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Thoughts on the Flow of Money

January 14, 2012

The idea that you get back what you put out, in a certain general sense, is as old as the hills.  It features in the Sermon on the Mount, and also in certain teachings on the ancient Indian idea of Karma.  The idea of flow is also a natural one, and many things can be perceived to flow.  Modern science and mathematics have worked wonders with these ideas, with the ideas of conservation laws, and exemplified in the understanding we have of electrical phenomena: where currents of charge flow.  A crucial concept in electronics in the circuit: a closed loop from current or voltage source back to itself.  This is what I want you to think of.

To take this towards the idea of money flow, I’ll begin with the idea of value.  Value is a kind of connection between a thing and a person
who values that thing.  Things can be said to have intrinsic value when most people consider the
value of that thing to be the same, whereas otherwise value is relative.

Next, consider resources.  These may be material (i.e. fuel, food), human (time and effort) etc.

The practical thing in an economy is the flow, transformation and utilisation of resources.  Not money, or at least not currency, but resources.  (Think back to the Weimar Republic for an example where the flow of currency and resources become separated.)

This brings me to money.  Money represents a token of deferred value.
One gives up the money when they get the value it is exchanged for.  As such, money is a tool to allow for more complex and interwoven exchanges of material and human resources than would be possible without it.  And it allows a temporal separation of exchanges of physical resources (I work, then get the money, then spend it on a loaf of bread two weeks later, for example, whereas if I worked directly for the loaf of bread, I would most likely have to receive it immediately and not have the capacity to save the fruits of my labour.)

Now consider chains of linked transactions.  An obvious example of this is a chain when buying houses: one person in the chain cannot move out of their house until the next house in the chain is available, and the person before them in the chain cannot thus move in.  Equally, with transactions, one cannot (and I’m keeping things simple without the idea of debt here) trade something that they do not have.  Thus one must obtain a resource before one can exchange it for something.  The person afterwards in the chain of transactions cannot trade it until they obtain it either, and thus we build up a long chain of potential transactions that are all waiting for our resource to appear.  When chains loop back on themselves, things get interesting.  I’ll leave you to consider all the possibilities, but for a moment just consider the chicken-and-egg situation of how dues such a chain of transactions get started if everyone in the loop is waiting for everyone else.

This is where debt can be useful as a genuinely productive catalyst.  One can start up a flow of resources with money that they do not have.  This has benefits, but also obvious drawbacks, since when going into debt, one should only make promises that they can honour in future,  and to ensure this it is necessary to have a certain amount of foreknowledge of events.  When expectations are not met, people can be left with debts that they thought they could repay but now cannot.  Worse still is when someone is compelled to commit to expenditure that they must finance with debt, without having a clear plan as to how the debt will be repaid.  So debt is a useful, but potentially dangerous tool and it should be seen as such.

Finally, consider the effects of hoarding value, that is, not putting things out for whatever reason.  If one controls a certain sum of resources and holds onto them without utilising them, those resources are denied to the rest of the population and, if everyone plays the hoarding game, everybody will struggle to get what they need because others are needlessly holding onto them.  Thus one needs to spend wisely so as not to get into trouble, but not be too thrifty for the sake of their own gain as then the population as a whole will suffer.

Game Theory has much to say about this sort of thing, but that is an area in which I am not an expert, so feel unable to confidently comment on it in detail.

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From → Economics

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