

Since money can be traded for any kind of good or service, it is an especially potent means for gaining control. It can be valued higher than any particular good or service. Those who see it that way, therefore, have good reason to acquire as much of this valuable commodity as they can. And therein lies the vulnerability of the system.

Those who use goods and services as a means of acquiring as much money as possible are not interested in using the money right now to purchase other goods and services. They use the money to purchase control, now and in the future. They can use the money without spending it by investing it or lending it at interest, which gives them more money in the future without involving a trade for any goods or services, and at the same time gives them power and influence even without being spent. The promise of spending it, or maintenance of a symbolic low level of spending, is enough.

Acquiring more money becomes an end in itself, the relationship of money to goods and services fading into the background. The value of money itself is in enhancing control rather than maintenance and improvement of life, and that becomes the paramount use of it. The role of money as a lubricant for trade becomes secondary or is ignored altogether.

This change results in disrupting the precise balance of the circular flow of money. The bookkeeping of transactions no longer balances, because instead of continuing the flow, the money is siphoned off into ever-increasing private stores that are held or invested for monetary gain instead of being spent and sent back into circulation.

And perhaps even more important, this siphoned-off money is used to increase the control by the people with the most money of the people with less of it. Money buys laws and lawmakers, legal and paralegal enforcers, self-serving loyalty and support from those with less money who also want more of it. Money buys the power to make the rules.

The love of money, it has been said, is the root of all evil. Perhaps "all" is an exaggeration, but the growth of a money-oriented society is also the growth of a power and control-of-others oriented society, a society that has been persuaded to admire the causes of its own eventual downfall.

The cure for this situation is obvious: ban "gaming the system" for the sole purpose of acquiring money and power. A ban is not strictly necessary, but it will prevent an enormous amount of suffering compared to simply letting this inherently-flawed approach to money play out to its logical conclusion. This does not mean banning the management of large amounts of money, a necessary function that requires the same level of knowledge and skill that many other important jobs require. It just means not skimming, using for private gain part of the money being managed. It means viewing the accumulation of private fortunes as embezzlement of money that is needed by everyone, not just a few.

Of course such a reform would be very difficult to put into practice: money also buys protection against those who rock the boat. And the competitive attitudes that the acquisitional society develops will not disappear overnight. It will take a long time for admiration of the "rags to riches" saga to turn into distaste, and for some degree of humane concern for the losers of competitions to start appearing.

Best,

Bill P.

[Bill_Powers1]

[From Bill Powers (2012.01.29.1600 MST)]

Martin Lewitt 2012 Jan 29 13:21 MST --

ML: A good way to tax those who hoard money is to print it. It probably wouldn't hit the people you think. It is a myth that the rich have much money, most have stocks, bonds, capital equipment and other property. Only the cash, bonds, CDs, checking accounts, demand deposits and other dollar denominated assets would be hit by the "tax" of printing money.

BP: What the rich have is a huge amount of money that they control and which they can use for their own private purposes. Of course they avoid paying taxes on most of it by holding it through corporations that they control. However, any time they need a large amount of cash, it is easily available -- often just by telling the finance department to cut a check in such a way that it can be classed as a business expense. A fact-finding tour to Bali, for example.

ML: The benefit of newly "printed" money flows to those that get first access to it. Why shouldn't that be the people instead of whomever is getting it now?

BP: Several reasons, the first of which is that the rich would never allow you actually to do that. Can you imagine getting such a bill through today's congress? Congressmen are not hired by the rich to devalue the portfolios of those who employ them; quite the opposite.

The second reason is more practical. It is never a good idea to institute an arbitrary change in any variable of a large system. The intended effect will be just one of many effects if it occurs, and most of the other effects will cause problems. The money supply has to remain balanced with economic transactions at all times if the system as a whole is to function properly. Each buyer must receive enough in earnings to pay for what is bought or contracted for, and each supplier must be paid enough for what is received to cover all costs including raw materials, labor, production equipment, depreciation, distribution, and profits (profit is a cost to a corporation, though it is income for the owners). Inventories must normally remain constant, sales equalling production. A certain amount of money must be allowed to accumulate in various accounts to average out good and bad times, but once the required amount has been saved, savings have to remain essentially constant, too, or change only as the size of the economy changes.

All these pontificial pronouncements, by the way, are simply what I've learned from trying to make economic models run for more than a few minutes at a time without crashing.

What's generally missing in existing economic systems is any consideration of system concepts. We have to learn that what is best for me starts with what is best for everyone including me. Each person who seeks only what is best for himself is an enemy of the system in which everyone has a stake. It's necessary to get outside oneself far enough to see that the whole system has to work, or none of it will work right. There do not seem to be many people in 2012 who have seen that, and there are particularly few among those who argue about economics.

Best,

Bill P.

[Shannon_Williams]

Hi Bill,

I would like to post this essay as a note on my Facebook page. Would that be ok? I love it.

Thanks,
Shannon

···

Sent from my iPhone

On Jan 29, 2012, at 12:41 PM, Bill Powers <powers_w@FRONTIER.NET> wrote:

[From Bill Powers (2012.01.29.0935 MST)]

Just some thoughts.

For years I'm been having uneasy thoughts about the financial system, and in general about the role of money in the economy. When people talk about the invention of money and the advantages it confers on the system, I believe they are making sense. Money enables everyone to trade services and goods for all kinds of goods and services, instead of just those few available locally. It gives us a common scale for comparing values of very different goods and services. I'm sure that a person more familiar with this subject could offer many more ways in which money provides advantages.

In macroeconomics, one fact that seems to be accepted by people in many different positions is that there is a circular flow of money in one direction, and goods and services in the opposite direction. In a healthy economy, this flow is unimpeded and precisely balanced. In their role as workers and managers, people and institutions receive money for their work from individual or institutional producers of goods and services. As consumers, they spend what they receive in order to buy and consume -- now or in the future -- the entire product of their own labors. Enough money must be available to balance the equations in both directions.

Circulating money, therefore, serves as a kind of lubricant for continuous and uninterrupted trade. It's here to stay.

However, money as currently conceived and used is also a point of vulnerability in any economic system. A store of money is a store of buying power, a claim on future goods and services. It's something that can be traded as a commodity, as any asset can be traded. That idea probably followed the invention of money very quickly if not instantly.

If money becomes a commodity, the role of money changes. We have to ask, what is now the measure of relative value? I think it boils down to control. Possession of money is valuable to the degree that it allows a person to control what happens to that person. That is essentially the same measure by which, ultimately, we judge the value of all goods and services.

Since money can be traded for any kind of good or service, it is an especially potent means for gaining control. It can be valued higher than any particular good or service. Those who see it that way, therefore, have good reason to acquire as much of this valuable commodity as they can. And therein lies the vulnerability of the system.

Those who use goods and services as a means of acquiring as much money as possible are not interested in using the money right now to purchase other goods and services. They use the money to purchase control, now and in the future. They can use the money without spending it by investing it or lending it at interest, which gives them more money in the future without involving a trade for any goods or services, and at the same time gives them power and influence even without being spent. The promise of spending it, or maintenance of a symbolic low level of spending, is enough.

Acquiring more money becomes an end in itself, the relationship of money to goods and services fading into the background. The value of money itself is in enhancing control rather than maintenance and improvement of life, and that becomes the paramount use of it. The role of money as a lubricant for trade becomes secondary or is ignored altogether.

This change results in disrupting the precise balance of the circular flow of money. The bookkeeping of transactions no longer balances, because instead of continuing the flow, the money is siphoned off into ever-increasing private stores that are held or invested for monetary gain instead of being spent and sent back into circulation.

And perhaps even more important, this siphoned-off money is used to increase the control by the people with the most money of the people with less of it. Money buys laws and lawmakers, legal and paralegal enforcers, self-serving loyalty and support from those with less money who also want more of it. Money buys the power to make the rules.

The love of money, it has been said, is the root of all evil. Perhaps "all" is an exaggeration, but the growth of a money-oriented society is also the growth of a power and control-of-others oriented society, a society that has been persuaded to admire the causes of its own eventual downfall.

The cure for this situation is obvious: ban "gaming the system" for the sole purpose of acquiring money and power. A ban is not strictly necessary, but it will prevent an enormous amount of suffering compared to simply letting this inherently-flawed approach to money play out to its logical conclusion. This does not mean banning the management of large amounts of money, a necessary function that requires the same level of knowledge and skill that many other important jobs require. It just means not skimming, using for private gain part of the money being managed. It means viewing the accumulation of private fortunes as embezzlement of money that is needed by everyone, not just a few.

Of course such a reform would be very difficult to put into practice: money also buys protection against those who rock the boat. And the competitive attitudes that the acquisitional society develops will not disappear overnight. It will take a long time for admiration of the "rags to riches" saga to turn into distaste, and for some degree of humane concern for the losers of competitions to start appearing.

Best,

Bill P.

[Martin_Lewitt]

[Martin Lewitt 2012 Jan 29 2330 MST]

[From Bill Powers (2012.01.29.1600 MST)]

Martin Lewitt 2012 Jan 29 13:21 MST --

ML: A good way to tax those who hoard money is to print it. It probably wouldn't hit the people you think. It is a myth that the rich have much money, most have stocks, bonds, capital equipment and other property. Only the cash, bonds, CDs, checking accounts, demand deposits and other dollar denominated assets would be hit by the "tax" of printing money.

BP: What the rich have is a huge amount of money that they control and which they can use for their own private purposes. Of course they avoid paying taxes on most of it by holding it through corporations that they control. However, any time they need a large amount of cash, it is easily available -- often just by telling the finance department to cut a check in such a way that it can be classed as a business expense. A fact-finding tour to Bali, for example.

In any well run business only a fraction of wealth is kept liquid as working capital. It is no doubt that the rich are wealthy and powerful and have ready access to money, but that does not support your hypothesis about their unwillingness to spend taking money out of circulation.

ML: The benefit of newly "printed" money flows to those that get first access to it. Why shouldn't that be the people instead of whomever is getting it now?

BP: Several reasons, the first of which is that the rich would never allow you actually to do that. Can you imagine getting such a bill through today's congress? Congressmen are not hired by the rich to devalue the portfolios of those who employ them; quite the opposite.

You are assuming their portfolios are dollar denominated, real wealth like stock ownership, land and capital equipment does not go down when dollars are printed. It is China or Japan's portfolio of treasuries which goes down and even they might welcome 2 to 3 percent devaluing of their portfolio if the US engine of economic growth jump starts the global economy. There is a double populist incentive for Congressmen to put the Federal Reserve into practice of printing money directly to the people: 1) printing to the people 2) economic hedgemony with China, Japan and others

Of course it doesn't hurt that our own economy gets lubricated with money in the hands of people able to locally optimized better than central planners.

The second reason is more practical. It is never a good idea to institute an arbitrary change in any variable of a large system. The intended effect will be just one of many effects if it occurs, and most of the other effects will cause problems. The money supply has to remain balanced with economic transactions at all times if the system as a whole is to function properly. Each buyer must receive enough in earnings to pay for what is bought or contracted for, and each supplier must be paid enough for what is received to cover all costs including raw materials, labor, production equipment, depreciation, distribution, and profits (profit is a cost to a corporation, though it is income for the owners). Inventories must normally remain constant, sales equalling production. A certain amount of money must be allowed to accumulate in various accounts to average out good and bad times, but once the required amount has been saved, savings have to remain essentially constant, too, or change only as the size of the economy changes.

The current systems was prone to such changes, as when $7 to $15 trillion disappeared under the collapse of the pyramid of leverage during the recent crisis.

All these pontificial pronouncements, by the way, are simply what I've learned from trying to make economic models run for more than a few minutes at a time without crashing.

Perhaps you should try modest 2 to 3% inflation, and locally intelligent agents acting strategically in their own interest in response to price signals.

What's generally missing in existing economic systems is any consideration of system concepts. We have to learn that what is best for me starts with what is best for everyone including me. Each person who seeks only what is best for himself is an enemy of the system in which everyone has a stake. It's necessary to get outside oneself far enough to see that the whole system has to work, or none of it will work right. There do not seem to be many people in 2012 who have seen that, and there are particularly few among those who argue about economics.

I'm your huckleberry. A system which thinks it knows what is best for everybody and assumes it isn't their individual self interest is deluded about human nature. As I recently pointed out to a wall street occupy buddy who was planning to commemorate his commitment to the cause with a tattoo, "Central planners usually don't have tattoo parlors high on their list of priorities." And I can quote me on that!

-- regards,
         Martin L

···

On 1/29/2012 4:42 PM, Bill Powers wrote:

Best,

Bill P.

[Bill_Powers1]

Hi, Shannon --

Sure, go ahead and use it!

Bill

···

At 07:04 PM 1/29/2012 -0600, you wrote:

Hi Bill,

I would like to post this essay as a note on my Facebook page. Would that be ok? I love it.

[Shannon_Williams]

Cool. Thanks! You know what would be nice, Bill is if you had a page
(or CSG had a page). Then when you write in the future, I (we all)
can just share it. This way, people beyond CSG are exposed to your
ideas. There are a million really intense conversations started
everyday just by a few people logging a note to their own page and
then sharing it.

···

On 1/30/12, Bill Powers <powers_w@frontier.net> wrote:

Hi, Shannon --

Sure, go ahead and use it!

Bill
At 07:04 PM 1/29/2012 -0600, you wrote:

Hi Bill,

I would like to post this essay as a note on my Facebook
page. Would that be ok? I love it.

[Shannon_Williams]

Note: 'page' below refers to FaceBook page.

···

On 1/30/12, Shannon Williams <verbingle@gmail.com> wrote:

Cool. Thanks! You know what would be nice, Bill is if you had a page
(or CSG had a page). Then when you write in the future, I (we all)
can just share it. This way, people beyond CSG are exposed to your
ideas. There are a million really intense conversations started
everyday just by a few people logging a note to their own page and
then sharing it.

On 1/30/12, Bill Powers <powers_w@frontier.net> wrote:

Hi, Shannon --

Sure, go ahead and use it!

Bill
At 07:04 PM 1/29/2012 -0600, you wrote:

Hi Bill,

I would like to post this essay as a note on my Facebook
page. Would that be ok? I love it.

[Bill_Powers1]

[From Bill Powers (2011.01.30.1625 MST)]

Martin Lewitt 2012 Jan 29 2330 MST --

BP earlier: What the rich have is a huge amount of money that they control and which they can use for their own private purposes.

BP earlier: Of course they avoid paying taxes on most of it by holding it through corporations that they control. However, any time they need a large amount of cash, it is easily available -- often just by telling the finance department to cut a check in such a way that it can be classed as a business expense. A fact-finding tour to Bali, for example.

ML: In any well run business only a fraction of wealth is kept liquid as working capital. It is no doubt that the rich are wealthy and powerful and have ready access to money, but that does not support your hypothesis about their unwillingness to spend taking money out of circulation.

BP: If they keep the money in tangible assets then it is out of circulation, isn't it? The "well run business" is only a front for the owners and managers of the business, who use it to express their personal preferences and ideologies and make their own lives as lush as possible.

As you imply, the magnitude of the circular flow is much greater than the amount of money that can be used for discretional spending. But the requirement for a viable economy is that the circular flow be precisely in balance so the money flow does not make local inventories of money (or goods) continuously increase or decrease. That balance can easily be disturbed and if the disturbance lasts too long, can bring the system near to limits of proper operation. A modest diversion of the circular flow can have a large effect.
...

ML: Of course it doesn't hurt that our own economy gets lubricated with money in the hands of people able to locally optimized better than central planners.

BP: Another term for local optimization is "keyhole optimization." It's not really optimization of the whole system, because it takes into account only a small number of the interacting factors that make up the whole. It's keyhole optimization that makes companies think that outsourcing to get cheap labor is a way to cut costs and increase profits. If one company were the only one doing that, it would prosper, but when many others see this clever strategy and adopt it, it ceases to be so clever because it destroys the local customer base. As a community of producers, your main customers are the people to whom you give paychecks for producing the goods they buy. When much smaller paychecks go to low-wage countries, they do not increase the foreign buying power enough for those workers to afford the products they make, and of course the income of the local workers who have been displaced has fallen, too, often to zero. Funny thing, sales go down when everybody gets on the bandwagon. The tires go flat. Clever move.

What you think of as examples of central planning, like what goes on in dictatorships, is planning by technically incompetent politicians, fanatics, and madmen who are trying to prove their ideologies correct without knowing the first thing about the design of large interacting systems. Put the same problem in the hands of scientists and engineers who understand how to model complex systems and are concerned only with making them work properly, and the outcomes would be far different.

BP earlier: All these pontificial pronouncements, by the way, are simply what I've learned from trying to make economic models run for more than a few minutes at a time without crashing.

ML: Perhaps you should try modest 2 to 3% inflation, and locally intelligent agents acting strategically in their own interest in response to price signals.

BP: That might work. It might also result in total disaster. Do you know how to make an accurate prediction of which outcome will happen? No, you're just expressing your faith in the free market system with nothing but your private convictions to back you up. I've been on a fixed income since 1990, with only part of it being indexed. I figure that a modest 3% inflation would have cut my buying power in half in 22 years. Thanks a lot pal, but I'm glad you're not in charge here.

And pray tell, what happens to the not-so-intelligent agents who don't understand financial strategies or price signals? Or who do understand them, but understand them wrongly? Are we supposed to just shrug them off and say they got what they deserved? Half of the people in this country are below average by any measure you care to use. Do we just write them off? Tell them to become smarter, more competent, more avaricious, more ruthless? And how are they to accomplish those things? You don't know, or apparently care. Every man for himself, and every child and old geezer like me. No thanks.

BP earlier: What's generally missing in existing economic systems is any consideration of system concepts. We have to learn that what is best for me starts with what is best for everyone including me. Each person who seeks only what is best for himself is an enemy of the system in which everyone has a stake. It's necessary to get outside oneself far enough to see that the whole system has to work, or none of it will work right. There do not seem to be many people in 2012 who have seen that, and there are particularly few among those who argue about economics.

ML: I'm your huckleberry. A system which thinks it knows what is best for everybody and assumes it isn't their individual self interest is deluded about human nature.

BP: Yes, and that's why competent system designers wouldn't think that (though many incompetent ones clearly have done so). The task is to accomodate as many individual self-interests as possible, as nearly as possible, while keeping the whole system healthy. People who consider ONLY their self-interest are obviously suffering from the delusion that they do not interact with other people, being affected by and affecting the other self-interests. They attribute their successes to their own efforts, conveniently forgetting the help and protection that others have given them, yet when failure occurs, it is everyone else who was responsible. The self-made man is a myth. John Galt was a figment of the imagination. Competent planners can't cave in to the preposterous posturings and demands of such people. But neither would they accept any equally preposterous opposite extremes.

Best,

Bill P.

[Martin_Lewitt]

[Martin Lewitt 2012 Jan 30 1822 MST]

[From Bill Powers (2011.01.30.1625 MST)]

Martin Lewitt 2012 Jan 29 2330 MST --

BP earlier: What the rich have is a huge amount of money that they
control and which they can use for their own private purposes.

BP earlier: Of course they avoid paying taxes on most of it by
holding it through corporations that they control. However, any
time they need a large amount of cash, it is easily available --
often just by telling the finance department to cut a check in such
a way that it can be classed as a business expense. A fact-finding
tour to Bali, for example.

ML: In any well run business only a fraction of wealth is kept
liquid as working capital. It is no doubt that the rich are wealthy
and powerful and have ready access to money, but that does not
support your hypothesis about their unwillingness to spend taking
money out of circulation.

BP: If they keep the money in tangible assets then it is out of
circulation, isn't it? The "well run business" is only a front for
the owners and managers of the business, who use it to express their
personal preferences and ideologies and make their own lives as lush
as possible.

No, they had to give the money to someone to get the tangible assets.
Even liquid assets like short term treasuries that they might have their
working capital in, had to be purchased putting the money in circulation.
They can quickly sell these when they need money to spend, which, of
course, means that they just obtained will be quickly back in circulation
again. The lush lives stuff is irrelevant to your point about money being
taken out of circulation.

As you imply, the magnitude of the circular flow is much greater than
the amount of money that can be used for discretional spending. But
the requirement for a viable economy is that the circular flow be
precisely in balance so the money flow does not make local
inventories of money (or goods) continuously increase or decrease.

No it doesn't have to be precise, you only need to be within the percent
inflation you are willing to tolerate. The central bank has a good record
of managing it until we get these big pyramids of debt that collapse.

That balance can easily be disturbed and if the disturbance lasts too
long, can bring the system near to limits of proper operation. A
modest diversion of the circular flow can have a large effect.
...

ML: Of course it doesn't hurt that our own economy gets lubricated
with money in the hands of people able to locally optimized better
than central planners.

BP: Another term for local optimization is "keyhole optimization."
It's not really optimization of the whole system, because it takes
into account only a small number of the interacting factors that make
up the whole. It's keyhole optimization that makes companies think
that outsourcing to get cheap labor is a way to cut costs and
increase profits. If one company were the only one doing that, it
would prosper, but when many others see this clever strategy and
adopt it, it ceases to be so clever because it destroys the local
customer base. As a community of producers, your main customers are
the people to whom you give paychecks for producing the goods they
buy. When much smaller paychecks go to low-wage countries, they do
not increase the foreign buying power enough for those workers to
afford the products they make, and of course the income of the local
workers who have been displaced has fallen, too, often to zero. Funny
thing, sales go down when everybody gets on the bandwagon. The tires
go flat. Clever move.

The same thing happens with capital equipment that increases labor
productivity such as happened to the US farming sector. The 95% that used
to do farm work that can now be done by 3%, are unemployed and can't
afford food. � NOT! You are assuming a zero sum game.

What you think of as examples of central planning, like what goes on
in dictatorships, is planning by technically incompetent politicians,
fanatics, and madmen who are trying to prove their ideologies correct
without knowing the first thing about the design of large interacting
systems. Put the same problem in the hands of scientists and
engineers who understand how to model complex systems and are
concerned only with making them work properly, and the outcomes would
be far different.

The worst do tend to rise to the top, according to F.A. Hayek.

BP earlier: All these pontificial pronouncements, by the way, are
simply what I've learned from trying to make economic models run
for more than a few minutes at a time without crashing.

ML: Perhaps you should try modest 2 to 3% inflation, and locally
intelligent agents acting strategically in their own interest in
response to price signals.

BP: That might work. It might also result in total disaster. Do you
know how to make an accurate prediction of which outcome will happen?
No, you're just expressing your faith in the free market system with
nothing but your private convictions to back you up. I've been on a
fixed income since 1990, with only part of it being indexed. I figure
that a modest 3% inflation would have cut my buying power in half in
22 years. Thanks a lot pal, but I'm glad you're not in charge here.

I'd have given you about $8000 to $12000 in "printed" money over the last
4 years, most of it early on. More than that per US capita was printed to
someone else. Do you think they spent it better than you would have? How
much of the benefit did you see?

And pray tell, what happens to the not-so-intelligent agents who
don't understand financial strategies or price signals?

The thing about price signals is that they are easy to read locally and
across borders and language barriers. Remember the story Milton Friedman
tells about how noone knows how to make a pencil.

Or who do
understand them, but understand them wrongly? Are we supposed to just
shrug them off and say they got what they deserved? Half of the
people in this country are below average by any measure you care to
use. Do we just write them off? Tell them to become smarter, more
competent, more avaricious, more ruthless? And how are they to
accomplish those things? You don't know, or apparently care. Every
man for himself, and every child and old geezer like me. No thanks.

Below average for modern human's is pretty intelligent, remember they are
descended from a chain of success 3 billion years long.

BP earlier: What's generally missing in existing economic systems
is any consideration of system concepts. We have to learn that what
is best for me starts with what is best for everyone including me.
Each person who seeks only what is best for himself is an enemy of
the system in which everyone has a stake. It's necessary to get
outside oneself far enough to see that the whole system has to
work, or none of it will work right. There do not seem to be many
people in 2012 who have seen that, and there are particularly few
among those who argue about economics.

ML: I'm your huckleberry. A system which thinks it knows what is
best for everybody and assumes it isn't their individual self
interest is deluded about human nature.

BP: Yes, and that's why competent system designers wouldn't think
that (though many incompetent ones clearly have done so). The task is
to accomodate as many individual self-interests as possible, as
nearly as possible, while keeping the whole system healthy. People
who consider ONLY their self-interest are obviously suffering from
the delusion that they do not interact with other people, being
affected by and affecting the other self-interests. They attribute
their successes to their own efforts, conveniently forgetting the
help and protection that others have given them, yet when failure
occurs, it is everyone else who was responsible. The self-made man is
a myth. John Galt was a figment of the imagination. Competent
planners can't cave in to the preposterous posturings and demands of
such people. But neither would they accept any equally preposterous
opposite extremes.

Galt had already withdrawn his support of others, look at the Reardon,
Dagny Taggart, and Wyatt characters instead. In a market economy, if you
want to get rich, you have to figure out how to help people, not what some
central planner considers "help", but what those people want that they are
willing to give value for.. What makes that happen is the self interest
of other people, they aren't going to give Reardon, Taggart and Wyatt
their money without value in return. Yes, being motivated to invest in
improving goods and services by returns you will get from your effort it
will is preposterous, of course, in the case of these characters, most of
the motivation wasn't even money but the subjective enjoyment of creation,
building and optimizing.

Something tells me you may not have read her works.

Regards,
    Martin L

···

On 1/30/12 5:37 PM, "Bill Powers" <powers_w@FRONTIER.NET> wrote:

Best,

Bill P.

[rsmarken]

[From Rick Marken (2012.01.31.1010)]

Bill Powers (2012.01.29.0935 MST)

In macroeconomics, one fact that seems to be accepted by people in many different positions is that there is a circular flow of money in one direction, and goods and services in the opposite direction.

I’m not sure this is true. At least, I don’t think they understand the circular flow as we do. I think economists view the economy as being made up of two separate groups, producers and consumers (or sellers and buyers). They might think of balance in terms of consumers having to pay producers at least what producers paid to produce what is being consumed. But I don’t think they really get the idea that producers and consumers are the same people and that people, in the role of consumers are continuously paying themselves back the money they paid themselves in the role of producers to produce what they are consuming.

It’s the same problem that psychologists have with understanding how closed loop systems work; they think they work like TOTE units, alternating cause and effect over time. I think it’s this temporal aspect of the behavior of a closed loop that economists (like psychologists) don’t get: the fact that all the variables are changing at the same time so that cause is producing effect while the effect is affecting the cause. The don’t understand the fact that you have to solve the feed forward and feedback equations that define the loop as a simultaneous pair to see how the loop works.

I think that was what was useful about my little simulation of a closed-loop economy; it showed how such an economy works at the aggregate level and what the effect is when all the money paid by the aggregate producer to the aggregate consumer (for production) is not being returned to the aggregate producer by the aggregate consumer. This leakage doesn’t affect GDP growth but it does drag production down below what it could be (creating unemployment).

I think economists are beginning to get glimmers of how this circular flow actually works, and the problems that are created when there is leakage from the flow. I just saw this article by Jared Bernstein, who I believe is influential in the current administration.

http://www.huffingtonpost.com/jared-bernstein/inequality-economic-growth_b_1243811.html

But it’s going to be hard or impossible to get sensible economic policies implemented in the US now. The wealthy can now buy the politicians they want (as you note) and there is a whole generation of people who have been raised to think that Reagan was a great president. Unless Obama wins by a landslide and gets veto-proof majorities in both houses of congress, I think we will just have to enjoy watching the ignominious end to a great country.

Best

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[amatic]

I was wondering - how exactly is the economy a closed loop system?

I didn’t get far with my attempts of modeling it, my brain just hurts when I start it, and I have much respect for you guys who did do modeling.

However, I wonder if maybe the economy is not about the circular flow of money. I mean, there is always something being exchanged for money. Money exchanges hands, a service or a product goes in the oposite direction, and that’s it. No flow. We could equaly say that there is a circular flow of bread or chicken.

As I see it, there are only control systems inside brains - a person controlling his level of income by choosing a job; controlling his level of spending by choosing which products to buy and so on. There are no superordinate, aggregate, loops that control the flow of money, no phisical mechanisms that control (no perceivers, comparators or effectors), just a bunch of small, internal ones that choose which exchanges to execute.

I don’t see where in the economy is the closed loop.

Best, Adam

···

On Tue, Jan 31, 2012 at 7:12 PM, Richard Marken rsmarken@gmail.com wrote:

[From Rick Marken (2012.01.31.1010)]

It’s the same problem that psychologists have with understanding how closed loop systems work; they think they work like TOTE units, alternating cause and effect over time. I think it’s this temporal aspect of the behavior of a closed loop that economists (like psychologists) don’t get: the fact that all the variables are changing at the same time so that cause is producing effect while the effect is affecting the cause. The don’t understand the fact that you have to solve the feed forward and feedback equations that define the loop as a simultaneous pair to see how the loop works.

Best

Rick

[Bill_Powers1]

[From Bill Powers (2011.01.31.1000 MST)]

BP earlier: If they keep the
money in tangible assets then it is out of

circulation, isn’t it? The “well run business” is only a
front for

the owners and managers of the business, who use it to express
their

personal preferences and ideologies and make their own lives as
lush

as possible.

ML: No, they had to give the money to someone to get the tangible
assets.

Even liquid assets like short term treasuries that they might have
their

working capital in, had to be purchased putting the money in
circulation.

They can quickly sell these when they need money to spend, which, of

course, means that they just obtained will be quickly back in
circulation

again. The lush lives stuff is irrelevant to your point about money
being

taken out of circulation.

BP: Hmm. You’re right. Ow. What you’re saying is that once money is in
circulation, it stays in circulation. I don’t see the flaw in that. Of
course some people can sit on large amounts of cash, but the answer to
that is one I’ve heard often; rich people put their money to work to grow
more of it. They invest it, which also puts it back in
circulation.
So why is every penny that ever existed not still flitting from one hand
to another all the time? Why isn’t everyone immensely wealthy? Help me
out here. I know that all that circulating money isn’t circulating
through me, or anyone else in this mobile home park, where all the
kids think I’m rich because I live alone in this huge double-wide and
give them cookies and cocoa which they hardly ever get at home where
there are two aunts unrelated to each other, and food stamps.

Well, here’s one possibility; see what you think of it. Money is created
when lent by a bank (as cash or credit). And that implies that it is
destroyed when it’s paid back to the bank that lent it. So money is
disappearing all the time at a rather tremendous rate. New money is also
being created at a tremendous rate, but the net amount in circulation
must depend on the relative rates of borrowing and repayment when they
come to equilibrium. If they do.

But what happens when people default on loans? The borrowed money has
been spent and can’t be returned to the bank. It just stays out there
going around and around, unless there are other kinds of leakage that
destroy money. Are there such things?

And where does the money to pay interest come from? Only the principal is
created money. Interest must come out of created money, reducing the
amount available for repaying loans. It has to be paid from an excess of
defaults over repayments, doesn’t it? Otherwise it has to come from
magic.

This still doesn’t explain the disparity between rich and poor. A great
deal more money circulates among rich people than among poor people. Why
is that? Is there some inherent flaw in the system that says when you get
a little ahead, that makes it possible to get even further ahead? Is the
system itself organized to be inherently unstable?

The rich, of course, like to think that they are better off because they
deserve to be, by divine right or just because they’re smarter than other
people (a dumb idea I’ve heard more than once, which is even dumber
because believing it disproves it). Perhaps this is why my efforts to get
support for a real modeling effort in economics have been so uniformly
rejected. A model might show what is causing this instability, and we
might then tweak the rules to eliminate it, and that would have pretty
adverse effects on you-know-whom (and I don’t mean Voldemort).

BP earlier: As you imply,
the magnitude of the circular flow is much greater >than the amount of
money that can be used for discretional spending. But

the requirement for a viable economy is that the circular flow
be

precisely in balance so the money flow does not make local

inventories of money (or goods) continuously increase or
decrease.

ML: No it doesn’t have to be precise, you only need to be within the
percent

inflation you are willing to tolerate. The central bank has a good
record

of managing it until we get these big pyramids of debt that
collapse.

BP: Balancing within four or five percent of the flow isn’t
precise?

With regard to inflation, it wouldn’t take long for an inflation rate of
5% to halve the buying power of money – 13.5 years, to be
exact.

You’re assuming that we need to tolerate inflation. I suppose that
inflation is good for people who are increasing their incomes faster than
the inflation rate devalues them, but it’s bad for everyone else. These
rates are being time-integrated, so even the slightest imbalance will
lead to larger and larger changes, so a control system would be needed to
prevent a drift right off the top or bottom of the chart.

Is this where the disparity is coming from? If your income increases
faster than the inflation rate, you get richer and richer if you don’t
spend it all, and the more you make the harder it is to spend it all
without just throwing it away. If you’re below the critical income, you
can only get farther below it, and farther into debt, unless you turn to
crime. So the borrowing by the poor and their inability to pay the money
back is putting more and more money into circulation, and that money is
going to the rich. What a clever system. So who is in charge of
controlling the inflation rate? The rich or the poor?

ML: The same thing happens with
capital equipment that increases labor

productivity such as happened to the US farming sector. The 95%
that used

to do farm work that can now be done by 3%, are unemployed and can’t

afford food. Š NOT! You are assuming a zero sum
game.

BP: Why aren’t you? I’m really asking. You must know something I don’t
know, and I’d like to know why you think it’s true. Yes, many farmers
migrated to the city where they took whatever employment they could find
for whatever wages they could get. Were they better off for doing that?
Or was someone else better off because the farmers left a hard life for a
harder one?

BP earlier: What you think
of as examples of central planning, like what >goes on in
dictatorships, is planning by technically incompetent >politicians,
fanatics, and madmen who are trying to prove their ideologies >
correct without knowing the first thing about the design of large
interacting systems. Put the same problem in the hands of scientists
and

engineers who understand how to model complex systems and are

concerned only with making them work properly, and the outcomes
would

be far different.

The worst do tend to rise to the top, according to F.A.
Hayek.

I’d be more specific than that. They don’t rise to the top because of
being the worst, they are the worst because of their intense desire to be
at the top and their lack of scruples about how they do it.

BP earlier: That might work.
It might also result in total disaster. Do you

know how to make an accurate prediction of which outcome will
happen?

No, you’re just expressing your faith in the free market system
with

nothing but your private convictions to back you up. I’ve been on
a

fixed income since 1990, with only part of it being indexed. I
figure

that a modest 3% inflation would have cut my buying power in half
in

22 years. Thanks a lot pal, but I’m glad you’re not in charge
here.

ML: I’d have given you about $8000 to $12000 in “printed” money
over the last

4 years, most of it early on. More than that per US capita was
printed to

someone else. Do you think they spent it better than you would
have? How

much of the benefit did you see?

BP: In 22 years I would have lost half a million dollars in buying power
at 3% inflation. You’re going to fix that with $10,000?

I don’t know how much benefit I saw and neither do you. What would I have
spent your $10000 stimulus on? A nice Ford SUV or a GM one? Maybe a
Saturn? In what bank would I have deposited my money, and what would have
happened to it? I don’t know and you don’t know. You’re not speaking from
a base of facts and testable concepts, but from faith in an abstract
theory about free markets, a political stance, an ideology, and
imagination. That doesn’t tell me if you’re right. I’m less interested in
what you claim than in how you demonstrate that your claim is valid. You
don’t seem to spend much time talking about the latter.

BP earlier: And pray tell,
what happens to the not-so-intelligent agents who

don’t understand financial strategies or price signals?

ML: The thing about price signals is that they are easy to read locally
and

across borders and language barriers. Remember the story Milton
Friedman

tells about how noone knows how to make a pencil.

BP: I don’t know that one, or of any reason to believe it. I know how
pencils are made, don’t you? Why should I believe something just because
Milton Friedman said it? Or just because you say it? Why do you think
price signals are easy to read? How do you know when you’re reading them
correctly?

And anyway, you dodged my question: what happens to the people who don’t
have the brains or education to understand these things? Do you care? Do
they just get the punishment they deserve for being dumb?

BP earlier: Half of the

people in this country are below average by any measure you care
to

use. Do we just write them off? Tell them to become smarter,
more

competent, more avaricious, more ruthless? And how are they to

accomplish those things? You don’t know, or apparently care.
Every

man for himself, and every child and old geezer like me. No
thanks.

ML: Below average for modern human’s is pretty intelligent, remember they
are

descended from a chain of success 3 billion years long.

BP: So are the bacteria in my intestines; in fact, they’ve been around
and evolving for longer than human beings have, by a big margin. People
boast of having 20 years of experience when all they have had is one year
of experience 20 times. That’s called being a conservative. Look at
cockroaches; they haven’t changed in appearance for 600 million years,
and it’s not clear that they’ve become the slightest bit
smarter.

BP earlier: John Galt was a
figment of the imagination. Competent

planners can’t cave in to the preposterous posturings and demands
of

such people. But neither would they accept any equally
preposterous

opposite extremes.

ML: Galt had already withdrawn his support of others, look at the
Reardon,

Dagny Taggart, and Wyatt characters instead.

BP: No, he hadn’t. There wasn’t any John Galt. Rand made the imaginary
John Galt pick up his marbles and go home, saying “They’ll be sorry
when they don’t have John Galt to kick around any more, I’ll show
them when they see what a mistake they’ve made.” He and the
others you mention are imaginary characters carefully constructed to
conform to Ayn Rand’s beliefs and resentments. All that Ayn Rand ever had
was a bunch of invented facts to back her up. It’s easy to be right when
you’re allowed to pick your conclusions first, and then create facts to
fit them. Especially when your readers forget that they’re reading
fiction.

ML: In a market economy,
if you

want to get rich, you have to figure out how to help people, not what
some

central planner considers “help”, but what those people want
that they are

willing to give value for…

BP: Wait a minute, I thought the theme here was to be self-reliant and
help yourself. If you decide to help people, aren’t you just being
another one of those pesky central planners? I think what you mean is
that if you want to get rich, you have to figure out how to give people a
convincing illusion of being helped a little while you’re helping
yourself a lot more. Buy this car and pretty girls will flock around you
panting for sex. But don’t ask for your money back if they
don’t.

Actually helping people is what any intelligent planner would do,
especially with PCT in the background. An intelligent planner would first
test the theories of human nature and interaction that he was going to
use, and look for underlying principles that lead to correct predictions
when applied to historical data and checked against known previous
outcomes. In other words, the intelligent planner would develop a model
that can be demonstrated to work correctly. That doesn’t seem to interest
any economic theorists.

ML: What makes that happen
is the self interest

of other people, they aren’t going to give Reardon, Taggart and
Wyatt

their money without value in return.

BP: Sure they will. All you have to do to prove that is to write a book
in which some characters give their money to another character without
getting anything back, like in the Bible. after which you think up some
plausible-sounding reasons for their doing it. Then all the people who
want things to be that way will buy your book and cite it as an
authoritative source, while a lot of those who disagree with it will
argue with the characters while forgetting that they’re
imaginary.

ML: Yes, being motivated to
invest in

improving goods and services by returns you will get from your effort
it

will is preposterous, of course, in the case of these characters, most
of

the motivation wasn’t even money but the subjective enjoyment of
creation,

building and optimizing.

BP: Those motivations you speak of were imaginary because Ayn Rand
imagined them. How do you know what real people would have done or what
they control for? You may know what you would have done, but unless
you’ve studied people scientifically rather than politically, and have
demonstrated that your generalizations hold true, all you can do is
repeat whatever prejudices and superstitions you have accumulated over
the years, perhaps from novels that turned you on.

ML: Something tells me you may
not have read her works.

BP: Whoever told you that, you’d better fire him or her. I think I’ve
read most of what she wrote, though I haven’t checked. I just didn’t
believe her portrayals of human nature except as windows into the way her
imagination worked. What I saw through those windows was somewhere
between deluded and disgusting.
Look, man, she was nmaking all that stuff up. It never happened. It was a
story.

Best,

Bill P.

[Bill_Powers1]

[From Bill Powers (2011.01.31.2105 MST)]

Rick Marken (2012.01.31.1010)--

They might think of balance in terms of consumers having to pay producers at least what producers paid to produce what is being consumed. But I don't think they really get the idea that producers and consumers are the same people and that people, in the role of consumers are continuously paying themselves back the money they paid themselves in the role of producers to produce what they are consuming.

I think that this collapses the model too far. I, for example, have had jobs but I have never paid myself for doing them: some company or other organization paid me for the work I did. Most people are that way: they are consumers and workers, but not managers of companies. And while other individuals in the company were also in that relationship to it (being paid to be the CEO, for example), the company itself, as an organization, did all the paying, and what it got for itself was production it could sell. The corporation is the producer, a machine operated by hired consumers. Your view isn't wrong, but I think it hides too much.

The circular flow simply says that the money paid to the people who manage or do the producing is the same money that those people spend to buy the products they make (at the composite level including all producers and consumers). The money goes around and around, accumulating here and there in local stores such as savings or checking accounts, but only temporarily. The goods go only one way, from raw material to garbage can, but coincide with the money flow between inventory and consumer, going the opposite way. I think that picture exposes all the essential parts of the system to view without getting too detailed.

Best,

Bill P.

[Martin_Lewitt]

[Martin Lewitt 2012 Feb 1 0147 MST]

[From Bill Powers (2011.01.31.1000 MST)]

BP earlier: If they keep the
money in tangible assets then it is out of

circulation, isn’t it? The “well run business” is only a
front for

the owners and managers of the business, who use it to express
their

personal preferences and ideologies and make their own lives as
lush

as possible.

ML: No, they had to give the money to someone to get the tangible
assets.

Even liquid assets like short term treasuries that they might have
their

working capital in, had to be purchased putting the money in
circulation.

They can quickly sell these when they need money to spend, which, of

course, means that they just obtained will be quickly back in
circulation

again. The lush lives stuff is irrelevant to your point about money
being

taken out of circulation.

BP: Hmm. You’re right. Ow. What you’re saying is that once money is in
circulation, it stays in circulation. I don’t see the flaw in that. Of
course some people can sit on large amounts of cash, but the answer to
that is one I’ve heard often; rich people put their money to work to grow
more of it. They invest it, which also puts it back in
circulation.

No, people and businesses can sit or hoard cash. What I am saying is that a well run business and professionally run corporation does not let cash just sit, nor does a wealthy person who is managing his wealth well or has professionals managing his wealth.

So why is every penny that ever existed not still flitting from one hand
to another all the time? Why isn’t everyone immensely wealthy? Help me
out here. I know that all that circulating money isn’t circulating
through me, or anyone else in this mobile home park, where all the
kids think I’m rich because I live alone in this huge double-wide and
give them cookies and cocoa which they hardly ever get at home where
there are two aunts unrelated to each other, and food stamps.

People can hoard cash and they and businesses can be slower to spend it. A slower velocity has the effect of a reduced money supply.

Well, here’s one possibility; see what you think of it. Money is created
when lent by a bank (as cash or credit). And that implies that it is
destroyed when it’s paid back to the bank that lent it. So money is
disappearing all the time at a rather tremendous rate. New money is also
being created at a tremendous rate, but the net amount in circulation
must depend on the relative rates of borrowing and repayment when they
come to equilibrium. If they do.

Yes, money does disappear in fractional reserve banking when a loan is repaid or when a loan asset goes into default. I advocate scaling back the fractional reserve system and its unstable pyramid of credit.

But what happens when people default on loans? The borrowed money has
been spent and can’t be returned to the bank. It just stays out there
going around and around, unless there are other kinds of leakage that
destroy money. Are there such things?

The money stays out there that was lent, but the loan default reduces the value of the stock of loans on the banks books that are the basis of its reserve, it can lend less and it has to reduce its amount of lending to restore its reserve. In a correlated event like the recent crisis that leads to a collapse of the money supply.

And where does the money to pay interest come from? Only the principal is
created money. Interest must come out of created money, reducing the
amount available for repaying loans. It has to be paid from an excess of
defaults over repayments, doesn’t it? Otherwise it has to come from
magic.

The central bank can create or print money to replace that lost or taken out of circulation as well as to repay interest. What is important is the amount and velocity of money relative to economic activity. Wealth creation is important and can have money type effects. Back when gold was money, it would be easy to see where the interest paid on gold lent to a gold mining firm would come from. It was producing new wealth, that conveniently just happened to be gold.

This still doesn’t explain the disparity between rich and poor. A great
deal more money circulates among rich people than among poor people. Why
is that? Is there some inherent flaw in the system that says when you get
a little ahead, that makes it possible to get even further ahead? Is the
system itself organized to be inherently unstable?

That “flaw” is that those with more wealth can afford to defer consumption and invest in capital equipment, research and development, patronage of arts, helping the poor, etc. It doesn’t make the system unstable, it makes it wealthier. Poor people have traditionally had this opportunity as well. Even subsistence farmers who weren’t actively dying, had leisure time (the non-growing season), which they could defer and instead of enjoying it, they could invest it in making or improving plows or tools, improving their land by walking the extra few feet to crap on it instead of in a more convenient place, or on improving their mind through thought, education or social intercourse, or producing IP such as songs or art that might have marketable value. The “poor” in a developed country like the US have even less excuse.

The rich, of course, like to think that they are better off because they
deserve to be, by divine right or just because they’re smarter than other
people (a dumb idea I’ve heard more than once, which is even dumber
because believing it disproves it). Perhaps this is why my efforts to get
support for a real modeling effort in economics have been so uniformly
rejected. A model might show what is causing this instability, and we
might then tweak the rules to eliminate it, and that would have pretty
adverse effects on you-know-whom (and I don’t mean Voldemort).

I doubt the rich spend much time thinking that, is that what you would think about if you were rich? Personally, if I were rich, I’d be thinking about science and doing scientific research, and how to employ my wealth in order to sustain such efforts.

BP earlier: As you imply,
the magnitude of the circular flow is much greater >than the amount of
money that can be used for discretional spending. But

the requirement for a viable economy is that the circular flow
be

precisely in balance so the money flow does not make local

inventories of money (or goods) continuously increase or
decrease.

ML: No it doesn’t have to be precise, you only need to be within the
percent

inflation you are willing to tolerate. The central bank has a good
record

of managing it until we get these big pyramids of debt that
collapse.

BP: Balancing within four or five percent of the flow isn’t
precise?

Not as precise as two or three percent. You can target less and tolerate more.

With regard to inflation, it wouldn’t take long for an inflation rate of
5% to halve the buying power of money – 13.5 years, to be
exact.

By the rule of 72 it would be 14.4 years.

You’re assuming that we need to tolerate inflation. I suppose that
inflation is good for people who are increasing their incomes faster than
the inflation rate devalues them, but it’s bad for everyone else. These
rates are being time-integrated, so even the slightest imbalance will
lead to larger and larger changes, so a control system would be needed to
prevent a drift right off the top or bottom of the chart.

It is good for debtors and bad for lenders and others with dollar denominated assets and those on fixed incomes.

Is this where the disparity is coming from? If your income increases
faster than the inflation rate, you get richer and richer if you don’t
spend it all, and the more you make the harder it is to spend it all
without just throwing it away. If you’re below the critical income, you
can only get farther below it, and farther into debt, unless you turn to
crime. So the borrowing by the poor and their inability to pay the money
back is putting more and more money into circulation, and that money is
going to the rich. What a clever system. So who is in charge of
controlling the inflation rate? The rich or the poor?

Currently the “independent” federal reserve is in “charge”, but in the past they have effectively managed it for the rich, treating wage increases as inflationary, allowing banks the benefit of fractional reserve money creation and by purchasing bonds on the open market, increasing their market value. I disagree with these policies, think they should dial back fractional reserve banking and should have the more robust system of printing money directly to the people, so they aren’t so powerless to replace money during a collapse of debt.

ML: The same thing happens with
capital equipment that increases labor

productivity such as happened to the US farming sector. The 95%
that used

to do farm work that can now be done by 3%, are unemployed and can’t

afford food. ? NOT! You are assuming a zero sum
game.

BP: Why aren’t you? I’m really asking. You must know something I don’t
know, and I’d like to know why you think it’s true. Yes, many farmers
migrated to the city where they took whatever employment they could find
for whatever wages they could get. Were they better off for doing that?
Or was someone else better off because the farmers left a hard life for a
harder one?

I know what Karl Marx knew, that capitalism showed that wealth isn’t static. That people can defer consumption and put labor freed up by capital equipment to productive work.

BP earlier: What you think
of as examples of central planning, like what >goes on in
dictatorships, is planning by technically incompetent >politicians,
fanatics, and madmen who are trying to prove their ideologies >
correct without knowing the first thing about the design of large
interacting systems. Put the same problem in the hands of scientists
and

engineers who understand how to model complex systems and are

concerned only with making them work properly, and the outcomes
would

be far different.

The worst do tend to rise to the top, according to F.A.
Hayek.

I’d be more specific than that. They don’t rise to the top because of
being the worst, they are the worst because of their intense desire to be
at the top and their lack of scruples about how they do it.

Hayek was that specific. The people who most want to run other peoples lives tend to be like that.

BP earlier: That might work.
It might also result in total disaster. Do you

know how to make an accurate prediction of which outcome will
happen?

No, you’re just expressing your faith in the free market system
with

nothing but your private convictions to back you up. I’ve been on
a

fixed income since 1990, with only part of it being indexed. I
figure

that a modest 3% inflation would have cut my buying power in half
in

22 years. Thanks a lot pal, but I’m glad you’re not in charge
here.

ML: I’d have given you about $8000 to $12000 in “printed” money
over the last

4 years, most of it early on. More than that per US capita was
printed to

someone else. Do you think they spent it better than you would
have? How

much of the benefit did you see?

BP: In 22 years I would have lost half a million dollars in buying power
at 3% inflation. You’re going to fix that with $10,000?

You sound like one of the people with dollar denominated assets instead of being deeply debt like most consumers. That $10,000 was just for the recent crisis. You would have received just two or three hundred most years, not enough to preserve dollar denominated assets of someone rich like you. You would have had to be more active to preserve your wealth. Being wealthy isn’t necessarily all its cut out to be.

I don’t know how much benefit I saw and neither do you. What would I have
spent your $10000 stimulus on? A nice Ford SUV or a GM one? Maybe a
Saturn? In what bank would I have deposited my money, and what would have
happened to it? I don’t know and you don’t know. You’re not speaking from
a base of facts and testable concepts, but from faith in an abstract
theory about free markets, a political stance, an ideology, and
imagination. That doesn’t tell me if you’re right. I’m less interested in
what you claim than in how you demonstrate that your claim is valid. You
don’t seem to spend much time talking about the latter.

What is hard to understand about printing money being more reliable than getting banks to lend and people to borrow during a period of crisis an uncertainty.

BP earlier: And pray tell,
what happens to the not-so-intelligent agents who

don’t understand financial strategies or price signals?

ML: The thing about price signals is that they are easy to read locally
and

across borders and language barriers. Remember the story Milton
Friedman

tells about how noone knows how to make a pencil.

BP: I don’t know that one, or of any reason to believe it. I know how
pencils are made, don’t you? Why should I believe something just because
Milton Friedman said it? Or just because you say it? Why do you think
price signals are easy to read? How do you know when you’re reading them
correctly?

I doubt you know how to make a pencil, and you still won’t after seeing this Milton Friedman video:

http://www.youtube.com/watch?v=4ERbC7JyCfU

And anyway, you dodged my question: what happens to the people who don’t
have the brains or education to understand these things? Do you care? Do
they just get the punishment they deserve for being dumb?

And I thought you were the one that thought rich people were dumb because they thought they were smarter?

If these dumb people live in developed country, apparently not much happens to them. I care enough to propose a redistributive system of money creation and enough to try to set society on a course where it avoids destructive crises such as we are experiencing.

BP earlier: Half of the

people in this country are below average by any measure you care
to

use. Do we just write them off? Tell them to become smarter,
more

competent, more avaricious, more ruthless? And how are they to

accomplish those things? You don’t know, or apparently care.
Every

man for himself, and every child and old geezer like me. No
thanks.

ML: Below average for modern human’s is pretty intelligent, remember they
are

descended from a chain of success 3 billion years long.

BP: So are the bacteria in my intestines; in fact, they’ve been around
and evolving for longer than human beings have, by a big margin. People
boast of having 20 years of experience when all they have had is one year
of experience 20 times. That’s called being a conservative. Look at
cockroaches; they haven’t changed in appearance for 600 million years,
and it’s not clear that they’ve become the slightest bit
smarter.

Right, but mammalian and human strategies are more dependent upon intelligence and parental investment than cockroaches.

BP earlier: John Galt was a
figment of the imagination. Competent

planners can’t cave in to the preposterous posturings and demands
of

such people. But neither would they accept any equally
preposterous

opposite extremes.

ML: Galt had already withdrawn his support of others, look at the
Reardon,

Dagny Taggart, and Wyatt characters instead.

BP: No, he hadn’t. There wasn’t any John Galt. Rand made the imaginary
John Galt pick up his marbles and go home, saying “They’ll be sorry
when they don’t have John Galt to kick around any more, I’ll show
them when they see what a mistake they’ve made.” He and the
others you mention are imaginary characters carefully constructed to
conform to Ayn Rand’s beliefs and resentments. All that Ayn Rand ever had
was a bunch of invented facts to back her up. It’s easy to be right when
you’re allowed to pick your conclusions first, and then create facts to
fit them. Especially when your readers forget that they’re reading
fiction.

You are the one who brought up John Galt, need I remind you that the agents in your models aren’t real either? Ayn Rand had insight into socialist and communist type systems that rings hauntingly true even today.

ML: In a market economy,
if you

want to get rich, you have to figure out how to help people, not what
some

central planner considers “help”, but what those people want
that they are

willing to give value for…

BP: Wait a minute, I thought the theme here was to be self-reliant and
help yourself. If you decide to help people, aren’t you just being
another one of those pesky central planners? I think what you mean is
that if you want to get rich, you have to figure out how to give people a
convincing illusion of being helped a little while you’re helping
yourself a lot more. Buy this car and pretty girls will flock around you
panting for sex. But don’t ask for your money back if they
don’t.

I can tell that you are the type of central planner that won’t allow wasted any resources on tattoos, art or music, all your cars would be black and have no air conditioning, etc. I too think people should be spending their money on more capital equipment, and research and development. If I get wealthy, more resources will be spent in these areas. But not everyone is willing to work hard to pay for capital equipment, and to fund research and development. But if they are willing to work hard for tattoos, penis cars, cable TV and music CDs, well guess what happens to such dumb people, they get tattoos, penis cars, cable TV and music CDs. And guess what happens to central planner, to paraphrase a former soviet system “We pretended to work and they pretended to pay us.” Perhaps the central planner should have given them a different color car.

Actually helping people is what any intelligent planner would do,
especially with PCT in the background. An intelligent planner would first
test the theories of human nature and interaction that he was going to
use, and look for underlying principles that lead to correct predictions
when applied to historical data and checked against known previous
outcomes. In other words, the intelligent planner would develop a model
that can be demonstrated to work correctly. That doesn’t seem to interest
any economic theorists.

Perhaps all understanding of human nature hasn’t been codified. Perhaps we know enough about human behavior to know it is nonlinear and we don’t have enough data on the control variables of enough individuals to predict the system. General principles based upon simplifying assumptions are the best we can do.

ML: What makes that happen
is the self interest

of other people, they aren’t going to give Reardon, Taggart and
Wyatt

their money without value in return.

BP: Sure they will. All you have to do to prove that is to write a book
in which some characters give their money to another character without
getting anything back, like in the Bible. after which you think up some
plausible-sounding reasons for their doing it. Then all the people who
want things to be that way will buy your book and cite it as an
authoritative source, while a lot of those who disagree with it will
argue with the characters while forgetting that they’re
imaginary.

We have to imagine your model agents are like people too. After years of experience, Rand’s characters, especially the villains seem pretty realistic, hauntingly so.

ML: Yes, being motivated to
invest in

improving goods and services by returns you will get from your effort
it

will is preposterous, of course, in the case of these characters, most
of

the motivation wasn’t even money but the subjective enjoyment of
creation,

building and optimizing.

BP: Those motivations you speak of were imaginary because Ayn Rand
imagined them. How do you know what real people would have done or what
they control for? You may know what you would have done, but unless
you’ve studied people scientifically rather than politically, and have
demonstrated that your generalizations hold true, all you can do is
repeat whatever prejudices and superstitions you have accumulated over
the years, perhaps from novels that turned you on.

ML: Something tells me you may
not have read her works.

BP: Whoever told you that, you’d better fire him or her. I think I’ve
read most of what she wrote, though I haven’t checked. I just didn’t
believe her portrayals of human nature except as windows into the way her
imagination worked. What I saw through those windows was somewhere
between deluded and disgusting.
Look, man, she was nmaking all that stuff up. It never happened. It was a
story.

It it too real, she was a keen observer of the systems and people she had experienced. The people were caricatured a bit to make a point, but she obviously had real people and repeatedly encountered types in mind. She and Hayek were among the great minds of the century.

Regards,

Martin L

···

On 1/31/12 6:34 PM, “Bill Powers” powers_w@FRONTIER.NET wrote:

Best,

Bill P.

[MartinT]

[Martin Taylor 2012.02.01.09.40]

I'm not going to comment on most of this conversation, but there are

a couple of things that I don’t think have been mentioned.

Bill asks about money taken out of circulation. The way I see it,

money is not taken out of circulation when a loan is repaid, any
more than it is taken out of circulation when it passes hands in
other ways. When a loan has just been repaid to the bank, the bank
becomes just a holder of the money previously lent, in the same way
as would a merchant to whom the money was paid for something more
tangible. Money is taken out of circulation when a loan is in
default. The lender then can’t lend out more money based on the
promise that the originally lent money will be returned. It’s gone.
The ability to lend money is based on trust that the money will be
returned eventually, and the value of money is at heart based on
that same trust. That’s why allowing Lehman Brothers to default was
so devastating to the world economy. People lost trust in the value
of other outstanding loans.

The other point is that the non-money economy is more important than

the money economy. I don’t mean barter, but the goods and services
bought with money. Money exists only to make it easier for people
trade goods and services. However, if people keep buying things, why
doesn’t everyone wind up with a huge pile of stuff? Because the
things or the value of the things decays over time. Hair grows out
after a haircut, food gets eaten, advice gets stale, computers get
obsolete, roads break up in the spring thaw… Things vanish, and
you have a Red Queen situation, where you have to keep transmitting
money (getting and using it) in order to stay in the same place. You
(society as a whole) have to keep producing goods and services to
replace what is lost, and you need to buy and sell teh new
production in order that the barrelmaker doesn’t wind up with a big
pile of barrels when he would rather have something to eat.

You don't know what the value of something you buy now will be a

week, a month, a year down the road, but it will with high
probability be worth less than what you paid to get it. You
personally have less worth than you did unless you get more money to
replace the lost stuff (goods that have decayed, services of less
current value than when they were rendered). Inflation comes largely
from that decay process (more detail at
), and without
it, the economy would slowly collapse. The problem with fixed
incomes is that they are fixed in constant dollars, to the great
benefit of the payers, rather than in the morally correct constant
value dollars.
Now I’ll butt out.
Martin

···

http://www.mmtaylor.net/Economics/index.html

[From Bill Powers (2011.01.31.1000 MST)]

    >BP earlier: If

they keep the
money in tangible assets then it is out of

    >circulation, isn't it? The "well run business" is only a

front for

    >the owners and managers of the business, who use it to

express
their

    >personal preferences and ideologies and make their own lives

as
lush

    >as possible.



    ML: No, they had to give the money to someone to get the

tangible
assets.

    Even liquid assets like short term treasuries that they might

have
their

    working capital in, had to be purchased putting the money in

circulation.

    They can quickly sell these when they need money to spend,

which, of

    course, means that they just obtained will be quickly back in

circulation

    again.  The lush lives stuff is irrelevant to your point about

money
being

    taken out of circulation.

  BP: Hmm. You're right. Ow. What you're saying is that once money

is in
circulation, it stays in circulation. I don’t see the flaw in
that. Of
course some people can sit on large amounts of cash, but the
answer to
that is one I’ve heard often; rich people put their money to work
to grow
more of it. They invest it, which also puts it back in
circulation.

  So why is every penny that ever existed not still flitting from

one hand
to another all the time? Why isn’t everyone immensely wealthy?
Help me
out here. I know that all that circulating money isn’t circulating
through me , or anyone else in this mobile home park, where
all the
kids think I’m rich because I live alone in this huge double-wide
and
give them cookies and cocoa which they hardly ever get at home
where
there are two aunts unrelated to each other, and food stamps.

  Well, here's one possibility; see what you think of it. Money is

created
when lent by a bank (as cash or credit). And that implies that it
is
destroyed when it’s paid back to the bank that lent it. So money
is
disappearing all the time at a rather tremendous rate. New money
is also
being created at a tremendous rate, but the net amount in
circulation
must depend on the relative rates of borrowing and repayment when
they
come to equilibrium. If they do.

  But what happens when people default on loans? The borrowed money

has
been spent and can’t be returned to the bank. It just stays out
there
going around and around, unless there are other kinds of leakage
that
destroy money. Are there such things?

  And where does the money to pay interest come from? Only the

principal is
created money. Interest must come out of created money, reducing
the
amount available for repaying loans. It has to be paid from an
excess of
defaults over repayments, doesn’t it? Otherwise it has to come
from
magic.

  This still doesn't explain the disparity between rich and poor. A

great
deal more money circulates among rich people than among poor
people. Why
is that? Is there some inherent flaw in the system that says when
you get
a little ahead, that makes it possible to get even further ahead?
Is the
system itself organized to be inherently unstable?

  The rich, of course, like to think that they are better off

because they
deserve to be, by divine right or just because they’re smarter
than other
people (a dumb idea I’ve heard more than once, which is even
dumber
because believing it disproves it). Perhaps this is why my efforts
to get
support for a real modeling effort in economics have been so
uniformly
rejected. A model might show what is causing this instability, and
we
might then tweak the rules to eliminate it, and that would have
pretty
adverse effects on you-know-whom (and I don’t mean Voldemort).

    >BP earlier: As

you imply,
the magnitude of the circular flow is much greater >than the
amount of
money that can be used for discretional spending. But

    >the requirement for a viable economy is that the circular

flow
be

    >precisely in balance so the money flow does not make local

    >inventories of money (or goods) continuously increase or

decrease.

    ML: No it doesn't have to be precise, you only need to be within

the
percent

    inflation you are willing to tolerate.  The central bank has a

good
record

    of managing it until we get these big pyramids of debt that

collapse.

  BP: Balancing within four or five percent of the flow isn't

precise?

  With regard to inflation, it wouldn't take long for an inflation

rate of
5% to halve the buying power of money – 13.5 years, to be
exact.

  You're assuming that we need to tolerate inflation. I suppose that

inflation is good for people who are increasing their incomes
faster than
the inflation rate devalues them, but it’s bad for everyone else.
These
rates are being time-integrated, so even the slightest imbalance
will
lead to larger and larger changes, so a control system would be
needed to
prevent a drift right off the top or bottom of the chart.

  Is this where the disparity is coming from? If your income

increases
faster than the inflation rate, you get richer and richer if you
don’t
spend it all, and the more you make the harder it is to spend it
all
without just throwing it away. If you’re below the critical
income, you
can only get farther below it, and farther into debt, unless you
turn to
crime. So the borrowing by the poor and their inability to pay the
money
back is putting more and more money into circulation, and that
money is
going to the rich. What a clever system. So who is in charge of
controlling the inflation rate? The rich or the poor?

    ML: The same thing

happens with
capital equipment that increases labor

    productivity such as happened to the US farming sector.  The 95%

that used

    to do farm work that can now be done by 3%, are unemployed and

can’t

    afford food. Š NOT!  You are assuming a zero sum

game.

  BP: Why aren't you? I'm really asking. You must know something I

don’t
know, and I’d like to know why you think it’s true. Yes, many
farmers
migrated to the city where they took whatever employment they
could find
for whatever wages they could get. Were they better off for doing
that?
Or was someone else better off because the farmers left a hard
life for a
harder one?

    >BP earlier: What

you think
of as examples of central planning, like what >goes on in
dictatorships, is planning by technically incompetent

politicians,
fanatics, and madmen who are trying to prove their ideologies

correct without knowing the first thing about the design of
large
interacting systems. Put the same problem in the hands of
scientists
and

    >engineers who understand how to model complex systems and

are

    >concerned only with making them work properly, and the

outcomes
would

    >be far different.



    The worst do tend to rise to the top, according to F.A.

Hayek.

  I'd be more specific than that. They don't rise to the top because

of
being the worst, they are the worst because of their intense
desire to be
at the top and their lack of scruples about how they do it.

    >BP earlier: That

might work.
It might also result in total disaster. Do you

    >know how to make an accurate prediction of which outcome

will
happen?

    >No, you're just expressing your faith in the free market

system
with

    >nothing but your private convictions to back you up. I've

been on
a

    >fixed income since 1990, with only part of it being indexed.

I
figure

    >that a modest 3% inflation would have cut my buying power in

half
in

    >22 years. Thanks a lot pal, but I'm glad you're not in

charge
here.

    ML: I'd have given you about $8000 to $12000 in "printed" money

over the last

    4 years, most of it early on.  More than that per US capita was

printed to

    someone else.  Do you think they spent it better than you would

have? How

    much of the benefit did you see?

  BP: In 22 years I would have lost half a million dollars in buying

power
at 3% inflation. You’re going to fix that with $10,000?

  I don't know how much benefit I saw and neither do you. What would

I have
spent your $10000 stimulus on? A nice Ford SUV or a GM one? Maybe
a
Saturn? In what bank would I have deposited my money, and what
would have
happened to it? I don’t know and you don’t know. You’re not
speaking from
a base of facts and testable concepts, but from faith in an
abstract
theory about free markets, a political stance, an ideology, and
imagination. That doesn’t tell me if you’re right. I’m less
interested in
what you claim than in how you demonstrate that your claim is
valid. You
don’t seem to spend much time talking about the latter.

    >BP earlier: And

pray tell,
what happens to the not-so-intelligent agents who

    >don't understand financial strategies or price signals?



    ML: The thing about price signals is that they are easy to read

locally
and

    across borders and language barriers.  Remember the story Milton

Friedman

    tells about how noone knows how to make a pencil.

  BP: I don't know that one, or of any reason to believe it. I know

how
pencils are made, don’t you? Why should I believe something just
because
Milton Friedman said it? Or just because you say it? Why do you
think
price signals are easy to read? How do you know when you’re
reading them
correctly?

  And anyway, you dodged my question: what happens to the people who

don’t
have the brains or education to understand these things? Do you
care? Do
they just get the punishment they deserve for being dumb?

    >BP earlier: Half

of the

    >people in this country are below average by any measure you

care
to

    >use. Do we just write them off? Tell them to become smarter,

more

    >competent, more avaricious, more ruthless? And how are they

to

    >accomplish those things? You don't know, or apparently care.

Every

    >man for himself, and every child and old geezer like me. No

thanks.

    ML: Below average for modern human's is pretty intelligent,

remember they
are

    descended from a chain of success 3 billion years long.

  BP: So are the bacteria in my intestines; in fact, they've been

around
and evolving for longer than human beings have, by a big margin.
People
boast of having 20 years of experience when all they have had is
one year
of experience 20 times. That’s called being a conservative. Look
at
cockroaches; they haven’t changed in appearance for 600 million
years,
and it’s not clear that they’ve become the slightest bit
smarter.

    >BP earlier: John

Galt was a
figment of the imagination. Competent

    >planners can't cave in to the preposterous posturings and

demands
of

    >such people. But neither would they accept any equally

preposterous

    >opposite extremes.



    ML: Galt had already withdrawn his support of others, look at

the
Reardon,

    Dagny Taggart, and Wyatt characters instead.

  BP: No, he hadn't. There wasn't any John Galt. Rand made the

imaginary
John Galt pick up his marbles and go home, saying “They’ll be
sorry
when they don’t have John Galt to kick around any more, I’ll show
them when they see what a mistake they’ve made.” He and the
others you mention are imaginary characters carefully constructed
to
conform to Ayn Rand’s beliefs and resentments. All that Ayn Rand
ever had
was a bunch of invented facts to back her up. It’s easy to be
right when
you’re allowed to pick your conclusions first, and then create
facts to
fit them. Especially when your readers forget that they’re reading
fiction.

    ML:  In a market

economy,
if you

    want to get rich, you have to figure out how to help people, not

what
some

    central planner considers "help", but what those people want

that they are

    willing to give value for..

  BP: Wait a minute, I thought the theme here was to be self-reliant

and
help yourself. If you decide to help people, aren’t you just being
another one of those pesky central planners? I think what you mean
is
that if you want to get rich, you have to figure out how to give
people a
convincing illusion of being helped a little while you’re helping
yourself a lot more. Buy this car and pretty girls will flock
around you
panting for sex. But don’t ask for your money back if they
don’t.

  Actually helping people is what any intelligent planner would do,

especially with PCT in the background. An intelligent planner
would first
test the theories of human nature and interaction that he was
going to
use, and look for underlying principles that lead to correct
predictions
when applied to historical data and checked against known previous
outcomes. In other words, the intelligent planner would develop a
model
that can be demonstrated to work correctly. That doesn’t seem to
interest
any economic theorists.

    ML:  What makes that

happen
is the self interest

    of other people, they aren't going to give Reardon, Taggart and

Wyatt

    their money without value in return.

  BP: Sure they will. All you have to do to prove that is to write a

book
in which some characters give their money to another character
without
getting anything back, like in the Bible. after which you think up
some
plausible-sounding reasons for their doing it. Then all the people
who
want things to be that way will buy your book and cite it as an
authoritative source, while a lot of those who disagree with it
will
argue with the characters while forgetting that they’re
imaginary.

    ML: Yes, being

motivated to
invest in

    improving goods and services by returns you will get from your

effort
it

    will is preposterous, of course, in the case of these

characters, most
of

    the motivation wasn't even money but the subjective enjoyment of

creation,

    building and optimizing.

  BP:  Those motivations you speak of were imaginary because Ayn

Rand
imagined them. How do you know what real people would have done or
what
they control for? You may know what you would have done, but
unless
you’ve studied people scientifically rather than politically, and
have
demonstrated that your generalizations hold true, all you can do
is
repeat whatever prejudices and superstitions you have accumulated
over
the years, perhaps from novels that turned you on.

    ML: Something tells

me you may
not have read her works.

  BP: Whoever told you that, you'd better fire him or her. I think

I’ve
read most of what she wrote, though I haven’t checked. I just
didn’t
believe her portrayals of human nature except as windows into the
way her
imagination worked. What I saw through those windows was somewhere
between deluded and disgusting.

  Look, man, she was nmaking all that stuff up. It never happened.

It was a
story.

  Best,



  Bill P.

[Shannon_Williams]

[Shannon Williams 2012.02.01 10:00 CST]

Hi Martin,

Please get a peice of paper and draw upon it a redition of money
passing hand in various ways. If you try it, eventually you will end
up with something similar to the diagram that Rick draws. It is EASY
to draw money exchanging hands. Pretned like you are CSI and trace
the money trail. Please try it. The problem comes when drawing
repayment of debt. Repayment of debt does not hurt the economy as
long as someone else is immediately loaned the repaid debt. Thus the
money is kept circulating. But when you are in a situation where
there is more money in savings than is being loaned, then the money in
savings just keeps building. Draw it on paper. It is easy to see.

In case you come back and say that is not the situation then I ask you
to Google $10 trillion in savings. We have $10 trillion dollars
sitting in savings (or we did last summer, and once again 90% is owned
by 10% of all of the owners. Most of the money is some sort of
pension plan). Note: Banks were considering charging a service charge
for accounts over $50 million because they could not loan the money

Thanks,
Shannon

···

On 2/1/12, Martin Taylor <mmt-csg@mmtaylor.net> wrote:

[Martin Taylor 2012.02.01.09.40]

I'm not going to comment on most of this conversation, but there are a
couple of things that I don't think have been mentioned.

Bill asks about money taken out of circulation. The way I see it, money
is not taken out of circulation when a loan is repaid, any more than it
is taken out of circulation when it passes hands in other ways. When a
loan has just been repaid to the bank, the bank becomes just a holder of
the money previously lent, in the same way as would a merchant to whom
the money was paid for something more tangible. Money is taken out of
circulation when a loan is in default. The lender then can't lend out
more money based on the promise that the originally lent money will be
returned. It's gone. The ability to lend money is based on trust that
the money will be returned eventually, and the value of money is at
heart based on that same trust. That's why allowing Lehman Brothers to
default was so devastating to the world economy. People lost trust in
the value of other outstanding loans.

The other point is that the non-money economy is more important than the
money economy. I don't mean barter, but the goods and services bought
with money. Money exists only to make it easier for people trade goods
and services. However, if people keep buying things, why doesn't
everyone wind up with a huge pile of stuff? Because the things or the
value of the things decays over time. Hair grows out after a haircut,
food gets eaten, advice gets stale, computers get obsolete, roads break
up in the spring thaw... Things vanish, and you have a Red Queen
situation, where you have to keep transmitting money (getting and using
it) in order to stay in the same place. You (society as a whole) have to
keep producing goods and services to replace what is lost, and you need
to buy and sell teh new production in order that the barrelmaker doesn't
wind up with a big pile of barrels when he would rather have something
to eat.

You don't know what the value of something you buy now will be a week, a
month, a year down the road, but it will with high probability be worth
less than what you paid to get it. You personally have less worth than
you did unless you get more money to replace the lost stuff (goods that
have decayed, services of less current value than when they were
rendered). Inflation comes largely from that decay process (more detail
at <http://www.mmtaylor.net/Economics/index.html&gt;\), and without it, the
economy would slowly collapse. The problem with fixed incomes is that
they are fixed in constant dollars, to the great benefit of the payers,
rather than in the morally correct constant value dollars.

Now I'll butt out.

Martin

[From Bill Powers (2011.01.31.1000 MST)]

>BP earlier: If they keep the money in tangible assets then it is out of
>circulation, isn't it? The "well run business" is only a front for
>the owners and managers of the business, who use it to express their
>personal preferences and ideologies and make their own lives as lush
>as possible.

ML: No, they had to give the money to someone to get the tangible assets.
Even liquid assets like short term treasuries that they might have their
working capital in, had to be purchased putting the money in circulation.
They can quickly sell these when they need money to spend, which, of
course, means that they just obtained will be quickly back in circulation
again. The lush lives stuff is irrelevant to your point about money
being
taken out of circulation.

BP: Hmm. You're right. Ow. What you're saying is that once money is in
circulation, it stays in circulation. I don't see the flaw in that. Of
course some people can sit on large amounts of cash, but the answer to
that is one I've heard often; rich people put their money to work to
grow more of it. They invest it, which also puts it back in circulation.

So why is every penny that ever existed not still flitting from one
hand to another all the time? Why isn't everyone immensely wealthy?
Help me out here. I know that all that circulating money isn't
circulating through /me/, or anyone else in this mobile home park,
where all the kids think I'm rich because I live alone in this huge
double-wide and give them cookies and cocoa which they hardly ever get
at home where there are two aunts unrelated to each other, and food
stamps.

Well, here's one possibility; see what you think of it. Money is
created when lent by a bank (as cash or credit). And that implies that
it is destroyed when it's paid back to the bank that lent it. So money
is disappearing all the time at a rather tremendous rate. New money is
also being created at a tremendous rate, but the net amount in
circulation must depend on the relative rates of borrowing and
repayment when they come to equilibrium. If they do.

But what happens when people default on loans? The borrowed money has
been spent and can't be returned to the bank. It just stays out there
going around and around, unless there are other kinds of leakage that
destroy money. Are there such things?

And where does the money to pay interest come from? Only the principal
is created money. Interest must come out of created money, reducing
the amount available for repaying loans. It has to be paid from an
excess of defaults over repayments, doesn't it? Otherwise it has to
come from magic.

This still doesn't explain the disparity between rich and poor. A
great deal more money circulates among rich people than among poor
people. Why is that? Is there some inherent flaw in the system that
says when you get a little ahead, that makes it possible to get even
further ahead? Is the system itself organized to be inherently unstable?

The rich, of course, like to think that they are better off because
they deserve to be, by divine right or just because they're smarter
than other people (a dumb idea I've heard more than once, which is
even dumber because believing it disproves it). Perhaps this is why my
efforts to get support for a real modeling effort in economics have
been so uniformly rejected. A model might show what is causing this
instability, and we might then tweak the rules to eliminate it, and
that would have pretty adverse effects on you-know-whom (and I don't
mean Voldemort).

>BP earlier: As you imply, the magnitude of the circular flow is much
greater >than the amount of money that can be used for discretional
spending. But
>the requirement for a viable economy is that the circular flow be
>precisely in balance so the money flow does not make local
>inventories of money (or goods) continuously increase or decrease.

ML: No it doesn't have to be precise, you only need to be within the
percent
inflation you are willing to tolerate. The central bank has a good
record
of managing it until we get these big pyramids of debt that collapse.

BP: Balancing within four or five percent of the flow isn't precise?

With regard to inflation, it wouldn't take long for an inflation rate
of 5% to halve the buying power of money -- 13.5 years, to be exact.

You're assuming that we need to tolerate inflation. I suppose that
inflation is good for people who are increasing their incomes faster
than the inflation rate devalues them, but it's bad for everyone else.
These rates are being time-integrated, so even the slightest imbalance
will lead to larger and larger changes, so a control system would be
needed to prevent a drift right off the top or bottom of the chart.

Is this where the disparity is coming from? If your income increases
faster than the inflation rate, you get richer and richer if you don't
spend it all, and the more you make the harder it is to spend it all
without just throwing it away. If you're below the critical income,
you can only get farther below it, and farther into debt, unless you
turn to crime. So the borrowing by the poor and their inability to pay
the money back is putting more and more money into circulation, and
that money is going to the rich. What a clever system. So who is in
charge of controlling the inflation rate? The rich or the poor?

ML: The same thing happens with capital equipment that increases labor
productivity such as happened to the US farming sector. The 95% that
used
to do farm work that can now be done by 3%, are unemployed and can't
afford food. S( NOT! You are assuming a zero sum game.

BP: Why aren't you? I'm really asking. You must know something I don't
know, and I'd like to know why you think it's true. Yes, many farmers
migrated to the city where they took whatever employment they could
find for whatever wages they could get. Were they better off for doing
that? Or was someone else better off because the farmers left a hard
life for a harder one?

>BP earlier: What you think of as examples of central planning, like
what >goes on in dictatorships, is planning by technically
incompetent >politicians, fanatics, and madmen who are trying to
prove their ideologies > >correct without knowing the first thing
about the design of large >interacting systems. Put the same problem
in the hands of scientists and
>engineers who understand how to model complex systems and are
>concerned only with making them work properly, and the outcomes would
>be far different.

The worst do tend to rise to the top, according to F.A. Hayek.

I'd be more specific than that. They don't rise to the top because of
being the worst, they are the worst because of their intense desire to
be at the top and their lack of scruples about how they do it.

>BP earlier: That might work. It might also result in total disaster.
Do you
>know how to make an accurate prediction of which outcome will happen?
>No, you're just expressing your faith in the free market system with
>nothing but your private convictions to back you up. I've been on a
>fixed income since 1990, with only part of it being indexed. I figure
>that a modest 3% inflation would have cut my buying power in half in
>22 years. Thanks a lot pal, but I'm glad you're not in charge here.

ML: I'd have given you about $8000 to $12000 in "printed" money over
the last
4 years, most of it early on. More than that per US capita was
printed to
someone else. Do you think they spent it better than you would
have? How
much of the benefit did you see?

BP: In 22 years I would have lost half a million dollars in buying
power at 3% inflation. You're going to fix that with $10,000?

I don't know how much benefit I saw and neither do you. What would I
have spent your $10000 stimulus on? A nice Ford SUV or a GM one? Maybe
a Saturn? In what bank would I have deposited my money, and what would
have happened to it? I don't know and you don't know. You're not
speaking from a base of facts and testable concepts, but from faith in
an abstract theory about free markets, a political stance, an
ideology, and imagination. That doesn't tell me if you're right. I'm
less interested in what you claim than in how you demonstrate that
your claim is valid. You don't seem to spend much time talking about
the latter.

>BP earlier: And pray tell, what happens to the not-so-intelligent
agents who
>don't understand financial strategies or price signals?

ML: The thing about price signals is that they are easy to read
locally and
across borders and language barriers. Remember the story Milton Friedman
tells about how noone knows how to make a pencil.

BP: I don't know that one, or of any reason to believe it. I know how
pencils are made, don't you? Why should I believe something just
because Milton Friedman said it? Or just because you say it? Why do
you think price signals are easy to read? How do you know when you're
reading them correctly?

And anyway, you dodged my question: what happens to the people who
don't have the brains or education to understand these things? Do you
care? Do they just get the punishment they deserve for being dumb?

>BP earlier: Half of the
>people in this country are below average by any measure you care to
>use. Do we just write them off? Tell them to become smarter, more
>competent, more avaricious, more ruthless? And how are they to
>accomplish those things? You don't know, or apparently care. Every
>man for himself, and every child and old geezer like me. No thanks.

ML: Below average for modern human's is pretty intelligent, remember
they are
descended from a chain of success 3 billion years long.

BP: So are the bacteria in my intestines; in fact, they've been around
and evolving for longer than human beings have, by a big margin.
People boast of having 20 years of experience when all they have had
is one year of experience 20 times. That's called being a
conservative. Look at cockroaches; they haven't changed in appearance
for 600 million years, and it's not clear that they've become the
slightest bit smarter.

>BP earlier: John Galt was a figment of the imagination. Competent
>planners can't cave in to the preposterous posturings and demands of
>such people. But neither would they accept any equally preposterous
>opposite extremes.

ML: Galt had already withdrawn his support of others, look at the
Reardon,
Dagny Taggart, and Wyatt characters instead.

BP: No, he hadn't. There wasn't any John Galt. Rand made the imaginary
John Galt pick up his marbles and go home, saying "They'll be sorry
when they don't have John Galt to kick around any more, I'll show
/them/ when they see what a mistake they've made." He and the others
you mention are imaginary characters carefully constructed to conform
to Ayn Rand's beliefs and resentments. All that Ayn Rand ever had was
a bunch of invented facts to back her up. It's easy to be right when
you're allowed to pick your conclusions first, and then create facts
to fit them. Especially when your readers forget that they're reading
fiction.

ML: In a market economy, if you
want to get rich, you have to figure out how to help people, not what
some
central planner considers "help", but what those people want that
they are
willing to give value for..

BP: Wait a minute, I thought the theme here was to be self-reliant and
help yourself. If you decide to help people, aren't you just being
another one of those pesky central planners? I think what you mean is
that if you want to get rich, you have to figure out how to give
people a convincing illusion of being helped a little while you're
helping yourself a lot more. Buy this car and pretty girls will flock
around you panting for sex. But don't ask for your money back if they
don't.

Actually helping people is what any intelligent planner would do,
especially with PCT in the background. An intelligent planner would
first test the theories of human nature and interaction that he was
going to use, and look for underlying principles that lead to correct
predictions when applied to historical data and checked against known
previous outcomes. In other words, the intelligent planner would
develop a model that can be demonstrated to work correctly. That
doesn't seem to interest any economic theorists.

ML: What makes that happen is the self interest
of other people, they aren't going to give Reardon, Taggart and Wyatt
their money without value in return.

BP: Sure they will. All you have to do to prove that is to write a
book in which some characters give their money to another character
without getting anything back, like in the Bible. after which you
think up some plausible-sounding reasons for their doing it. Then all
the people who want things to be that way will buy your book and cite
it as an authoritative source, while a lot of those who disagree with
it will argue with the characters while forgetting that they're imaginary.

ML: Yes, being motivated to invest in
improving goods and services by returns you will get from your effort it
will is preposterous, of course, in the case of these characters, most of
the motivation wasn't even money but the subjective enjoyment of
creation,
building and optimizing.

BP: Those motivations you speak of were imaginary because Ayn Rand
imagined them. How do you know what real people would have done or
what they control for? You may know what you would have done, but
unless you've studied people scientifically rather than politically,
and have demonstrated that your generalizations hold true, all you can
do is repeat whatever prejudices and superstitions you have
accumulated over the years, perhaps from novels that turned you on.

ML: Something tells me you may not have read her works.

BP: Whoever told you that, you'd better fire him or her. I think I've
read most of what she wrote, though I haven't checked. I just didn't
believe her portrayals of human nature except as windows into the way
her imagination worked. What I saw through those windows was somewhere
between deluded and disgusting.

Look, man, she was nmaking all that stuff up. It never happened. It
was a /story/.

Best,

Bill P.

[rsmarken]

[From Rick Marken (2012.02.01.0900)]

Bill Powers (2011.01.31.2105 MST)–

Rick Marken (2012.01.31.1010)–

RM: They might think of balance in terms of consumers having to pay producers at least what producers paid to produce what is being consumed. But I don’t think they really get the idea that producers and consumers are the same people and that people, in the role of consumers are continuously paying themselves back the money they paid themselves in the role of producers to produce what they are consuming.

I think that this collapses the model too far. I, for example, have had jobs but I have never paid myself for doing them:

I still like my way of looking at it. When I say that consumers pay themselves back what they paid themselves as producers I’m talking at the aggregate level. Though it shows up at the individual level too. When you pay for the candy you give to the kids you are paying another producer/consumer for having produced what you are consuming. That money doesn’t go directly to the guy who made the candy; it goes to the company which then pays the employee. But I think all those details actually obscure what is going on at the macro level.

GDP is what the aggregate producer had paid (in some time unit, say 1 year) to produce all the goods and services produced that year. That includes payments for labor, profit, capital investment, and so on. So it’s payment that goes to everyone who is part of the aggregate consumer – from the lowliest laborer to the richest bankers. And that money is being returned to the aggregate producer (who paid it all out) by itself as the aggregate consumer – so the lowly laborers and richest bankers are paying themselves back for for all the stuff that they were paid for producing it.

That’s why I like to think of the aggregate economy as an aggregate control system; like a control system it is both a producer (output generator) and consumer (input processor) organized in a closed loop. And, like a control system, the aggregate economic control system controls its input; it controls for consuming stuff. The aggregate analysis reveals what an economy is all about; people collectively controlling for consumption of what they want and need. To me, this is a very satisfying general view of the economy since it is consistent with what we know about the individuals who make up the aggregate economy; they are control systems. So why shouldn’t the aggregate behavior of these control systems act like a control system.

Best

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[MartinT]

[Martin Taylor 2012.02.01.13.36]

[Shannon Williams 2012.02.01 10:00 CST]

  The problem comes when drawing
repayment of debt. Repayment of debt does not hurt the economy as
long as someone else is immediately loaned the repaid debt. Thus the
money is kept circulating.

Exactly. Maybe I didn't word it very clearly, but that was the point I was making. When the money is repaid, it can be loaned out again. But until it is, there is a limit to how many times the bank can loan out the same dollar. If the bank doesn't re-loan the returned money, the situation is the same as if the merchant to whom I paid a dollar just stuck it under a mattress.

I think this is what your are getting at, isn't it?

Martin

···

On 2/1/12, Martin Taylor<mmt-csg@mmtaylor.net> wrote:

[Martin Taylor 2012.02.01.09.40]

I'm not going to comment on most of this conversation, but there are a
couple of things that I don't think have been mentioned.

Bill asks about money taken out of circulation. The way I see it, money
is not taken out of circulation when a loan is repaid, any more than it
is taken out of circulation when it passes hands in other ways. When a
loan has just been repaid to the bank, the bank becomes just a holder of
the money previously lent, in the same way as would a merchant to whom
the money was paid for something more tangible. Money is taken out of
circulation when a loan is in default. The lender then can't lend out
more money based on the promise that the originally lent money will be
returned. It's gone. The ability to lend money is based on trust that
the money will be returned eventually, and the value of money is at
heart based on that same trust. That's why allowing Lehman Brothers to
default was so devastating to the world economy. People lost trust in
the value of other outstanding loans.

The other point is that the non-money economy is more important than the
money economy. I don't mean barter, but the goods and services bought
with money. Money exists only to make it easier for people trade goods
and services. However, if people keep buying things, why doesn't
everyone wind up with a huge pile of stuff? Because the things or the
value of the things decays over time. Hair grows out after a haircut,
food gets eaten, advice gets stale, computers get obsolete, roads break
up in the spring thaw... Things vanish, and you have a Red Queen
situation, where you have to keep transmitting money (getting and using
it) in order to stay in the same place. You (society as a whole) have to
keep producing goods and services to replace what is lost, and you need
to buy and sell teh new production in order that the barrelmaker doesn't
wind up with a big pile of barrels when he would rather have something
to eat.

You don't know what the value of something you buy now will be a week, a
month, a year down the road, but it will with high probability be worth
less than what you paid to get it. You personally have less worth than
you did unless you get more money to replace the lost stuff (goods that
have decayed, services of less current value than when they were
rendered). Inflation comes largely from that decay process (more detail
at<http://www.mmtaylor.net/Economics/index.html&gt;\), and without it, the
economy would slowly collapse. The problem with fixed incomes is that
they are fixed in constant dollars, to the great benefit of the payers,
rather than in the morally correct constant value dollars.

Now I'll butt out.

Martin

[From Bill Powers (2011.01.31.1000 MST)]

BP earlier: If they keep the money in tangible assets then it is out of
circulation, isn't it? The "well run business" is only a front for
the owners and managers of the business, who use it to express their
personal preferences and ideologies and make their own lives as lush
as possible.

ML: No, they had to give the money to someone to get the tangible assets.
Even liquid assets like short term treasuries that they might have their
working capital in, had to be purchased putting the money in circulation.
They can quickly sell these when they need money to spend, which, of
course, means that they just obtained will be quickly back in circulation
again. The lush lives stuff is irrelevant to your point about money
being
taken out of circulation.

BP: Hmm. You're right. Ow. What you're saying is that once money is in
circulation, it stays in circulation. I don't see the flaw in that. Of
course some people can sit on large amounts of cash, but the answer to
that is one I've heard often; rich people put their money to work to
grow more of it. They invest it, which also puts it back in circulation.

So why is every penny that ever existed not still flitting from one
hand to another all the time? Why isn't everyone immensely wealthy?
Help me out here. I know that all that circulating money isn't
circulating through /me/, or anyone else in this mobile home park,
where all the kids think I'm rich because I live alone in this huge
double-wide and give them cookies and cocoa which they hardly ever get
at home where there are two aunts unrelated to each other, and food
stamps.

Well, here's one possibility; see what you think of it. Money is
created when lent by a bank (as cash or credit). And that implies that
it is destroyed when it's paid back to the bank that lent it. So money
is disappearing all the time at a rather tremendous rate. New money is
also being created at a tremendous rate, but the net amount in
circulation must depend on the relative rates of borrowing and
repayment when they come to equilibrium. If they do.

But what happens when people default on loans? The borrowed money has
been spent and can't be returned to the bank. It just stays out there
going around and around, unless there are other kinds of leakage that
destroy money. Are there such things?

And where does the money to pay interest come from? Only the principal
is created money. Interest must come out of created money, reducing
the amount available for repaying loans. It has to be paid from an
excess of defaults over repayments, doesn't it? Otherwise it has to
come from magic.

This still doesn't explain the disparity between rich and poor. A
great deal more money circulates among rich people than among poor
people. Why is that? Is there some inherent flaw in the system that
says when you get a little ahead, that makes it possible to get even
further ahead? Is the system itself organized to be inherently unstable?

The rich, of course, like to think that they are better off because
they deserve to be, by divine right or just because they're smarter
than other people (a dumb idea I've heard more than once, which is
even dumber because believing it disproves it). Perhaps this is why my
efforts to get support for a real modeling effort in economics have
been so uniformly rejected. A model might show what is causing this
instability, and we might then tweak the rules to eliminate it, and
that would have pretty adverse effects on you-know-whom (and I don't
mean Voldemort).

BP earlier: As you imply, the magnitude of the circular flow is much

>than the amount of money that can be used for discretional
spending. But

the requirement for a viable economy is that the circular flow be
precisely in balance so the money flow does not make local
inventories of money (or goods) continuously increase or decrease.

ML: No it doesn't have to be precise, you only need to be within the
percent
inflation you are willing to tolerate. The central bank has a good
record
of managing it until we get these big pyramids of debt that collapse.

BP: Balancing within four or five percent of the flow isn't precise?

With regard to inflation, it wouldn't take long for an inflation rate
of 5% to halve the buying power of money -- 13.5 years, to be exact.

You're assuming that we need to tolerate inflation. I suppose that
inflation is good for people who are increasing their incomes faster
than the inflation rate devalues them, but it's bad for everyone else.
These rates are being time-integrated, so even the slightest imbalance
will lead to larger and larger changes, so a control system would be
needed to prevent a drift right off the top or bottom of the chart.

Is this where the disparity is coming from? If your income increases
faster than the inflation rate, you get richer and richer if you don't
spend it all, and the more you make the harder it is to spend it all
without just throwing it away. If you're below the critical income,
you can only get farther below it, and farther into debt, unless you
turn to crime. So the borrowing by the poor and their inability to pay
the money back is putting more and more money into circulation, and
that money is going to the rich. What a clever system. So who is in
charge of controlling the inflation rate? The rich or the poor?

ML: The same thing happens with capital equipment that increases labor
productivity such as happened to the US farming sector. The 95% that
used
to do farm work that can now be done by 3%, are unemployed and can't
afford food. S( NOT! You are assuming a zero sum game.

BP: Why aren't you? I'm really asking. You must know something I don't
know, and I'd like to know why you think it's true. Yes, many farmers
migrated to the city where they took whatever employment they could
find for whatever wages they could get. Were they better off for doing
that? Or was someone else better off because the farmers left a hard
life for a harder one?

BP earlier: What you think of as examples of central planning, like

>goes on in dictatorships, is planning by technically
>politicians, fanatics, and madmen who are trying to
prove their ideologies> >correct without knowing the first thing
about the design of large>interacting systems. Put the same problem
in the hands of scientists and

engineers who understand how to model complex systems and are
concerned only with making them work properly, and the outcomes would
be far different.

The worst do tend to rise to the top, according to F.A. Hayek.

I'd be more specific than that. They don't rise to the top because of
being the worst, they are the worst because of their intense desire to
be at the top and their lack of scruples about how they do it.

BP earlier: That might work. It might also result in total disaster.

Do you

know how to make an accurate prediction of which outcome will happen?
No, you're just expressing your faith in the free market system with
nothing but your private convictions to back you up. I've been on a
fixed income since 1990, with only part of it being indexed. I figure
that a modest 3% inflation would have cut my buying power in half in
22 years. Thanks a lot pal, but I'm glad you're not in charge here.

ML: I'd have given you about $8000 to $12000 in "printed" money over
the last
4 years, most of it early on. More than that per US capita was
printed to
someone else. Do you think they spent it better than you would
have? How
much of the benefit did you see?

BP: In 22 years I would have lost half a million dollars in buying
power at 3% inflation. You're going to fix that with $10,000?

I don't know how much benefit I saw and neither do you. What would I
have spent your $10000 stimulus on? A nice Ford SUV or a GM one? Maybe
a Saturn? In what bank would I have deposited my money, and what would
have happened to it? I don't know and you don't know. You're not
speaking from a base of facts and testable concepts, but from faith in
an abstract theory about free markets, a political stance, an
ideology, and imagination. That doesn't tell me if you're right. I'm
less interested in what you claim than in how you demonstrate that
your claim is valid. You don't seem to spend much time talking about
the latter.

BP earlier: And pray tell, what happens to the not-so-intelligent

agents who

don't understand financial strategies or price signals?

ML: The thing about price signals is that they are easy to read
locally and
across borders and language barriers. Remember the story Milton Friedman
tells about how noone knows how to make a pencil.

BP: I don't know that one, or of any reason to believe it. I know how
pencils are made, don't you? Why should I believe something just
because Milton Friedman said it? Or just because you say it? Why do
you think price signals are easy to read? How do you know when you're
reading them correctly?

And anyway, you dodged my question: what happens to the people who
don't have the brains or education to understand these things? Do you
care? Do they just get the punishment they deserve for being dumb?

BP earlier: Half of the
people in this country are below average by any measure you care to
use. Do we just write them off? Tell them to become smarter, more
competent, more avaricious, more ruthless? And how are they to
accomplish those things? You don't know, or apparently care. Every
man for himself, and every child and old geezer like me. No thanks.

ML: Below average for modern human's is pretty intelligent, remember
they are
descended from a chain of success 3 billion years long.

BP: So are the bacteria in my intestines; in fact, they've been around
and evolving for longer than human beings have, by a big margin.
People boast of having 20 years of experience when all they have had
is one year of experience 20 times. That's called being a
conservative. Look at cockroaches; they haven't changed in appearance
for 600 million years, and it's not clear that they've become the
slightest bit smarter.

BP earlier: John Galt was a figment of the imagination. Competent
planners can't cave in to the preposterous posturings and demands of
such people. But neither would they accept any equally preposterous
opposite extremes.

ML: Galt had already withdrawn his support of others, look at the
Reardon,
Dagny Taggart, and Wyatt characters instead.

BP: No, he hadn't. There wasn't any John Galt. Rand made the imaginary
John Galt pick up his marbles and go home, saying "They'll be sorry
when they don't have John Galt to kick around any more, I'll show
/them/ when they see what a mistake they've made." He and the others
you mention are imaginary characters carefully constructed to conform
to Ayn Rand's beliefs and resentments. All that Ayn Rand ever had was
a bunch of invented facts to back her up. It's easy to be right when
you're allowed to pick your conclusions first, and then create facts
to fit them. Especially when your readers forget that they're reading
fiction.

ML: In a market economy, if you
want to get rich, you have to figure out how to help people, not what
some
central planner considers "help", but what those people want that
they are
willing to give value for..

BP: Wait a minute, I thought the theme here was to be self-reliant and
help yourself. If you decide to help people, aren't you just being
another one of those pesky central planners? I think what you mean is
that if you want to get rich, you have to figure out how to give
people a convincing illusion of being helped a little while you're
helping yourself a lot more. Buy this car and pretty girls will flock
around you panting for sex. But don't ask for your money back if they
don't.

Actually helping people is what any intelligent planner would do,
especially with PCT in the background. An intelligent planner would
first test the theories of human nature and interaction that he was
going to use, and look for underlying principles that lead to correct
predictions when applied to historical data and checked against known
previous outcomes. In other words, the intelligent planner would
develop a model that can be demonstrated to work correctly. That
doesn't seem to interest any economic theorists.

ML: What makes that happen is the self interest
of other people, they aren't going to give Reardon, Taggart and Wyatt
their money without value in return.

BP: Sure they will. All you have to do to prove that is to write a
book in which some characters give their money to another character
without getting anything back, like in the Bible. after which you
think up some plausible-sounding reasons for their doing it. Then all
the people who want things to be that way will buy your book and cite
it as an authoritative source, while a lot of those who disagree with
it will argue with the characters while forgetting that they're imaginary.

ML: Yes, being motivated to invest in
improving goods and services by returns you will get from your effort it
will is preposterous, of course, in the case of these characters, most of
the motivation wasn't even money but the subjective enjoyment of
creation,
building and optimizing.

BP: Those motivations you speak of were imaginary because Ayn Rand
imagined them. How do you know what real people would have done or
what they control for? You may know what you would have done, but
unless you've studied people scientifically rather than politically,
and have demonstrated that your generalizations hold true, all you can
do is repeat whatever prejudices and superstitions you have
accumulated over the years, perhaps from novels that turned you on.

ML: Something tells me you may not have read her works.

BP: Whoever told you that, you'd better fire him or her. I think I've
read most of what she wrote, though I haven't checked. I just didn't
believe her portrayals of human nature except as windows into the way
her imagination worked. What I saw through those windows was somewhere
between deluded and disgusting.

Look, man, she was nmaking all that stuff up. It never happened. It
was a /story/.

Best,

Bill P.