Who needs money?

The economy — and anything related to money — can be an emotionally charged subject. For some people it brings to mind opportunities for success in business and the potential for great wealth. Others see our modern financial system as the embodiment of the oppression of the masses by the rich and powerful. And some lament the valuation of our assets in monetary terms as merely an unfortunate sign of the ever increasingly shallow and materialistic tendencies of our society.

Each of these views is held up by various people as their rallying cry either for political reform or for defense of their view of the “American Dream,” often, unfortunately, without really understanding some very fundamental things about how economics works and even how it relates to basic human nature. The reality is that all of these views contain a touch of truth. There are great opportunities in our modern society, as well as some serious economic problems. But an undue focus on a particular aspect or effect without understanding the whole can lay the foundation for shallow and simplistic ideals and proposals for solutions to our problems.

Theories about how the economy works as well as proposed solutions to the problems of our society come in all shapes and sizes. There are, for example, people who say that our monetary system itself is a fundamental cause of our problems and that it is the use of money by our society that allows the exploitation of the masses by the rich and powerful. They claim that if only we could ditch our use of money entirely, all of our problems could easily be solved. Others say that the real solution is in a more “fair” distribution of wealth or perhaps increased regulation or maybe even central control of all production. Still others claim that 100% free market capitalism is the truly perfect system and if all governmental restrictions and regulations were to be lifted, we would live in a panacea of freedom and abundance.

Are any of these severely conflicting goals feasible? Are any of them even desirable? Is our use of money really a fundamental a problem? Is money even the basis for economics? And what is “wealth,” anyway?

Economics is fundamental to many of the debates in our world today. Extremely vocal groups and movements such as Occupy Wall Street and the “Tea Party” base their claims on various, occasionally radical, economic theories. And even arguments between the more middle-of-the-road Democrats and Republicans are based on nuanced versions of these same views.

So, a lot of what we will say here might appear obvious and even mundane to many people, but when we are bombarded by so many claims by so many people saying that they have the solution to society’s problems, it is important to take a look at how things work in the real world and how they relate to real fundamentals of human nature.

on the Basic Nature of Economics
 
 
 
What is economic value?

This question is at the heart of a number of theories — and fallacies — about how economics functions. And some people use their answers to this question to promote radical changes to society.

A survey of the past couple hundred years of economics finds a number of different theories of value. Each of them has a major influence on how its adherents interpret the functioning of the economy and, in turn, what they promote as ideals for society. Significantly, Carl Marx espoused what is called a ‘labor theory of value’ which is central to his promotion of communism as the supposedly optimal system for modern civilization. Ironically, his ideas were partly based on a labor theory of value as described by Adam Smith, who is hailed as one of the founders of capitalistic ideals.

There is a certain mathematical functionality to the labor theory of value which can make it seem intuitively obvious from a certain point of view. But there are powerful driving forces in the creation of true value that this theory overlooks. As with most things in our society, reality is much more complex and has much more to do with the thoughts and desires of individual human souls than can be described by a mere mathematical formula.

So let’s take a look at how value actually originates in human activities:

on the Origin of Value
 
 
 
Production, Trade, Money, and Humanity

Money is the source of all evil — so the slightly misquoted Biblical saying goes. And, although their ideas are generally not based on the Bible, there are vocal factions who take this idea to heart in pointing to what they see as forces of oppression that are built into the very foundation of our capitalistic system. Some even go so far as to say that our use of money itself is the problem. Another popular idea is that in each purchase and sale transaction where money is exchanged for goods or services, there is always a winner and a loser. And in the view of people who espouse this notion, the winner is always the evil capitalistic merchant or corporation and the loser is the person who is just trying to get by and obtain items to fill his needs.

Alternatively, economists explain that money is merely a tool for facilitating trade. Furthermore, most economists will tell you that, in almost every case, an exchange of money for goods and services is a win – win situation where each side comes away with more value than he or she had before the transaction began.

So, what is the truth of the matter? Is our use of money really a fundamental problem? Or is there some sort of alchemy-style magic in economic transactions where value gets created seemingly from nothing more than the trade itself? And, if so, how can this be?

Well, yes, there is a magic of sorts in economic trade, because economic transactions have to do with the creative power of the human spirit. Some of these answers were covered in the details on the Origin of Value. But an example in the form of a lifelike story can illuminate a little better how things work. And at the same time, we will show that money and monetary valuation performs more of a function than just providing a simple medium of exchange:

on Production, Trade & Money
 
 
 
Capitalism & Socialism

There is no greater or more famous dichotomy in the realm of economics and, perhaps, worldwide human relations in general, than that of Capitalism vs. Socialism (or its rather more extremist and ominous-sounding cousin, “Communism”). Proponents of each can often be seen claiming that the other is evil at the very core of its being. On the one hand, Capitalists point to the failed experiment of state socialism in Russia and the Union of Soviet Socialist Republics with its brutal, iron-fisted totalitarian rule being the only way it held sway over its people. With this as a backdrop, they point out that the principles of communism run contrary to basic human nature. And on the other hand, Socialists point to the extreme concentration of power in the hands of a rich upper class in capitalist America with its huge income disparity which they claim leads to oppression of the masses.

And within our Western system, one side claims that such things as the “socialist” concept of labor unions are stifling to economic growth while the other sees capitalist big business and its relationship with government as an oligarchy that is the biggest threat to our cherished freedoms.

The truth of the matter is, of course, more complex than the simple dichotomy and its accompanying name-calling. Because the real world is firmly rooted in human nature. And human nature is, in turn, the root of both the “good” and “evils” of any and all systems.

Let’s take a little deeper look into these things:

on Capitalism vs. Socialism
 
 
 
“Public Sector” vs. “Private Sector” & Economic Theories

Birther: “Did you know that Barack Obama is really a Kenyan?

Economist: “I am not nearly so concerned about whether or not he is a Kenyan.
              My main concern is that he is a Keynesian!

During Barak Obama’s first campaign for the presidency, the media was flooded with controversy over the circumstances of his birth and its relationship to a particular directive of the U.S. Constitution. The noise was so loud that it often drowned out discussion of more relevant issues. We will leave such items to be fought out in the tabloids. Here we will focus on those subjects that actually affect our country and the world. And the attitude that is held by our leaders toward economics is definitely one of those subjects.

For example, Keynesian Economics, as referred to in the above quip, is an economic theory that was first introduced in the era of the Great Depression in the 1930’s. One of its main attributes is the concept that Government has a major role to play in the maintenance of the economic well-being of a country. Such Depression-era initiatives as the Works Progress Administration, the Civil Conservation Corps, and the Banking Act of 1935, and others, set major precedent in the operation of our government and the economy.

But what really is the proper role of Government in the economy?

on Economic Theories
 
 
 
Currency, Debt, Fractional Reserve Banking, and the Fed

The Creature from Jekyll Island was a popular book of the 1990’s that promoted a conspiracy theory view of the establishment of the Federal Reserve, the central banking system of the United States, which is, in fact a quasi-private / semi-governmental organization with vast powers over the economy and the nation’s money supply.

Adherents to this theory can sometimes be heard exclaiming shock at the strange and supposedly undisclosed-to-the-outside-world concept of “fractional reserve banking,” by which banks are only required to have a fraction of their total deposit liabilities on reserve in the form of currency. They sometimes act as though they have discovered a deeply classified — nearly occult — secret of the worldwide conspiracy-to-control-everything, seemingly not realizing that the operation and practices of the Fed and fractional reserve banking is taught in introductory economics classes in every worthwhile business school in the country.

On the other hand, there actually are some very basic problems with our banking system and its relationship to Government that have had a profound effect on many people in America and throughout the world. Legitimate issues and concerns about our banking system, how it is run, and even the fundamental philosophy of it’s existence, have been voiced by people who are very knowledgeable of the workings of the system. It is a little known fact, for instance, that in the 1960’s, Alan Greenspan, Chairman of the Federal Reserve of the United States from 1987 to 2006, had been a close friend of Ayn Rand and had written a scathing article voicing his fundamental opposition to the operation and even the very existence of the organization that he was eventually appointed to lead.

on Debt, Money and the Federal Reserve