MONEY Or: ECON-101 applied to the real world.

 

MONEY
Or: ECON-101 applied to the real world.

Measure of value
People talk about money as if it were some kind of stuff, like wood, or apples, or houses, or bicycles. But money is actually information about values. As taught in ECON-101: money is a measure of value. A given value denominated in a specific currency is a price. The value is (or should be) the same whether it’s specified in dollars or euros or cowrie shells. It’s like specifying a length in metres or in feet or in ells; or temperature in degrees Celsius or degrees Fahrenheit. The length and the temperature are the same regardless of the measuring units used. We expect the value of a thing to be the same whether it’s measured in dollars or euros. That’s why we want to know “How much is that in dollars?” when we buy something in a foreign country.

Cash
So money isn’t stuff. It’s a way of measuring the value of stuff. That makes it very useful for trading stuff. Before there was money, people bartered. They offered a certain amount of some stuff, say jars of oil, in exchange for other stuff, say jars of wheat. The concept of money apparently began in the Middle East when people used copies of the seals on the jars as tokens for the jars themselves. The seals were marked to show both the commodity and the owner. They broke the seals in half, and brought half-seals to market to trade for other half-seals. Then they showed up at each other’s warehouses or barns, matched the half-seals to each other, and carried off their purchases.

Eventually, people began to make tokens of value using stuff that couldn’t be used for much else. The reason gold was used is that it doesn’t rust, and that it’s almost useless. Besides money, about the only thing you can use gold for is to make pretty things. Material tokens of value are called cash; and many people still prefer cash over other forms of money because these tokens are definitely made of stuff, so cash confirms the feeling that money is some kind of stuff.

Inflation
When people began to use metal to make tokens of value, the concept of money as information was almost complete. I say almost, because many people then and now believe these metal tokens have “intrinsic value.” That is, people believe that the value of a piece of gold somehow fixed. This is the reason people want to go back to the gold standard, the assumption being that this will somehow stop shenanigans like price inflation, unbacked credit, “printing money”, and so on. Unfortunately, it doesn’t work that way. And the reason it doesn’t work that way is that money is – wait for it! – information, not stuff. People will give away goods in exchange for tokens of value if, and only if, they believe they can exchange those tokens for goods of the same value as the goods they gave away. Once they stop believing this, we have serious trouble, perhaps even runaway inflation.

Inflation will happen regardless of what the tokens are made of. When the Spanish imported hundreds of tons of gold into Europe from South America, prices measured in gold went up: people had to give more gold for the same value of goods. The reason for this is that the amount of goods had not increased. The amount of wealth, and hence its value, remained the same. There wasn’t more wheat or timber or cloth or real estate just because there was more gold. But people believed that gold was wealth. That mistake cost them a great deal of wealth: Spain almost went bankrupt.

Types of Money
We use many forms of money in our current state of economic sophistication:

a) Cash is metal and paper tokens each of which represents a certain value: a penny, 25 cents, 5 dollars, etc. These tokens were originally fixed weights of “precious metal”. Pretty soon, they became coins of fixed size and weight that represented some value. Then came paper money, which could be “redeemed” for metal coins.

b) Cheques are pieces of paper that represent whatever value we write on them. $24.95, $1200, $75,346, etc. These evolved from “letters of credit”, which a traveller would carry from one place to another. A banker in the traveller’s home country would guarantee that the traveller’s debts in the foreign country would be covered up to the amount on the letter of credit. Related to this are bonds, which are promises to pay a certain amount of money to the person who presents the bond. Letters of credit and bonds can be traded, because they are promises to pay, as can cheques, something the pay-day loan companies exploit. "Currency trading" is actually trading promises to pay.

c) Bank book, bank statement: this represents the value of money you have “on deposit”.

But most of the money we use nowadays is pure information:

d) Digital data stored on a computer storage device on the bank’s servers. These are records of the amount of money in your accounts and investments, the amount of money you owe on your loans, and so on.

e) Digital information moving to computer storage from the card terminal on which the merchant and you press buttons so that you can pay for your purchase. This money is pure information. The only way you know the payment has been made is by another piece of information: the slip of paper on which the transfer of money has been recorded.

Public spending
The use of electronic transfers makes it crystal clear that money is information. It’s not stuff. But thinking of it as some kind of stuff causes confusions that can bring down governments. Or worse.

When major public works are proposed, a lot of people ask, “Where will the money come from?” This misses the point. The real question is, “Is there enough wealth (energy, materials, and human skill) to do what we want to do?” If there is, then “paying” for it is just a matter of recording the value of the resources used. How do you that? By issuing enough money tokens to represent that value. This freaks out some people, who see it as “printing money.” But that’s exactly what private banks do when they lend you the money to buy a car or build a house. They "deposit" a credit in your account, which means that you now have that amount of money to spend. They don’t have anywhere close to the amount of money “on deposit” that they lend out. By law, in Canada they can lend up to 200 times what they have “on deposit”. What happens when they want to lend more than that? The get a loan from another bank, and “deposit” it.

Inflation (again)
If you understand that money is a measure of wealth, then inflation is a weird thing to happen. It’s as if the measure of distance changed because there are too many metre sticks floating around, and we have to make them shorter so we can use them up to measure the distance from here to there. That’s absurd. The distance from here to London is the same no matter how long or short a metre stick is. But that’s what happens when we have inflation. Briefly, inflation happens when there is a mismatch between the actual value of a country’s total wealth and the value of that wealth as measured by money, the measure of the wealth that we have. If the total value of wealth is X, and our money totals 2X, then prices will have to double to maintain an accurate ratio between value and price. This is what happened to Spain in the 15th century. In effect, in a period of inflation money embodies false information about value, and the money system won’t work unless and until people accept the new, lower value of money.

But inflation is not the same as increasing the money supply. Inflation happens when the money supply increases faster than the amount of wealth. It does so for many reasons, one being that people raise prices beyond the value of the goods and services they offer. Another is interest beyond the cost of processing the money data. That means that more money is needed for people to maintain something close to a stable trading system, and banks oblige by issuing even more money, at interest, of course.

The money supply should increase in proportion as we create more wealth. And prices should change as different commodities increase or decrease in value relative to each other. That is, these changes in the value of wealth cannot be measured absolutely, only as ratios. That’s why the price of gold increases. The amount of gold remains about the same,  because new gold mines add very little to the total amount of gold stored in places like Fort Knox. But it must measure more wealth, and the only way to do that is make an ounce of gold measure a larger amount of wealth. So the price of gold is raised.

Prices of commodities do change as their values change. In fact, most consumer goods are cheaper than they were decades ago, but inflation tends to disguise that. We have to measure prices in “constant dollars” to see the price changes. We would have “constant dollars” if the money supply were to change exactly in proportion to the change in wealth.

Prices also change in relation to each other. Sixty years ago, you could have bought about 1,000 loaves of bread for the price of a typical TV set. Now, a typical TV set is worth only about 100 loaves of bread, and it’s a better TV set, too.

We could of course insist on a fixed price for gold, in which case a dollar would measure larger and larger values of wealth. That in turn would require prices to fall. Suppose we now have twice as much wealth as we had before, but the same number of dollars to measure its value. Then what was priced at $1 would now have to priced at 50 cents. That’s called deflation, and for some reason we don’t like it at all.

Supply and demand
Economists tend to talk as if the economy were some kind of natural phenomenon like the weather.  It is of course no such thing, but a human invention. The “law of supply and demand” demonstrates this nicely. It is considered to be a description of how prices behave when particular commodities become more or less abundant. It is actually a description of human psychology. It describes how humans behave when they believe something is scarce or abundant.

When something that we want appears to be in short supply, we will offer more of what we have a lot of in order to get the scarce commodity. This is how it works in a barter economy, and it works exactly the same way in a money economy. Advertisers know that making a product appear to be scarce will enable them to charge more for it. Perceived scarcity explains bubbles. Actual scarcity can cause revolutions and wars.

The easiest demonstration that this “law” is an abstract description of human behaviour is to observe what happens when somebody has nothing to trade for what they want, or else doesn’t want to trade. If they have the power to do so, they just steal what they want; and if the owner of the wealth objects, they beat him up or worse.

Robbery instead of trade illustrates the truth that trade both requires and builds the rule of law, that is, civilisation. You can’t trade with people who’d rather steal from you. And once you start trading, you have to have some rules, or else you or the other party will revert to stealing.

2012-09-04 & 2012-03-03

Grammar Notes 1

Some time ago, the denizens of a news group sidetracked themselves into a discussion about grammar. Here’s part of the exchange, between "Richard" and myself, slightly edited for clarity.

"Richard" posted this example of a bad sentence:

“Me and him went to see the dog wag it's tail.”
How many errors in that sentence?



I replied:
Three.


"Richard" also offered this as the corrected sentence:

“He and I went to see the dog wag its tail.”

I continued:


But there are no grammar errors whatsoever. (And that's a complete utterance, albeit not a complete sentence.)

a) Its/it's is a spelling error, not a grammar error. Just read the sentence out loud, and you'll hear why that's so. (1)

b) "Me and him" is a usage error. Not acceptable in "standard" usage, is all. "Standard usage", like any other, is in constant flux. That's why an earlier observation is spot on: "for Sue and me" is beginning to sound down-market. (2)

Want to see real grammar errors? Look at (and speak) this:

c) "He and I see a dog its tail wag went to."

Only one phrase in c) is in its correct position, and two phrases are in correct sequence. Also, all phrases are correctly formed, so (oddly enough) most native speakers of English can and will figure out what the speaker intended to say. (3)

Here's the same string of words ordered by two non-grammar rules:

d) "A I he to and dog its see wag tail went"

At this point, there's no grammar there, so it would be somewhat pointless to talk about it having errors of grammar.

Footnotes:
     (1) The focus on the written language that shows up in a newsgroup is understandable, but it leads to subtle and not so subtle errors. Writing is of course not merely a record of speech, because it has inherently fewer codable features than speech. But speech is primary, and forgetting that can cause even very clever people to make serious mistakes. For example, Noam Chomsky's positing a "surface and deep structure" to account for ambiguities is pointless. In speech there is no ambiguity in the examples he gives, because intonation, which shapes the syntax of a sentence, disambiguates what in the written language is not (and cannot) be indicated.
      The primacy of speech is the reason that so-called “computer languages” are not languages: they are written codes, with strict rules, which are necessary precisely because these "languages" are actually codes. We use actual words and conventional math symbols to make it easier for humans to decode. One could just as well replace the terms and symbols with colour terms. Or coloured shapes.

(2) Another example: For me, pronouncing "herb" as erb is a solecism. But in US  usage it's correct, and herb would be judged down-market. Unfortunately, Canadians are adopting US usage. Sigh.

(3) When we hear fractured utterances, we automatically correct them as we interpret them. Most of what we speak and hear is fractured, more or less badly. Speech formed of complete and correctly formed sentences sounds odd. When my wife first heard a colleague at the University, she said, "He sounds like a book."

Garry Ryan. The Lucky Elephant Restaurant (2006)

     Garry Ryan. The Lucky Elephant Restaurant (2006) Ryan lives in Calgary, and makes that city the setting for his books. This is a police procedural with a social conscience: D.I. Lane is gay, and has an extensive social/family network, which to some extent interferes with his police work. His partner Arthur’s sister is dying of cancer, so they will have to adopt her son Matt. Jay, the prime suspect's brother, has been hiding from her, but finds a substitute family in the Vietnamese community. Because Matt is enrolled in minor hockey, Lane becomes a ref, and tangles with a hockey parent who’s a jerk. And so on. These vignettes extend the story to book length, and plotwise delay the action enough that it takes some time for Lane and sidekick Harper to close the case. They also intersect with the actions of the prime suspect, who is attempting to get the case closed quickly, and if possible eliminate Lane as well.
     Plot: a man and his daughter are found dead in the foothills bush west of Calgary. There are “anomalies” that suggest murder. The ex-wife/mother is a suspect early on. It’s pretty obvious that she done it, so the plot turns on how Lane and Harper will get sufficient evidence to make the case, and whether they'll be able to do so before she does more damage. In the end, she over-reaches, attempting another arson, but is caught in the act, and shot when she attacks the police who are guarding Lane’s house.
     Ryan handles the various levels of ignorance and knowledge, lies and truth, past and present skilfully enough that the narrative tension keeps us reading. In style and structure, the novel is cinematic: chapters of varying length, jump-cuts and montage-like snippets of scene, miscellaneous information, dialogue, sidelights on character. It wouldn’t take much to turn this book into a script; I think it would make a good series. Like many late 20th/early 21st century crime novels, the mood is elegiac and dark. There is hope and joy in family life and friendship, but these treasures must be jealously protected from attacks by bigots, egotists, jerks, power seekers, and other social riffraff.
     All in all, an above average example of the genre.**½ (2012)

Model Railroader, June 1950

     Model Railroader, June 1950 I rescued this issue from the trash at the club. Apparently it was too out-of-date to interest the members. But it’s a fascinating look at the state of the hobby in 1950, by which time the post-war boom had prompted innovations that with surprisingly few additions and enhancements are still with us. The major change since then is the miniaturisation of electronics and the improvements in plastics, both accompanied by large reductions in costs. The price/quality ratio of model trains has improved by at least an order of magnitude.
     Income has also improved since the 1950s and 60s, so that real prices are much lower than back then. For example, at minimum wage, I would have had to work about four hours to buy an Athearn boxcar kit. Now, an Accurail boxcar kit costs about 1½ hours. And it comes with metal wheels, a KD compatible coupler, and more and better details.
     Skills have also improved, for although there’s proportionally much less scratch-building and kit-building than there was back then, the quality is higher. The biggest visible change is in the look of the models and the layouts. Modellers these days expect scenic realism and take prototype fidelity for granted, so much so that they carp at minor discrepancies that wouldn’t have rated even a passing comment in 1950.
     The how-to articles took a lot for granted. An article on building a S scale hopper consists of two photos, one large and two small drawings, and text to fill up 5 columns of a two-page spread. It includes instructions such as “Spot and drill No. 67 holes for the grab-irons.” The drawing calls out the dimensions of the grab irons, but not their positions. A knowledgeable modeller might be able to place the grab irons correctly, but clearly accuracy was not a major concern.
     The lead article by Frank Ellison discusses where to locate industries. This and many others he wrote where gathered into a book in 1954. I still have my copy, much worn, and rebound to protect its precious pages. Ellison was a pioneer of operation. His articles did a lot to help modellers operate their trains in a railway-like manner. The second major article shows how to super-detail a Yard Bird switcher (made by John English). Lots of advice, and several photos from different angles with the details called out. The author has obviously taken care to research the details to be added, something that also helped improve modelling skills and raise the bar on prototype fidelity.
     Most of the articles are short, and consist essentially of collections of workshop tips. They show that at the time modellers wanted to know about ways of adapting whatever was available to make better models as cheaply as possible. Hobbies were still a somewhat suspect pastime. Improvements in leisure time and disposable income would eventually create the craft and hobby industry that we know today, but back then money and time was supposed to be used for more useful pursuits, such as renovating kitchens.
     I enjoyed re-reading this old magazine. ** to *** (2012)

Stuart McLean. Home From the Vinyl Cafe (1998)

     Stuart McLean. Home From the Vinyl Cafe (1998) The 2nd Vinyl Cafe collection. It includes Dave Cooks the Turkey, probably the most requested of the Dave & Morley stories. The seasonal arrangement gives the effect of an episodic novel. As before (see Vinyl Cafe Unplugged), I found reading the stories more of a pleasure than hearing Stuart McLean read them. Recommended. *** (2012)

Stephen Hawking. The Theory of Everything (2002)

     Stephen Hawking. The Theory of Everything (2002) I like reading Hawking. His disability makes writing tedious and slow, and encourages an economy of words that makes for astonishing clarification of difficult ideas. The style also shows that these ideas are difficult only in that they are unfamiliar and often counterintuitive. Simplicity is more difficult to grasp than complexity. Hawking has a playful and sometimes mordant wit, which adds to the pleasure.
     The book outlines the current state of cosmology, reminding us how tentative such theories must be. The result is a vision of the Universe as a grand drama, whose plot we discover as we live through it (at least in the minuscule scenes in which we play a part), but which has no purpose beyond its own existence. As recently as the 1990s, that existence was guessed to be limited; time would eventually have a stop. Now, it’s not so obvious what may happen. The latest theories suggest that the Universe is much larger than what we can or could observe, though what “larger” means in this context is somewhat less than clear. Highly recommended, but if this is your first excursion into this realm of ideas, you will have to read the book at least twice to make sense of it. **** (2012)

John Toland. Hitler: the Pictorial Documentary of his Life (1978)

     John Toland. Hitler: the Pictorial Documentary of his Life (1978) Well, it’s a documentary, and a good one for giving an overview of the man. Toland begins each chapter with an excerpt from his biography, and captions round out the narrative. The book is apparently intended for an audience of students and the casually interested, and for them it fulfills its limited purposes.
     However, by presenting a chronicle rather than a story, the book may encourage deeper study. It raises questions. For example, why and how was Hitler able to achieve his goal of political power and domination of Germany? This question unanswered tends to perpetuate the popular misconception that he used some kind of force (never specified in this story, however). For us, the most important lesson is that Hitler ensured that at every step he had at least quasi-legitimate justification for what he did. Legality mattered.
     The political images are almost meaningless without knowledge of the events they portray, but the private, personal life is intelligible to anyone aware of his own milieu. The overall impression is that Hitler’s personal life was that of a man with limited taste who yearned for the apparent sophistication of the moneyed classes. An odd miasma of lower-middleclass respectability hangs over it all.
     The reproduction of the photos is average. Many original photos were of poor quality, or apparently exist only as poor copies of the originals, which doesn’t help. ** (2012)