Economics is all about money, right? It’s all about theories on how to distribute it, use it, make it, or protect it, yes? This is a common perception, and the focus on money dominates the area of political and personal understanding of all things related to important concepts like markets and wealth.
Yet there is substantial evidence that this is simply inadequate at best, wrong at worst. The purpose of money, according to a rigid definition, is to be a medium of exchange and a store of value. But there is quite a lot of evidence that as a store of value, a representation of accumulated wealth, it often fails horribly.
Money only works in a dynamic sense. There are several ways to read that statement, and they are all valid points.
We’ve discussed what money is several times in Barataria. Ultimately, it is a way of keeping score or a tool to get things done, and the emphasis on one or the other says much more about society than anything else.
Economics, for its part, is about the systems which are used to allocate scarce resources, and money is just a part of the system for doing this. If everything was free for the taking, we would all do a lot more taking.
As a store of wealth, however, the failures of money or at least the social belief in it as such have dramatic failure points. Take, for example, the real estate and related bubbles which collapsed across the developed world in 2008. There was a lot of apparent value in property, which attracted more money.
The perceived value went up all the time until the day that it didn’t. We can call this a “bubble” and focus on the mentality which created it, but if you focus on the money there is one undeniable fact presented. A large excess of money simply went away as if it never existed in the first place. The more that the market of the time attempted to tie money to some actual thing of value the more it became untenable and slouched towards inevitable collapse.
This is happening on a much bigger scale today in China. The savings rate in that nation is 37% of income, an insanely high level. It has to be that way because of a lack of consumer credit, consistent healthcare system, retirement system, and other reasons. The lack of a modern banking system which can turn ordinary savings into pools of capital has fueled an absolutely epic boom in real estate.
It is estimated that up to 30% of the Chinese economy, or about $3.6 trillion, is based on real estate development. People everywhere take their savings, at least the part that is not held in cash at home, and put it into new properties being built all the time. This speculation has given rise to vast “dark cities” where no one lives and driven up the price of places where people actually do to the point where no one can afford to live.
In essence, real estate developers have become something like a banking system, turning savings into much larger pools of capital which they can then invest somewhere else. Where else? Sometimes into more real estate, but far too often just about anything else. That includes as much overseas investment as they can muster, including real estate in California.
It simply has to all collapse at some point, and the political ramifications of this are too vast to fully contemplate. Suffice it to say that this excess of money, seeking to be defined more closely as wealth, will ultimately reflect the genuine wealth backing it by disappearing.
What’s remarkable about this is how the process plays out consistently in all places across all time. Every society has a totem object of some kind which represents “prudent investment” as a way of making money work. This might be gold, stocks, bitcoin, property, or Beanie Babies. It doesn’t matter what it might be or what fad it’s subject to. Every social order which generates too much money has to, at some point, simply incinerate the excess.
The result is calamity. It is the great failure of all economic systems, regardless of their politics.
The failure comes because money, and things assigned a value by money, are simply not appropriate representations of actual wealth. Money, as a thing, inherently defines all sense of wealth dynamically, which is to say that the value of any object is only known when it is sold. You can define your money in terms of actual useful items, such as food or energy, and you probably should. But ultimately all money is subject to market forces in and of itself, and the net value of money rises and falls based on how much of it there is around and the demand for it.
This is where “supply side” or Modern Monetary Theory (MMT) or any of the other theories based on the supply of money utterly fall apart. Wealth is necessarily defined dynamically. If money is to actually represent wealth, or stand as a store of value, it has to be defined by market forces. But the market values money itself based on the same laws of supply and demand as anything else, be it a necessary commodity or a totem object.
Any useful economics is therefor not about money, but about the process of accumulating wealth. Given that labor ultimately creates all wealth, my favorite joke that “Economics is just sociology with a way of keeping score” is literally true. Any concept of economics that begins or ends with money is simply missing what is essential and doomed to repeat the same kind of failures as any other system with the wrong emphasis.
The economy is about people. Economics must be about people as well. You don’t have to dive too deep into the ever increase role of technology, literally “the study of skill” in Greek, to see that , either.