A Brief Tract on Economics & Currency:

Studying economics for one month had a very profound impact upon my political leanings and interpretation of history, colonialism, foreign adventurism, etc. I’m developing an increasing sympathy for the ambitions, goals, and achievements of latter 19th-century and 20th-century colonialism: specifically, the achievements of the Japanese who appeared to me to have done an exceptionally intelligent and humane job, all things considered, the good taken with the bad. I certainly did not start out with this point of view. Again, one reason for the latter is my self-study of economics and my newly acquired understanding that the zero-sum notion (i.e. that economies have finite resources), is simply nonsense.

While making use of the limited library and Internet resources available, I looked for but never found an explanation to counter this zero-sum notion. So, I’ve come up with my own. It only took a couple of minutes to piece together. Here’s my sample scenario disproving zero-sum:

200 years ago, on average it took about two people to make enough food for three mouths.

If you're a farmer living somewhere in a barter economy, you trade your grain for whatever it is that you want. There's no such thing as money. But the problem with trading grain and other foodstuffs is that they rot, are eaten by vermin, destroyed by frost and damp weather, etc.

So, the problem with using grain as a currency is that it constantly depreciates. Your five bushels of grain may become four or even three bushels within 12 months. The value of your harvest steadily declines to nothing as time progresses.

Currency is invented by somebody or else it’s co-opted from some other culture/economy/state. Early currencies consisted of everything from shells to jade. Here, for simplicity's sake, we'll jump directly to a currency of gold. Gold does not rot. Thus, the first advantage of gold as a currency for trade is that you have more profit left over at the end of the day because gold does not depreciate.

In other words, the cost of doing business has gone down significantly because the value of the currency is steady (which also means that the cost of the currency has decreased. Money actually costs something to buy. It did then and it still does today. And the cheaper the cost of money, the cheaper the cost of doing business). Barter goes out of fashion: it's more cost-efficient to get rid of (i.e. sell) depreciating assets (your grain) and store its value in a non-depreciating asset such as gold. Another reason is that the cost of transporting currency declines precipitously when you can store high value in a small satchel of metal. The equivalent of that satchel would be transporting wagon loads of grain, which requires horses, wagons, and people to drive them. All this lowers efficiency and is a heavy additional cost/drag to doing business.

So, rather than trade in a currency of perishable goods which consistently lose their value through various depreciation processes (frost, vermin, mold, fungus, fire etc.), there are great advantages in dealing in gold currency.

(As an aside, you might reasonably wonder, if grain is perishable, then no matter where the grain is stored it is still going to lose value. What develops is a profession, the grain merchant, specially dedicated to storing grain in a manner preventing it from perishing at such a rapid rate. This profession develops specialized storage space and processes for preserving grain. It also develops methods for converting already perishing grain into goods of value (such as alcohol). The grain merchant earns his living through a combination of specialized know-how and through taking advantage of economies of scale.)

So, at the end of this process, the cost of money is much cheaper. The value of trade is much higher. The value of money is constant. The profitability of your farm has jumped dramatically.

Let's say, at this stage, due to the greatly increased efficiency of trade and value storage (i.e. gold), two people can produce enough grain to feed four mouths. This means that there's now a surplus of grain on the market, which means that the cost of grain goes down because everyone is competing to sell grain to the same population of people. The lower cost of grain means that it's cheaper to employ work animals such as horses. When the cost of maintaining horses comes down significantly, so does the cost of harvesting lumber because horses are used to skid wood out of the forests and transport it to lumber mills. The cost of mining comes down as well because horses are used to transport minerals and coal out from the mines. The cost of transporting grain for the farmer to the marketplace comes down as well.

To give you an idea of the significance of this, according to classicist Victor Davis Hanson, in ancient Greece the amount of land required to raise one horse was sufficient to maintain 20 farmers. Lowering the cost of maintaining horses made a huge impact upon early economies. Prior to the automobile, horses were used everywhere: on the farm, to pull carriages and coaches, to wage war, etc. (Horses were so prevalent that you knew when the flu was coming because horses usually got the flu two weeks before people.)

Lowering the cost of harvesting lumber and of transportation in general, means the cost of furniture and the cost of building houses out of wood comes down a great deal as well. Not to mention the fact that with lower cost of grain, feeding laborers has become less expensive as well. This means you can employ more laborers because you can feed more of them for less money. The cost of living and the cost of doing business have come down. At the same time the number of jobs has increased for everyone now that the demand for products has jumped. People can afford better houses, furniture, storage for farm produce, new and more horses, children’s toys, wooden and leather storage for clothes, bows and knives. Quality is higher, efficiency rises, and everything lasts longer. I.e. the cost of living declines once more, while the quality of life increases.

Similarly, the cost of producing metal implements has come down as well. This is because the cost of wood, minerals, and coal has come down, as has the cost of producing man-made coke, which used to be required to make steel, has come way down. Again, the cost-of-living keeps coming down so you can employ more people to make an ever-growing volume of materials of all kinds as well. There is an increasing surplus of everything.

(In other words, the poverty that is sometimes associated with early capitalism was the result of excess population. This surplus population was a hang-over from feudalism. It was not invented by capitalism. Indeed, capitalism’s higher living standards results in people having smaller families. And, were it not for capitalism, Western Europe during the 19th century would have resembled some of the worst parts of India. Capitalism was not the problem, it was the solution.)

Today, two percent of American’s work on farms and they produce a surplus that’s sold around the world.

What seems counterintuitive at first is that high value can be extracted from traditionally low-value resources. What happens, at least what I believe happens, is that the value locked into the resources has been released via the key/catalyst of capitalism. For example, as long as grain depreciated, value was automatically lost. As long as horses were fed on grass, and not grain, they were inordinately expensive as the amount of land required for the grass was great. In a sense, they were artificially expensive. When the cost of grain was brought down through introduction of stable currency, which then facilitated improved storage and market efficiency, it became cost-effective to feed it to horses and the innate efficiency of horses could be tapped into. Etc, etc…

Biff Cappuccino