Mike Thank you for this story, and Keith thanks for your commentary.
Keith, You are probably right. No-one ate in this example, but they all ate in the first place when the debts were created. What they lacked as they were eating was the money to pay for their food, and what the 'stimulus package' provided was that money. This is why I am such an advocate for local currency systems, they can make this story come true relatively indefinitely - so long as they are properly constructed, and can be relatively easily exchanged for other currency. regards Charles Brass futures foundation www.futuresfoundation.org.au From: [email protected] [mailto:[email protected]] On Behalf Of Keith Hudson Sent: Thursday, 23 December 2010 8:28 AM To: [email protected]; RE-DESIGNING WORK, INCOME DISTRIBUTION, EDUCATION Subject: Re: [Futurework] Stimulus package: a model 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/
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