"Butchers sell to Bakers who sell to Butchers and in this way money circulates around the economy as summarised in Fisher's equation MV=PT
M = Money stock in an economy
V = Velocity of circulation
P = Price level
T = Number of Transactions"
It is sometimes claimed that one of the failings of the New Testament is that it loses so much in translation to English i.e. The Ancient Greeks had four words for love and it gets translated as just the one big ambiguous ‘Love' in English - so a lot of meaning is lost in translation. But it's not the New Testament that has a problem and it's not the translators that are the problem either, the problem is this : English is a rubbish language ! Two people can talk in English and walk away having understood totally different things. If the topic being discussed in English is important it's worse than rubbish - it's dangerous : Two people can march next to each other on a protest for "Freedom" but if they new each other's meaning of the word they'd likely as not be protesting against each other.Look at the first part of the above MV=PT sentence which is found is a similar form in most Economics textbooks : "Butchers sell to Bakers" - this is ambiguous and misleading to a comical extent just at the point it needs to be most clear - the ‘English' is perfect but a ‘proper' language would flag the above as a Grammatical mistake so sentences like that are not even used. Where is the ambiguity ? : When a butcher - as a butcher, in the business of butchering, from his business cash box or business bank account, or business credit, buys stock or supplies from a Baker for sale to his, the butcher's customers, the accounts entries - the double entry bookkeeping - are totally different from when Mr Butcher as Mr Jones the Consumer buys some bread from the baker on the way home using the drawings from the profit of his Butchering business. As consumers, Mr Jones the butcher and Mr Smith the Baker will shop in each other shops - the phrase to use to describe this is not "Butchers buy from Bakers" but "Consumers buy from Retailers" - as you can now see we are a little clearer and suddenly the ‘money-go-round' thing that is implied in the "Butchers buy from Bakers" thing - disappears. Retailers don't buy - as typical - from other retailers : Sainsbury's does not use its monthly sales receipts to buy stock from Tesco's and vice versa. Sainsbury's and Tesco's buy from trade suppliers - warehouses, farms, factories. The money flow implied by this statement - the one that actually happens in practice is more of a hierarchical flow - money is created as loan by a bank for a factory or a farm, this money is paid to workers who - as consumers will buy from retailers at the top of the chain. Stock is sold to retailers from the farmer and factory (plus sundry number of steps in between) then when Mr Jones and Mr Smith, as consumers, pay £100 to buy the final goods in the shop the shop - the Butcher and Baker do not use these retail receipts to buy goods from each other - business to business - they use the money to pay their suppliers, the suppliers use this money to pay their suppliers and eventually the money is returned to the bank to pay off the original loan - at which point - given that all money actually is is transferable bank debt - the money when it ‘pays off' the loan, ceases to exist. So in the first instance MV = PT just doesn't mean anything - as the model of what happens that it is trying to say something about doesn't even exist. MV<>PT - a dimensional/units approach. Say we had an over simplified closed economy on a Desert Island using an over simplified "Consumers buy from Retails" model in which there are 1 Million of Gold Coins in the pockets of the Consumers/Workers. They get paid every month to make half a million loaves of bread. Every month they spend all their money in the shops. The cost and hence the price of the bread in the shops is then £2 per loaf (assume no profit and no fixed asset charges for simplicity) so every month 1 million pounds gets paid to the workers and the shops sell half a million loaves at £2 per loaf. The £1 million is in this way given back the shopkeepers who pay this out again to the workers every month to bake the bread to go in the shops for next month. What's the MV = PT going on here ?
Well we have :
M = £1,000,000
V = 12
So MV = 12,000,000
And P = £2 - the price of a loaf T = Half a million loaves sold every month for 12 months = 6,000,000 loaves sold per year. So we have MV = PT = 12,000,000 which is the GDP of the Economy and the total sales figures in all the shops. QED
But wait a minute - what if there was a miser millionaire on the Island and he had £1,000,000 and didn't spent it as he made his own bread - What is the MV=PT now ? Well if we want to keep the PT side of the equation and keep the ‘answer' at £12,000,000 - which seems like a real number that means something, then either one of two things must happen. If we say that M now equals 2,000,000 then in order to get the equation to balance, V must now drop to 6. But we liked the 12 - it had a real feel to it that made it look like it meant something - the 12 pay days of the year. The other thing we can do is say M is not the Money Stock but is the Money stock involved in the circulation. Let's look at the dimensions/units of the equation to see if this will helpLet's try the dimension of :MV - M as being £'s V - well ‘Velocity' indicates it's got something to do with something/time - the velocity of a car is in Miles/Hr or more generally Distance/Time - so Cycles/Year would seem reasonable - when people got paid weekly and spent it weekly the Velocity of money might have been 52 Cycles/year - the above seems reasonable as 12 Cycles per year given the Monthly pay. This then leaves MV being dimensioned as £ Cycles/Year The other side of the equation :Price is Price per transaction or £/Transaction and T is Transactions/Year so PT is dimensioned as £/Year. This leaves us in a mess as the two sides of the equation have different dimensions. The PT as £/Year sounds like it's saying something real so let's say (assumption opened to be challenged) that the correct dimension is £/Year - so let's go back to the MV side and change things there to get the ‘right answer' : Changing M : if you have M dimensioned not as £ - which would be the measurable money stock - £2,000,000 in the above example you instead dimension it as £/Cycle then we get the right dimensions M (£/Cycle) x V (C/Year) = £/Year but M is then not the Measurable Money stock. This way round, it becomes the amount of Money spent per Cycle (per month) in this case £1,000,000/Month spent on consumer goods. The equation MV=PT then becomes "The money spent by Consumers in 12 months = the money received by retailers in a year - spooky eh ? - i.e. MV=PT is actually a trite tautology (tautologies tell us nothing) masquerading as an equation (which do tell us something). OK lets try plan B - which somewhat anti-intuitively is what economists actually do - i.e. doesn't it make more ‘sense' to have v stay as 12 ? Let's have M dimensioned just as £ so it's back to the money stock on £2,000,000 - this means we need to change the dimensions of V - Hold on ! Cycles per Year sounds like a pretty good start (and end!) for the dimensions of something called velocity of circulation ! - but let's try it to see we what happens. We are aiming for £/yr = the PT dimension. If we have M as £ then the dimension of V must be /yr - which is not the dimension of a Velocity - but it is the dimension of something in physics called Angular Velocity. Let's run through it in numbers again : We had M = £ 2,000,000, we have PT = 12,000,000 and we can't go to a bank and say "Can you look at the 12 major cash flows a year you see and tell me tell me what V the Velocity of circulation is ?" as he might say 12 - and that we ‘know' this is wrong answer - the right answer is 6. How did we get to 6 again ? How did we know the ‘right' answer and the bank manager didn't ? We took the final answer - PT of 12,000,000 and divided it by the M of 2,000,000 i.e. We actually started with V = PT/M = 6 and then pretended we got it from an outside source and then we put it back into the equation MV = PT. So the way round we did it - and economists do it is way as well - we basically said : M(PT/M) = PT. Cancelling the common terms we get 1=1 a miserable definitional tautology ! They able to cheat because they used the Words : "Velocity of Circulation" but it's actually just a tautological balancing figure and so it should be called a tautological balancing figure - or perhaps the "Angular Velocity of the Money stock in relation to the Total Retail Receipts" which would then elicit the response - "I beg your pardon Angular ‘Whatdidyousay ? " The answer would be "The abstract (i.e. meaningless i.e. not an observable phenomenon) ratio : (Total Retail receipts per year)/(the money Stock) - and then no one would pay the formula any more attention for the rest of Time - outside of it being studied in history lessons as "mass madness curiosity thing caused by the linguistic inadequacy of English" and filed next to the Loch Ness monster in the silly cabinet. So in conclusion MV= PT is true but the name for V - "velocity of circulation" is so deeply misleading that it's a good start point to say it's wrong - basically it's meaningless. But beware of some policy bod using MV=PT and concluding you need to lose your job or be taxed more. Don't let them use English - force them to use dimensioned equations and double entry bookkeeping (and given that there are two parties to every transaction and both use double entry bookkeeping tell him to show you the quadruple entry bookkeeping).The silliness of this if further shown when see that M has several definitions : There is M0 - notes and coins which leads to M0V0 = PT so V0 = PT/M0. But to call V0 the ‘velocity of circulation of notes and coins' sort of linguistically implies that the economy runs on 2p pieces getting passed around - which some people believe. But if you accept that this is the case then explain V1 - which derives from the definition of M1 - notes coins and current account balances. V1 is not the ‘velocity' of M1 it's merely an abstract ratio PT/M1 - but if you call it "The Velocity of circulation of M1" then it implies a totally different money-go-round economic model from the model implied by the definition of V0, or V2 or V3.... The "Velocity of circulation of the M's" name is bad English that implies some strange circular thing with money that just does not happen - if you believe it does with one of the M's then you are going to have to explain the others. In summary : the V's are the ratios of PT to the M's - they are tautological balancing ratios and they are not too different from the children's game of "Think of a number, add one, now add two and now take away three and look you've got the number you started with" - it's logical jumping up and down on the spot.
Policy implications of MV=PT. The first claim of the MV=PT crowd is that is that as it's a formula that derives from the circulation of money model theory of the economy... "butchers selling to bakers who sell to butchers" and as MV=PT is true and hasn't been shown to be false it legitimises this daft "butchers selling to bakers who sell to butchers" model that is never seen in the real world. This is ridiculous : MV= PT merely means: 1=1 and there are not very many policy implications that flow from this other than there should be quite a large legal case heading the way of Economists for professional fraud on civilisation that starves in a world that burns food in poor counties (reality is we have enough food) and works till they drop in a world that's been machinated, automated and computer chipped to the eye balls in the ‘rich' countries for years (reality is we should be all "living the life" while the computers and machines do most of what little work is needed)... because of some ya di ya scientific sounding reasons concluded from 1=1 ! The second implication of this is what's known as ‘sound money' - which basically means tax everyone and interest rate them to death so they never have any money in their pockets and then that'll keep inflation down as otherwise "too much money will be chasing too few goods" and the if that happens the price will rise and we'll get inflation. We can't use the MV=PT equation to prove this rubbish any more that you can use the 1=1 equation or "think of a number..."
Thought experiment 1 : Imagine there was a Major in a small village in the middle of France. Now his friend runs the Polish (poor) National coach company and by ‘arrangement' all the Polish holiday coaches take a stop at the village. There is a market that waits for the daily arrival of these coaches and the average price of the bread in the market is 10 Francs. If the Major leaves office and the new Major has as friend who runs the German (rich) national coach company then we have a classic "MV = PT too much money chasing too few goods situation" - a whooping 10 fold increase in M ! - but does the price of the bread in the Market go up? The answer depends on how much the market is a free market - if a French market stall holder can make a living selling bread to Poles at 10 Francs then, now the money M, has gone up 10 times, can he increase the price of his loaf 10 times or even by anything at all ? - Well the moment he does, the Germans will buy the bread from a cheaper stall. Only if there is "fiddle" and new entrants are barred from setting up a stall and a price cartel is established, will the price be able to rise - so it's not an increase in money that causes the price of a loaf to rise it's the how shall we call it ? say the index of market un-competitiveness. The higher this is, the higher the price will be. You might object that in a few years there will be expensive bread in the stalls but this will be speciality bread - better bread - this is not inflation any more than you suffer inflation as you walk down the street and see a mini for sale at one price and 10 minutes later see a Roll Royce for 10 tines the price - it's a better car and it's a better loaf. To play with the example a little more - at the other extreme, if a Polish tourist with 50 Francs in his wallet wanders off the beaten track and has a knife put to his throat by a mugger (in economics-speak a knife to the throat is ‘cornering the market in a necessity") . It'll cost the Pole 50 Francs for his next breath - it'll cost a German tourist, with 500 Francs in his pocket, the whole 500 Francs - it is at this point - in "cornered markets in necessities" do we see an increase in Money causing inflation. But this is English being rubbish again. "...an increase in Money causing inflation" That last phrase is grammatically correct. In a "proper" language it should jump out as being just a plain mistake in grammar though. It should say "Uncompetitive markets cause inflation when more money is available."When stated this way round the focus is placed correctly on solving the uncompetitive part - arresting the muggers, breaking the cartels etc rather than on solving the "too much money" in my pocket part which leads to "let's tax'm high and raise interest rates"- i.e. the government mugs my pay-packet first before it even hits my street mugger and cartel vulnerable wallet - cheers ! - Thanks for saving us from being mugged by mugging us !The other way to counteract uncompetitive markets is by Government regulation - this sometimes gets the job done quite effectively - sometimes it messes up. A ‘principled' approach of "Only Markets can solve un-competitiveness" is as silly as "Only Government regulation can solve un-competitiveness". The methods are open to debate and trial, error and innovation. The important thing is that this is where the emphasis should be, rather than saying "1=1 so people should be kept poor".
Having established that money does not ‘go round' butcher to baker' style, that money is not stuck inside an unbreakable MV=PT law of monetary nature discovered by mathematicians and that it is not some type of ‘virtual gold' that is in a God given fixed supply, I'd like to show that you don't need to ‘get money' from someone else who has it. Banks actually do not ‘need' customers to deposit money in current and savings accounts in order to ‘have money' they can loan out - though they generally like to do so as current accounts are quite cheap (You won't get rich on the interest on a current account - so a bank won't get poor. If a private customer transfers their money - their ownership of bank debt - from one bank to another - then the first bank will now have that debt owned by the second bank and the first bank will have to pay interest to the second bank at the Inter Bank Lending Rate - which is usually quite high compared to the retail interest rate). It works like this : If you deposit £100 in your current account at your local bank and go for a coffee and then see some happy person coming out of the bank 5 minutes later bank saying "Whoopee I've just got a loan of £100" - Don't worry, that £100 was not taken out of your savings account - it's still there - what happened is the bank created a new £100 by using the Double Entry : Debit Loan Account £100, Credit Current Account £100. The Credit in the current account is "Money" - and that's all money is at present : "Universally Transferable Bank Debt" - it's a Bank issued IOU - a ‘BOU' a ‘Bank Owes You' note. When you issue an IOU and then later pay the debt, the IOU is returned to you and the debt and IOU (which is a note of the ownership of the debt) ceases to exist. It's the exactly the same with Money - when the loan is paid off the bank makes the Double Entry : Credit Loan Account £100 and Debit Current Account £100 and the BOU - the money - the Bank debt - ceases to exist. So What ? The ‘So What' from this is the realisation that money is a contrived human invention and hence we can change its properties to suit our reality - we made it so we can change it. My underlying point in all of this is that we've been living in a reality that no longer suits the money system we have - it's over 100 years out of date. That reality basically being the existence of machines which means we don't need to work all day every day to live - which is a predicate of the current system. A modern steel factory can output millions of tonnes of steel per year with six or seven ‘workers' and they have able to do so since the 1980's. If the 6 billion people on this planet were to be ‘fully employed' in modern industry at modern levels of efficiency we'd put the whole Earth through a factory in matter of days.
Thought experiment 2 : Imagine a space-age future. Super advanced robots make all the goods and provide all the services we need. What money system would be suitable for us to use ? The first answer - "The one we have at present" - which is largely based on being paid money to do work which gets sold to someone else for money (more money in than was paid out - to make a profit) would leave most of us all very hungry very quickly as there would be no work to do. People who owned things - Land, Property, Shares in Robot Companies, Farms... etc might be expected to receive an income from charging for the use of these things but deriving an income from ‘work' would be so very two centuries ago. Imagine we worked out a financial system that worked for all of us in Robot World. Whatever it would look like, if it ‘worked' - i.e. if it allowed all of us to enjoy the fruits of the Robots, then right now, today, due to the level of mechanisation and computerisation we have at present - whatever this system might be - we should be using half of it right now.
Thought experiment 3 : You are walking down a dark unlit road. Suddenly, from nowhere, 6 men armed with shotguns, all drunk as skunks appear in front of you... "Are you in trouble ?" - it depends how cultured they are. If they are a bunch of young country squires for whom ‘work' is an optional extra intellectual hobby to fill dark winter days who have spent the day at shooting practice and the evening drinking real ale then probably you're perfectly safe. If they are from an inner city, or outskirts in the middle of nowhere, housing estate... then start praying. Wealth doesn't equal Culture and Civilisation, but without wealth, culture and civilisation has a hard time getting started. Now swap the negative word ‘Rich' for the phrase ‘Financially Independent' and swap the cartoon caricatured cruel, bad mannered fat rich bloke for the picture of healthy, well fed teenagers going white water rafting during the summer holidays rather than gaunt illiterate feral teenagers hanging round in gangs at the end of your street and you might be more predisposed to accept the radical suggestion coming next : Why don't we all get paid without doing work ! - That's going to have to be the basic theme of the financial system in Robot World - so why not have something of that system in part now ? You'll get paid not based on just what you yourself produce, but in part - maybe later in whole, merely on what can be produced. We are not all required to stand at a machine and press the start button - why should only those ‘lucky enough' to find the work pressing the buttons get to eat ?
1st Obstacle - Set aside the physical and financial obstacles first - imagine we lived in Robot World and had a Robot Financial system. The question is "Is it a good idea for everyone to be financially independent ?" - If you don't then "Go to Hell" - Actually you might be able to catch a bus - there is plenty of Hell on the surface on the planet - if you want it - go to the poor no-go areas in most cities, stay there and shut up. If you are ‘religious' and think that poverty is a good thing then why do 9 out of 10 prayers involve something to do with "money... and can I have more of it please" I think NEFS - Net Export Financial Simulation see
http://worldnews.blog-city.com/financial_news__world_coffers_about_to_run_dry__nefs_to_th.htm is the first step in moving towards a financial system that is suitable for the reality of modern human existence. If you have a better one then I'd be pleased to hear the idea but do the Quadruple entry bookkeeping (see - http://worldnews.blog-city.com/financial_scenaios_quadruple_entry_bookkeeping.htm ) on it first. Different countries might have different ways of implementing it. Communist countries will want to have it centralised and paid to ‘Glorious Government Workers' etc, some countries might want to pay it to elderly people, or married couples. I'd tend to be inclined to not mess around and divide it equally between everyone - the Sun shines on everyone - why not NEFS ? Power of the Banks :"It's his money he can do whatever he likes with it" Add together what you now know from the above that Banks create money to what you already know that without money you're in trouble and you realise that Bankers are quite amazingly powerful. So now, not only will you perhaps be interested in having some say in how much NEFS are issued, you might also be interested in having a say in what loans to whom a bank manager makes now what you realise it's not someone's private money they are loaning out when a loan is made and so can't be covered by "It's his money he can do whatever he likes with it" - it's brand new created money. Money is like Music and unless you are financially independent then you are a dancing monkey. If you are to call yourself a "Free Person" and have it mean something then you need to have a say as to what music gets played. Exactly what form this exercising of say takes - voting for your local bank manager like Americans vote for their local sheriff or something else - is a technicality and might be different from place to place and culture to culture. I suggest whatever you method you choose that you think of something you don't want and see if your method might stop it.
