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Sunday, November 21, 2010

The economy: Fixing the money supply: Introduction and initial questions

On PBS's "Fixing the Future: NOW on PBS", this question was asked: Does the economy exist to serve the people, or do people exist to serve the economy?

Here's a better thought: The economy exists to allocate scarce resources in the best (or near-best) possible way, such that everyone benefits from a share of the better allocation.

Yes, the economy should exist to serve the people. At the moment, it doesn't.

What is the central flaw? It turns out that there is one, and only one, central flaw. But how to solve that central flaw ... not so simple, not so clear.

(To clarify: This is not the only flaw. It is not the only big flaw. If you are familiar with the assumptions of micro-economics at the base of economic theory, you know that they all have flaws and problems. You know that the flaws inherently introduce feedback into the equations, and equations with feedback are subject to chaotic behavior that cannot handle station analysis and needs simulation or dynamic analysis that is completely "hand-waved" out in normal economic studies. But this is, as far as I can tell, the single biggest, and most impactful / far-reaching flaw of them all.)

The central flaw: A scarce resource is used to determine the allocation of other scarce resources. Money is used to determine how resources are allocated. But money is scarce -- artificially. There is an artificial limit on how much money there should be, and it's less than what's needed to make things actually work. It's short because the planning for how much money there should be never took population growth into account. And it's been short since the baby boom -- the "stagflation" of the 70's comes directly out from this viewpoint as an expected behavior (and normal means of looking at the economy have trouble explaining stagflation).

But this means that inflation is a result of three different factors -- supply of money, supply/demand for goods, and population levels. Population levels are normally ignored in this analysis.

How do you solve this issue? How do you put more money in to fix the scarce-ness of money? Do you want to put more money in? Should you? Do you reduce the costs of things to let the buying power of the existing money increase to handle the increase in population?

I cannot say that I have "The" answer. But I do have "An" answer that works.

It requires the understanding that money has no value in and of itself. The pretense that a dollar should be about equal to one Spanish gold doubloon has to be completely abandoned.

Here's the "punch-line". You are not expected to understand this, any more than you'd understand a joke if you just heard the last line without the buildup.

It is meant to be something to think about, to wonder. Just like a joke's punch-line by itself might make you think about word meanings, sound-alikes, or similar, this is for you to think about.

The punch-line: The government needs to directly give cash to people as a source of money, balanced by taxes taken from those entities -- people and non-people -- that concentrate money. The "Fountain and sink" model from RPG's and online games is the way to re-build the real life economy.

If your first thought is, "That's crazy", then good. What's your second thought? Your third? If you're so sure it must fail, why?

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