Why the money supply must inflate

mmm....shiney!

mmm....shiney!

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Chucking some ideas out here.

Firstly some definitions:

"wealth" - the accumulation or increase in access to goods and services considered in demand by the consumer

"currency" - (or "money") a unit of account commonly known* to be exchangeable for wealth

"common knowledge" - common knowledge is something everyone knows that everyone knows.

And just covering bases if this one pops up:

"value" - the idea that the value of a good or service is not inherent or based on labor costs, but is determined by an individual's or entity's perception of its usefulness or desirability at a specific time.

* when something is commonly known it becomes common knowledge. So when government issued fiat is commonly known to be exchangeable for goods or services it can be said to form part of our common knowledge in social situations.

Or to steal from Steven Pinker and adapt it to currency (or money):

"He trusts it. She trusts it. He knows that she trusts it, and vice versa, ad infinitum."

Source: https://news.harvard.edu/gazette/st...-head-not-exploding-steven-pinker-can-explain
 
We have the analogy of a simple economy consisting of:

10 units of currency circulating
A factory with ...
10 workers producing...
10 units of magic goods that provide consumers their immediate needs each year each worth...
1 unit of currency each

In this simple economy the entire production of 10 units of magic goods are bought by the workers producing the good using what they're being paid ie 1 unit of currency each year. The cycle is balanced. As long as the demand, productive capacity nor amount of money circulating in this simple economy doesn't change everything will remain in equilibrium - forever.
 
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Economies are dynamic and evolve over time. Two scenarios that eventually unfold are:

a. consumer demand rises as a result of population increase, a change in consumer preference, a new product on the market etc.

b. productivity improvements as a result of capital investment, employee training, management decisions etc result in an increase of productive capacity.

So in both scenarios we've got either an increase in demand or an increase in supply. So how should monetary/fiscal policy makers react in order to maximise the the productive capacity of the economy to meet the rising demand? There is currently only 10 units of currency in circulation in an economy that demands 20 units of currency equivalent goods in order to satisfy their demand.

I'll leave it there for now in order to collate my thoughts and allow for comments.
 
:eek: - forever.

Joe starts self sacrificing to save for the future...
But not getting his needs fulfilled he needs stress leave, vitamin supplements, and long walks on the prairie.

Lucky, Jim. who rides tigers for fun, takes on extra shifts for Joe, few extra hrs. here and there.
perhaps the employer doesn't respect mathematical fractions of units of currency.
So Jim just trades Joe directly for magic crumbs.

Biologically. Joe gets weak at production over time. but... Jim gets WAY better.
And starts to value his extra strength and Joes weekly crumb rations.

Joe feels this is to his disadvantage as he is weak now.
Jim get angry because he works so much more and doesn't actually get paid for the effort.
The Tiger doesn't appreciate Jims newfound superiority complex.

The ecosystem of the 10 workers becomes a dynamic of biological personalities with quirks and caveats, and everyone feels like they are getting a raw deal.
Perhaps its because against the pure classical logical; real life pain and negative emotions "stick" more to ensure avoidance and survival in genetic algorithm approaches to existence at a more fundamental level, leading to procreation and (while Jim is getting eaten by the tiger) the happy go lucky base jumpers that just don't dwell, are not manipulating the scenarios with a bias of greed, control, manipulation, or fear, avoidance and adaptation.
So just basically, the differences between people lead to everyone feeling alienated, and feeling like theirs something wrong and negative going on.

The system doesn't need more money at this point.
It just needs to properly leverage a richer tapestry of fractionalization of the whole.

At what point do people become so emotional that they all self sacrifice freedom, to elect a subset group in order to "work more effectively" for their mere survival?

Or, at what point does societal caste structure evolve, such that competition for placement into a privileged classes, with particular biases and advantages become something of a "free for all", while the system recognizes "identity" as a social credit card for privilege's that go on un-paid with infinite balance, or, worse... a stigma, vilified and downtrodden in social cost, with no actual consumption of anything to have need for that price be paid?

My question shiny, is:
does the evolution of the system your describing, seek to actually dispel caste/categorical bias, and bring awareness of an equality of needs and a reasonable value for wants?
or does it cement ideology of identity/class members and value propositions for categorical "roles and functions" of society. where ambitions grants some people privilege's once the rest of society comes to also accept some difference between people, for better or for worse.
where becoming a member of a strict authority/group grants "definition of the system" powers, where the logic of any monetary, moral, value or otherwise knowledge is able to be thrown out the window for whatever the empowered decide makes sense to them.
because the people will revolt....
Jim didn't get eaten by the tiger for nothin... he died doing what he loved.

PS: ill remove this if its a bit too much of a tangent shiny, just throwing a spanner in the works for your consideration.

To your question:
a: ill go with population increases as a result of growth from the survivors and advantaged who got to mate, whose children survived because of the decisions their parents made.
say 14 workers and 6 children needing the goods
b: production increases from specialization of the workers (skill / training) passed down from generation to generation. (enough to be able to make 20 units, with 14 workers!)

Then how should the money base grow?
The economy's real measure of value is TIME spend working.
and as the TIME spend working = the value representation of the circulating currency.
it should increase to 14 units, while the cost of the goods should be targeting .666 each.
Anyone who has worked and saved any fraction, that fraction is still worth its effort in time.
the goods got cheaper with the efficiency gain.

And supposing the 2 people that don't have a kid should be allowed to save their .333 unit profit, and with luck they will be able to grow the population and preserve the gene pool increasing it to 21 members.
Otherwise, they don't survive to procreate and the society gene pool becomes more specialized around the survivors traits.
So I suppose its dependent on societal bias of parents vs singles, vs population growth rate desires and distribution of societal surplus.
 
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Azure said:
The economy's real measure of value is TIME spend working.
Click to expand...

That's the Labour Theory of Value (Ricardo, Marx etc). It's been replaced in modern economic discourse with the Subjective Theory of Value.

See the definition of value in the first post above.
 
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Back to the unfolding scenarios.

The changes in the status of the consumer have meant that they require more goods in order to maintain or increase their level of wealth. If they've got more mouths to feed in their family or there has been an increase in the population due to immigration then they'll be consuming more just in order to maintain their standard of living. If they're making a change in the consumption habits then the increase in consumption leads to an increase in their level of wealth.
The increase in demand also coincides with an increase in productivity, the factory is now producing 20 units of goods per year which means that the consumer demand can be met.

However, the workers are still receiving the equivalent of 10 units of currency, yet they're consumption habits mean that they need more money or their living standards will decline or stagnate depending upon their situation. Naturally an increase in productivity would normally flow into an increase in wages for the workers eg they'll be paid the equivalent of 20 units of currency which would mean they can afford to purchase all the goods produced in order to meet their demands.
 
But the money supply is at its optimal level so if they aren't going to receive a pay rise (after all where is the extra money going to come from?) then they're either going to have to cut their level of consumption or at best keep it at the current level if they're able to.

If the workers aren't going to consume the 20 units of goods that the factory is now capable of producing then the factory owner has the option to either reduce the price of each good to 0.5 units which means that all the goods can be now purchased for the existing 10 units of currency, which removes the profit incentive to increase productivity (especially as more resources are required in order to produce more goods) and therefore it's not a move that the owner would likely make.

The alternative is that the owner could operate the factory at a level half of its productive capacity ie 10 units of goods which would preserve the profit margins as they are (all things remaining equal) but result in sub-optimal levels of productivity.

Without a commensurate increase in the money supply to match the increase in demand for goods and the productivity improvements on offer, workers are forced into a life of austerity and/or the economy would be operating at a sub-par level when it comes to utilising resources.
 
It's pretty much what was happening at the end of the Bretton-Woods system and why Nixon ended the convertibility of the USD for gold because there wasn't enough gold to back consumer demand in order to increase their wealth.
 
Azure said:
My question shiny, is:
does the evolution of the system your describing, seek to actually dispel caste/categorical bias, and bring awareness of an equality of needs and a reasonable value for wants?
or does it cement ideology of identity/class members and value propositions for categorical "roles and functions" of society. where ambitions grants some people privilege's once the rest of society comes to also accept some difference between people, for better or for worse.
where becoming a member of a strict authority/group grants "definition of the system" powers, where the logic of any monetary, moral, value or otherwise knowledge is able to be thrown out the window for whatever the empowered decide makes sense to them.
because the people will revolt....
Click to expand...

The model of a simple economy is deliberate in order to keep the picture clear and simple. The evolution of this economy as it becomes increasingly complex can see it take either a liberal or an authoritarian path.

I would argue though that as the money supply increases, the lives of individuals in that society will become wealthier on the whole. And as we find ourselves more easily satisfying our lower order needs we can then turn our energies to satisfying higher order needs which can involve values such as justice, equality, environmentalism etc.

It wouldn't come as a shock to anyone that countries with the highest GDP/capita (to pick one metric out of the air) are also the wealthiest. Here's a select few:

chart.svg


Source: https://www.givingwhatwecan.org/blo...dian-income-gdp-per-capita-and-the-gini-index
 
leo25 said:
But at what rate?
Click to expand...

Good question.

You'd probably have to use something like real output (real GDP), or maybe do what the MMT crowd suggest and spend enough to utilize idle labour (those looking for work) or unutilised productive capacity eg the factory that can produce 20 units of goods but is only producing 10 which leads to unmet demand. An actual example of unmet demand would be the closure of the softplastics recycling factories REDcycle, or upgrading infrastructure such as the goat track called the Bruce Hwy.

It's still going to be flawed but it may mean spending is better directed.

leo25 said:
Too much is worse than too little.
Click to expand...

Too much can create inflationary pressure, too little leads to austerity and declining levels of wealth.

Really depends on what you're trying to achieve. I'm probably in the camp of it's better to spend too much than too little.
 
In the example of the simple economy above, the rate of change in the money supply must be at least 100%.
 
NOTING:
There is currently only 10 units of currency in circulation in an economy that demands 20 units of currency...

Also NOTE:
10 units of currency circulating
A factory with ...
10 workers producing...
10 units of magic goods that provide 1 person their needs.

Im going to list the assumptions I would consider to be implied in common knowlege:
Each worker gets paid 1 unit of currency,. They either get paid at the end of their service, after producing 1 unit each, OR after producing the 10 units together as a group, contributing equally to the work in terms of the subjective value of their role in the system. Fairly. 1 for 1.
The pay cycle is monthly.

Considering change as per point a. & b.
Lets assume this changes your simple example to:

10 units of currency circulating
A factory with ...
20 workers producing...
20 units of magic goods that provide 1 person their needs.

Implications...
If all 20 workers continue to work for 1 unit of currency.
The system assumes endebture to the workers to the value of 20 units of currency per pay cycle. due to the nature of the velocity of money, this can still be accomodated without additional currency:

Production delivery can be staggered and Pay cycles can be scheduled: each week 5 workers get paid 5 units. And 5 goods get released for sale.
Theirs still 10 units of currency in circulation and assuming that no worker goes 2 weeks without buying the majical product that gives them what they want, then their will be enough money to pay the workers each week without inflating the money supply.
 
Re: "That's the Labour Theory of Value..."

Ok thats fair, you did mention it in the preface. However the concept of a value proposition is one that applies a value for EVERYTHING subjectively.

For the purpose of fairness its fine to show that your 1 good = 1 unit of currency. But you didnt explicitly specify the workers wages... if we assign "work contribution to produce 1 good" the value of 1 currency unit. And each person gets paid 1 currency unit for their contrubution.

Then we can treat that just like watts = volts x amps and declare that since everyone gets paid 1 unit for their contribution to producion (is it commonly accepted that each of 10/20 people actually buys 1 unit? Or is their competitive hoarding, retirement investment or non workforce dependants involved?), can we assume their time spend working is directly related to the "hourly rate" of their role in the business, and that they accept and perform it to various levels of happiness but, pleasant cooperation as a society.

Subjective value on : "needs met" for a population with different depths of need gets tricky tho...

As the business owner who works for 1 day per month to define the system to get paid 1 unit of currency for the effort because its "the most priveleged job in the world"
..vs the cleaner who works 6am to 8pm, 6 days a week: Is the limit of acceptable labor deviation ill accept from a simple model system that ceaces to value equality of its members labor, before ill need you to explain what moral propositions or religious/political base your example monetary system needs to ensure is in place in the population.

Alot of what you have said otherwise makes a lot of sence.
But im finding the "working example" and the "high level" general paradigms, are simply disjoint.

In the example... to keep it simple but usefull, would you say that modern monetary policy would target inflation to-drive or to-suppress, things like: growth (population increase, where velocity of money is impacted by division), or profit incentives (consumable waste or retirement savings).. or would you see inflation affecting policies as being a direct modulator of the velocity of the circulating pool of money, which either dries up against available goods, or speeds up competition for limited resources?
 
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Azure said:
10 units of currency circulating
A factory with ...
20 workers producing...
20 units of magic goods that provide 1 person their needs.
Click to expand...

In this situation the money supply as measured in the output of goods produced has actually halved - previously it was 10 units of currency for 10 units of goods ie 1:1, now it's 10 units of currency for 20 units of goods ie 1:2. Is that a good thing? On face value (well to a bean counter lol at least) it would appear so. But...

- there are twice as many workers yet consumer satisfaction remains the same.

- productivity has obviously increased as a result of the extra workers which still enables the factory to meet the status quo (needs) of the new population.

- as long as the factory can maintain the current level of production all the basic needs of the workers will be met.

- but they will not see an increase in wealth, having to live without satisfying any further needs or acquiring more comforts ie a life of austerity.

Now for policy makers intent on ensuring that the population lives within its means, then an austere life may be the holy grail of public policy. That's fine if you want to ensure that your citizens don't consume goods and services beyond their means to acquire like advances in medical technology, cultural or artistic pursuits and so on. Unfortunately human wants are limitless and to force austerity onto a population is hardly a defendable moral choice.
 
But cant the monetary base be re-spent?

If economic activity depends on the velocity of money in the circulating economy.. which.. say in the sence of the example has the workers producing ONLY the goods in a single cycle of the currency. The business however makes ALL the money and realisticly no profit...
I mean.. every cent they make must be spend on the workers in the next cycle for wages.

So that hasnt change as the system has only grown.

If we just add a "savings" part to the example... the money dries up completely, as its hoarded out of existance, for: "a rainy retirement".
At this point, velocity tanks as circulating currency vanishes. (I.e: the wage cycle chamge mentioned before becomes very dependant on the circulating supply to unwind and process trade.
Unless... the savings (by the bank as an example) invests in the business for the wages to be paid...

Balances must be recorded as debts.
And the business become creditors to the investors.

How that is unwound, and how a change in the actual currency base affects that. Is a challenge. Because it affects the need to invest wisely (in the productive ventures) as savings are accumulated amd the base grows. vs the percieved value of investments in stable vs volitile markets.
 
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Azure said:
But cant the monetary base be re-spent?
Click to expand...

It obviously does which makes the economic model more complex than the one I initially proposed. My simple model doesn't reflect reality, it just simplifies our understanding. I hope. o_O

Azure said:
If economic activity depends on the velocity of money in the circulating economy.
Click to expand...

Velocity of money is a contentious issue. Let's just say it is a measurable factor but I wouldn't argue that economic activity depends upon it. How often money changes hands is probably more a sign of robust economic activity as opposed to an essential precedent to it.

Azure said:
If we just add a "savings" part to the example... the money dries up completely, as its hoarded out of existance, for: "a rainy retirement".
At this point, velocity tanks as circulating currency vanishes. (I.e: the wage cycle chamge mentioned before becomes very dependant on the circulating supply to unwind and process trade.
Click to expand...

Yep I agree. Hence why I would argue that money shouldn't be a store of value because if it's hoarded it doesn't perform it's task as a medium of exchange. I have a preference for people to save in assets (gold, BTC, RE stocks etc) as opposed to currency.

Azure said:
Unless... the savings (by the bank as an example) invests in the business for the wages to be paid...
Click to expand...

Banks don't invest deposits any more. They could I suppose but I'm not sure that the economy would benefit to any greater extent than if they just do what they do now ie create deposits.
 
Azure said:
Implications...

Production delivery can be staggered and Pay cycles can be scheduled: each week 5 workers get paid 5 units. And 5 goods get released for sale.

Theirs still 10 units of currency in circulation and assuming that no worker goes 2 weeks without buying the majical product that gives them what they want, then their will be enough money to pay the workers each week without inflating the money supply.
Click to expand...

Isn't it 4 weeks that they have to wait?

But anyway it would work if 15 workers are happy to not get paid nor consume each week because in this simple economy no other goods are produced or consumed nor are any others in demand.

But how does that process allow the economy to meet the future needs of individuals as their desire for consuming more of the goods grows? An artificial constraint is placed upon consumption (and production) as a result of a deliberate policy to not inflate the money supply.

Do you have to adjust the pay cycles constantly if the money supply is not growing to meet demand? Meaning the frequency between working and getting paid is extended ad infinitum.
 
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