At 16:03 22/12/2010 -0400, Mike Spencer wrote:
I really, *really* don't know how money and finance work at the macro
level. As with many people, my model for economics is the the sale of a
pig by one farmer to another, the biz of a small tradesman in colonial
America or the like. So here's an easily followed analysis at a scale
that I can grasp, however lacking in detail if not totally spurious.
It is a slow day in the small Nova Scotia town of Pumphandle, and
streets are deserted. Times are tough, everybody is in debt, and
nearly everybody is living on credit.
A tourist visiting the area drives through town, stops at the
motel, and lays a $100 bill on the desk saying he wants to inspect
the rooms upstairs to pick one for the night.
As soon as he walks upstairs, the motel owner grabs the bill and
runs next door to pay his debt to the butcher. The butcher takes
the $100 and runs down the street to retire his debt to the pig
farmer. The pig farmer takes the $100 and heads off to pay his
bill to his supplier, the Co-op. The guy at the Co-op takes the
$100 and runs to pay his debt to the local prostitute, who has
also been facing hard times and has had to offer her "services" on
credit. The hooker rushes to the hotel and pays off her room bill
with the hotel owner. The hotel proprietor then places the $100
back on the counter so the traveler will not suspect anything.
Shortly, the traveler comes down the stairs, states that the rooms
are not satisfactory, picks up the $ 100 bill and leaves.
No one produced anything. No one earned anything. However, the
whole town is now out of debt and looks to the future with a lot
more optimism .
And that, folks, is how a Stimulus package works.
Not mine. Found on the net.
It's a very clever story and dupes many people. However, it has a fallacy
within it -- even before it's supposed to represent a stimulus package. Let
me deal with "level 1" first. It has a missing component. It may seem
trivial, but it's not really. No-one has been eating during the whole
episode! What this means in formal terms is that a cyclic economy (that is,
by far the most part of a normal national economy) still needs additional
energy coming into it from outside the system to keep the cycle going. This
is part of the law of thermodynamics -- without additional energy, any
system gradually dissipates energy merely by its activity. It cannot keep
going except by constant injections of energy.
As to the story exemplifying how a stimulus works (level 2), this is even
more lacking as a model. A real stimulus in an economy means that it is has
to be an additional input over and above the normal "topping up" energy
required for a cyclic economy. The additional input is, in formal economic
terms, investment. It creates a new product or service which, if it's
considered to be desirable, is then worked hard for by potential consumers
with work over and above the normal level required for a cyclic economy.
(It doesn't mean that in a real economy everybody has to work for longer
and longer hours as the years go by. Usually most investment goes into
making existing products more efficiently which means that, by working for
the same number of hours a consumer can buy an additional product -- which
then draws more people into employment in making it.)
Keith
Keith Hudson, Saltford, England
<http://allisstatus.wordpress.com/2010/12/>http://allisstatus.wordpress.com/2010/12/
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