The “modern” economy and modern economics make several assumptions that I think are not true. For some of these, the results are economic dislocations (IMHO) and there are a few “products” that depend on these confounding of understandings for their existence.
I’m going to present a “thought paradigm” or “explanation in a box” that I think might help illustrate some of the issues. I’m not sure this is the best way to look at things, but I think it helps to remove some of the “crap” that passes for generally accepted truth.
Store Of Value and Money
There is a common confusion over what is a ‘currency’ vs what is a ‘money’. IMHO much of it ‘by design’. Governments love to issue “paper money” when what is really being issued is “paper currency”. Why do I say that? The definitions I learned getting the ‘ol Econ degree.
Currency is a “medium of exchange”. Doesn’t matter what it is, you can swap things for it, and swap it for things.
Money is a medium of exchange, but also has a “store of value” function. People want to “put something away for later”.
So in a prison, cigarettes are often used as both money and currency. They store well, have high value to unit size, are always in demand, and can be easily traded in sizes from individual cigarettes to packs to cartons. (They also have the feature that the “money supply” is constantly consumed so inflation can not build up ;-)
Over time, all sorts of things have been used for money, from carved stones to precious (and semi-precious) metals and stones. These fairly universally involve significant embodied labor in the extraction / creation processes and have high value / unit or density. (Though the giant carved stone donuts used by one tribe were questionable on that front, they did have high embodied labor). Traditional money was a form of embodied labor that was durable over time.
Also, as a side note: The historic 16 : 1 ratio of value of sliver to gold was based on the relative costs to mine them in antiquity. The reason that does not hold today is that the mining of both has “moved on” to other technologies and the relative costs have shifted. I mention this simply because it is still commonly brought up by “hard money bugs” as an advocacy position when they advocate for hard money and the preferred ratio of sliver to gold prices / values. There is a long economic history on this too, so it ought to be mentioned as a well thrashed out point. It was, once, a major political topic and ignoring it would be undeserved. It has some humor available too:
Wizard of Oz
Since the 1960s historians and economists have explored the bimetallism symbolism in The Wonderful Wizard of Oz/ The original 1900 book centers on a yellow brick road (gold), traversed by magical silver slippers (the 1939 movie changed them to ruby slippers), as Dorothy leads a political coalition of farmers (Scarecrow), workers (Tin Woodman) and politicians (Cowardly Lion) to petition the President (Wizard) in the capital city of Oz (the abbreviation for ounce, a common unit of measure for precious metal). The real enemy of the little people (Munchkins) is the giant corporation or Trust (Wicked Witch of the West), whom Dorothy dissolves, just as the progressives of the era tried to dissolve the corporate trusts.
As opposed to metals and stones and other things that “embody labor” and have an “intrinsic value”, we have the more common means of exchange today. The fiat currency. Often called a “paper currency” since that was the major manifestation until computer bits took over. Now much of our “money supply” really consists of computer bits storing accounting entries for currency inventories.
IMHO, what makes a fiat currency or paper currency different from hard money is that it simply is not a “store of value” as it has no embodied labor to speak of. (Actually, with modern mining, embodied labor and capital consumption) In short, an ounce of gold will always be an ounce of gold and baring any miraculous breakthrough in mining or transmutation of elements, has a stable embodied work content. It may slowly change over time as technology advances, but that is limited to just a percent or 2 a year (and sometimes not at all) by the rate at which new inventions and discovery happen.
Just to be clear: I am not a “Gold Bug” nor am I a “hard money advocate”. The “worth” of a commodity can shift rapidly with economic demand, and gold is just another commodity. This means that use as money means prices can shift rapidly based on the demand for gold industrially and not on inherent value. I’m not particularly fond of paper currencies either, and have my own ideas about a better money then either (but that’s in a prior posting – the commodity basket backed debit card). I’m doing descriptions, not advocacy, here.
Fiat currency costs nearly nothing to manufacture and has nearly no intrinsic value. Sure, some is collected as art, of a sort, but usually long after the use as a currency has waned. It retains exchange value and use only so long as someone strongly backs it with willingness to do various exchanges with it. Typically the Central Bank (that swaps it for mortgages, insurance contracts, and sometimes real goods like metals – gold, silver). Economics typically glosses over the point that a mortgage is very different from gold when it comes to a central bank taking “assets” in exchange for currency. IMHO, that is in error. The two have very different natures, and in the long run, that bites. Both the mortgage and the currency are just paper promises.
Just keep in mind that history is littered with broken currencies as nations and banks came and went. In the early years of the USA, there was no central bank and each bank could issue their own currencies. These often took the form of deposit receipts for gold or silver. This practice carried forward into the Federal Reserve System up until Nixon killed it. He wanted to spend a LOT more money than was available with gold backing, and did so. The French, knowing this meant the $US was going to drop value, started trading them in for Gold and Sliver as the contract said could be done. Eventually (many many tons of gold shipped to France later…) Nixon gave up and decoupled the $US from gold and removed silver from our coins. Since then, the $US has lost roughly 95% of the “value” it had then.
I can verify this from personal observation over that span of time. Stamps were 3 cents, moving to 5 ¢ and now have moved from 35 ¢ toward 1/2 dollar. Bread was a dime, and is now about $1 to $3 a loaf. Cars were about $1500 to $2000 and now run closer to $20,000 to $30,000. So it goes. So in many ways the $US is already a “broken currency”, but since it took 50 years, we haven’t noticed so much. This will be forced to accelerate going forward due to the ghastly debt level being racked up, but is presently in check as our demographics does not have folks looking to cash those checks just yet. And that is the thesis presented below. That TIME is the missing element in “store of value” vs “store of labor” (or “store of work”)
The key point about gold vs paper currency is that gold is a “store of value” and a “store of work”, where paper currency is only a “store of value” in the short run, and is never a “store of work”. I think this matters. So much of modern economic though tries to portray paper currency as having some “store of value” and therefor being a “money”; while I’m of the opinion that “store of work” matters and that paper money is only a “store of hope” and is only worth what someone else will give you for it. Gold, silver, copper, even iron and land have intrinsic worth and so can not be reduced to zero (or even much below the cost to mine or produce). They can be bid up to higher than reasonable levels, and so have volatility issues as a currency.
Demographics As Destiny
It is a common theme of political economics. Nations with growing populations can grow. Nations with stagnating / declining populations can not. Nations with dramatic influx of foreigners will be changed into something else.
For the USA (and perhaps the EU as well), there is a “Baby Boom” generation. Born after W.W.II when the G.I.s came home. I’m part of it, though at the trailing edge. My older siblings are the start of it and the middle. The “boomers” have often defined economic trends and style fads as they moved though “the system”. They will do that, too, when they retire. (That is happening now, with my older siblings already retired and me about 5 years out). As we move from the most productive years to the retired years, the “bubble” of production will move with the boomers to a bubble of consumption. Our economics will move from “saving for retirement” to “cashing it in”.
That is the fundamental problem facing Social Security, Medicare, Medicaid, Federal and State Retirement systems, and Corporate Retirement plans. The Corporate Retirement plans have faced this before the rest, with many going bankrupt, or being eliminated entirely. It is my opinion that a similar issue faces all the rest. Further, that it is not possible to solve it. Why? Simply because paper “assets” are not real labor. There is a fundamental fraud in thinking that a T-Bill can grow food or make cars. It is a “store of value”, but not a “store of labor”. We will have a bubble of ‘takers’ and no supporting bubble of ‘makers’.
Don’t look to China to bale us out on this with their ‘makers’. Thanks to the “1 child policy” they face a demographic wall of their own.
Health Policy Report
The Effect of China’s One-Child Family Policy after 25 Years
Therese Hesketh, Ph.D., Li Lu, M.D., and Zhu Wei Xing, M.P.H.
N Engl J Med 2005; 353:1171-1176September 15, 2005DOI: 10.1056/NEJMhpr051833
China’s one-child family policy has had a great effect on the lives of nearly a quarter of the world’s population for a quarter of a century. When the policy was introduced in 1979, the Chinese government claimed that it was a short-term measure and that the goal was to move toward a voluntary small-family culture.1 In this article, we examine to what extent this goal has been achieved and the implications for the future of the policy. First we explain why the policy was introduced and how it is now implemented. We also examine the consequences of the policy in regard to population growth, the ratio between men and women, and the ratio between adult children and dependent elderly parents. Finally, we examine the relevance of the policy in contemporary China and whether the time has come for the policy to be relaxed.
In 1979, the Chinese government embarked on an ambitious program of market reform following the economic stagnation of the Cultural Revolution. At the time, China was home to a quarter of the world’s people, who were occupying just 7 percent of world’s arable land. Two thirds of the population were under the age of 30 years, and the baby boomers of the 1950s and 1960s were entering their reproductive years. The government saw strict population containment as essential to economic reform and to an improvement in living standards.2 So the one-child family policy was introduced.
Figure this really had impact starting with births in 1980. That’s 35 years ago. Add 20 years for start of child bearing, the last of those pre-1 children are now about 55 years old. In the next decade, they age out into retirement. All those “2 parents” being supported by all those “1 child” workers.
IMHO, this is a large part of why both Republicans and Democrats have largely ignored the influx of illegal aliens and often granted “amnesty” for the flood over the border. Having spent 2 generations berating us to stop having children “for the planet” and us generally having “at replacement” or below rates of reproduction; they have decided to flood the place with imports to make up for the labor shortage that makes the retirement promise a hollow one. Need more taxes? Just bring in more workers… Legalities be damned and that stuff about stopping population growth ignored. Something similar plagues the EU and UK, but with muslim influx from North Africa and the Levant & Pakistan areas instead of Mexicans and Central Americans. Having done as you were told “for the good of the planet”, you are now to be replaced.
But what happens when those new imports decide they don’t give a damn about paying for a bunch of old folks that they hate to live a life better than theirs? Are they really going to honor “retirement” benefits for folks who borrowed the money from their future? Can they, even just as a practical matter?
National Debt – Money borrowed from future labor
Nations love to borrow money. IMHO, the best thing a nation can do is forbid national debt. Just make it a zero. Why?
National debt is borrowing from the future. It robs those who are not a party to the contract.
Right now, in the USA (as an example) we have Obama and his Republican Congress racking up about $1 Trillion per year on average of National Debt. This is “value” that is being consumed today. Embodied labor and capital stock depreciation, gone into pet projects. The folks who will pay this bill will be working in 30 years when the 30 year bonds come due. Those folks will be about 40 to 50 years old then. That makes them 10 to 20 years old now. Generally speaking, not involved in the decision to borrow from their future wealth to spend now. The notion that this “stimulates the economy” so is somehow free is simply wrong. Perhaps if it were spent on fundamental wealth building projects, it could, but generally it is not so spent. We are not building steel mills, coal mines, or automobiles with the money. It is going to welfare payments (“EBT” cards and food programs), retirement benefits,
bribe money foreign aid expenditures, expenditures on political staffs, and wars. Hardly any of the Federal budget is for economic production.
In short, this is increasing consumption today at the expense of future consumption. While that might be an existential thing during a time of war (real national survival war, not the petty adventures of personal prestige that most “leaders” indulge in); it is very hazardous to future wealth at any other time.
The simple fact is that labor is in its essence an ephemeral thing. It exists at the moment of production and is consumed and gone. Once gone, it can not be recovered. This matters.
A borrowing today of money from someone else, spent today on consumption today; also consumes the embodied labor from the here and now. In some future time it is not sufficient to hand over pretty pictures on paper. The repayment is expected to obligate labor and capital stock in return. That must be the labor of those in the future, especially for 30 year government bonds.
This leads to the fundamental fallacy of “investing for retirement” in paper assets of governments.
While hard assets like gold and silver have “embodied labor” in them, so in some future date can be exchanged for other labor (avoiding the labor needed to mine and refine gold and letting it make cars instead); this is not the case for a government bond or a box of currency. Handing that to someone does not replace some other labor. When that bond is cashed in, the currency paid will expect to command the consumption of labor and capital depreciation. That can only come from actual labor then.
Similarly, stock in a company may represent a share of working capital stock (real production, land and machinery with their embodied labor); it may also represent a fantasy in a fraud, or a share of a dying enterprise being mined of all real productive assets, and similar. So to some extent ownership of stock in productive capital via corporate stocks and shares can contain an embodied labor component. Similarly, a corporate bond is expected to be used to grow the company and make added production capacity. To the extent this is true, it is investment in actual production and when redeemed can claim actual production. IMHO, this distinction (nearly universally ignored) also matters.
Why is fairly simply illustrated. China is borrowing money to build manufacturing facilities and expand farming (and mechanize). This increases their future production of goods. It “embodies labor” into a productive asset. The USA is borrowing money from China to fund wars and consumption expenditures. (Look at the US Budget – dominated by military and transfer / welfare / social security / healthcare spending). Now in 10 or 20 years when the Chinese look to cash in their US Treasuries (or in 5 to 10 when Japan looks to do the same) to fund their retirement: They will be wanting to buy food, clothes, medical care, vacations, etc. etc. ALL of those will require real labor THEN, not promises from now. From where will that labor come?
The USTreasury bond implies that it will come from someone in the USA. Via taxing a portion of their income to pay interest and principle on the bond so that money can be used to buy food, clothes, etc. etc. But we have a giant bubble of retiring folks (in the USA, and China, and Japan…) and no matching bubble of labor that’s 30 years younger. Despite the signatures on the bonds, someone will come up short at cashing time on the labor front.
I think much of the EU is in the same boat. The UK I’m not so sure about.
We see this playing out in Greece.
Historically too much borrowing (for consumption that long ago disappeared in the rear view mirror). A current generation of retirees being told “sorry, no retirement for you” (by several means, from cutting benefits to increased taxes to higher prices). ‘Austerity’ plans saying to increase taxes (so as to pay the bond holders) yet the already high taxes drive out private productive capacity and push personal services into a black market. More taxes decrease production, right when more production is needed. That, then, increases unemployment especially among the young. Just those folks who had no say in the original expenditure, and who are expected to provide the labor to make the food, serve the meals, and provide the medical care to that retiring group. With even less labor in productive use, the cycle deepens.
Even more State Dependency via welfare / the dole / unemployment payments, leading to yet more borrowing to pay it. Increasing the “roll forward” of that labor debt in the future. A debt that can never be paid as the labor sitting idle is lost forever, as the system grinds to a halt. The only real question is the form that the repudiation will take.
One can simply decline to pay the bond holder. Tell them THEY don’t get a retirement on someone else’s labor.
One can tell those currently living on government payments that they get nothing. ( Part of “austerity”, but also sometimes a motivation to provide labor).
One can roll the debt even further into the future (“rescheduling”) and make it the people of 20 years further on who are out of luck.
Or one can recognize that currency is a fluid thing that doesn’t embody stored labor and just inflate away the value of both the debt and the welfare / retirement claims. Essentially a combination of the first two by more subtle means.
What you can not do is make more productive capacity and labor appear to provide those expected goods and services without paying for them with something that does have embodied value… i.e. real money. If you pay them with printed currency, it is just an indirect form of ‘inflate away’. Though sometimes this is the best solution if coupled with significant tax and regulatory “reforms”.
IFF the idle labor is made cheap compared to world competition (usually via currency exchange rate reduction) and taxes on it are low enough to encourage business to hire and labor to work, then the labor will be productively empoyed. (Especially so if burden of wasted labor via regulatin and taxation are reduced as well.) That, then, begins to supply real productive labor.
IFF taxes are lowered to where private enterprise can see a profitable endevor, then productive capital stock will be formed.
IFF regulatory burden is reduced to where most labor is spent productively instead of on “make work” compliance, both the cost savings and efficiency will flow through to more product.
In that context, a recovery can start. BUT, only if the “demand” for goods and services from the non-productive portion of the country does not drive productive capacity to insolvency via excess taxation. So some “shortfall” of available labor and goods will fall on a very large dependent class ( for example the Baby Boom retirement bubble) when there is not sufficient working age to support them. You can’t make enought “stuff” without enough “labor”.
And that is the fundamental problem.
For Greece. For the EU writ large. For the USA. For China in a few years.
Worth vs Value vs Labor & Work
Gross Domestic Product is the usual way to measure economic performance. It is deeply flawed. I’ll mention just 2 of the many for illustration.
1) Inflation is poorly handled.
2) War expenditures are positive GDP.
Let’s take the second one first. As we make $100 Billion expenditures on bombs, and drop them on cities destroying productive capacity, that is added to GDP. Soldiers paid to stand around, dig holes and fill them up, or kill people and blow up buildings; add to positive GDP.
I think it is quite obvious that does not add to productive capacity. Part of The Broken Window Fallacy; the basic issue is that destruction is a net cost, and money spent on it is not available for productive investment.
For item 1, how do we value things that change over time? I recently bought, for $60, a computer with more total compute power than a supercomputer from earlier in my career. Do we value it at $60? Or at the multiple $Millions of compute value for the predecessor? Is producing an ounce of gold “worth” $300 as a decade back, or the $1800 of a couple of years back, or the $900 of now?
I would add to this that GDP does not recognize at all the relative time scales on which labor and physical stock create and lose value.
In short, GDP is time blind and can’t tell value from worth from price. It has no idea about embodied labor nor consumed capital stock and thinks destruction is a positive good.
I’d like to illustrate a different point of view on that. While this is my own creation, and only half finished at that, I’d not be surprised at all if someone else, likely more famous, has observed the same things. I was trained as a Keynesian, and only lately began catching up with the Austrian School (who I think are much more right).
First, lets put a few things on a “Store Of Value” spectrum. The first line is a heading that gives an idea of the degree to which things store value. Then I’ve made guesses about where some things belong on that scale.
Store Of Value
Destructive Neutral Wasting Durable
war crypto currency stored grains Gold, metals
some demolition labor paper currency Oil development
iPhones, computers Lifetime credentials & licenses
The idea here being that some things destroy value, like demolition of a working sports stadium (where demolition of a waste dump might create value, the stadium is still usable, so has some value). Wars clearly destroy value as it is all about “killing people and breaking things”.
Some things are neutral about storing value. Labor is ephemeral. It produces something or it doesn’t. The value of the labor is embodied in the work, or is lost to “beach time” or “R&R”. In either case, the labor itself is not storable.
Crypto Currencies, like Bitcoin, have no inherent “value”, they are only worth what people think they are worth. Paper currencies typically have the “full faith and credit” of a country or union of countries behind them. This means that a Central Bank or Government is willing to exchange something else for them (often yet another paper currency or sometimes ‘specie’ meaning gold or silver). While this tends to support the “value” stored in currencies in the short run, it is a ‘wasting’ asset as politicians simply never saw a dollar (or euro) they could resist spending, even those from the future via deficit spending, and thus inflation consumes the value over time. While the case can be made that theoretically that need not be so, there is no existence proof ever… All that changes is the timing.
Finally, some things have inherent value. They may change slowly over time (gold, for example, as mining techniques improve) but are generally durable. I’ve listed oil development here as the discovery and build out of an oil field creates a durable value that may last for decades. Saudi has been pumping how long?…
Note that stored grains slowly go bad, computers decay on a Moore’s Law schedule (double the power at the same cost every 18 months means value is 1/2 every 18 months) and then there are things like the iPhone. Hot today, but in 5 years? So these store value, but on various decay rate schedules.
Now, for a currency, where most “exchange” happens in days to months, that it is slowly wasting away as a store of value doesn’t matter too much. Thus central banks targeting a 2% inflation rate. That just means they are only stealing 2% of future value in any one year. It also means that future obligations, like retirement payments, are being repudiated at 2% / year. (Unions try to get inflation escalators to claw back that repudiation, which lead to redefinition of the inflation rate calculation method. And the lier’s Race goes on…)
I’ve also included lifetime credentials and licenses as an example. Though ever more rare, at one time you could get a “Lifetime Teaching Credential” or similar licenses and those entitled the worker to lifetime benefits in employment. Ever more licenses and credentials require “ongoing continuing education” and similar upkeep, so have moved into the “wasting asset” category.
So for something to be “money”, it needs to be a “durable store of value”. I’ll leave it for folks to think up what fits that right most column, is easily divisible, transportable, and durable. As an example / hint, whiskey was a way to embody the value of grains (that would otherwise be subject to rats, rots, and oxidation) into a more compact, tradable form.
Anything not so “durable” may be a currency, but is not a real money.
There are other implications from this chart. Where would you place a Government Bond, for example? And since labor is ephemeral, how does labor today pay off that future bond when it comes due? Can it really ever be paid in a decaying currency?
There is an inherent disconnect on “stored value” between the labor pool and the paper asset pool. IMHO this is very important for understanding the theft via government bond of future value of labor (and capital stock – as I don’t subscribe to the Marxist idea that goods produced are 100% embodied labor…)
A government today may issue a bond (perhaps bought by folks working in China) and spend the value of that labor, but expect it to be repaid with the value of labor from some future citizens. If it is not repaid (or repaid with inflated currency devoid of value) the government has effectively stolen the future citizens labor (via future taxes) or stolen the labor of the foreigner via repudiation / inflation. This is a necessary consequence of the differences in stored value of labor vs government bonds. (This also extends to capital stock owners, but constantly putting “and/or capital stock” in every sentence is tedious… and doesn’t add much to clarity.)
Is it immoral to steal their future labor (and through it, liberty) in that way?
Is it immoral for them to repudiate a contract they never entered?
Both of those questions are being played out in the EU today.
Next, lets look at storage of work.
Storage Of Work vs Labor
In this case, I’m using “work” to mean getting something done, be it by machine, by capital stock, or by labor; while labor means human effort only. Any or all of these can create value, or create things with no inherent value. I think this distinction matters too. Also note that “worth” and “value” are often used to mean the same things. There is an inherent value to a lump of gold. It took labor, machines, energy, buildings, land, and know-how to win it from the ground; and can always be made into attractive jewelry. Yet the “worth” on any one day depends on who is selling how much, and how much is to be bought.
Similarly, a crypto-currency has embodied work. That is the entire basis of them. Computers are used to search out the solution to a puzzle. As you present your solutions to the manager of the currency, you are assigned credit for that work unit. You, and only you, may claim ownership of that unit of work. But does that work have value? And if not, what is it worth?
OTOneH, that stored work is forever yours. OTOH, it really is useless. It is not like gold (that also is ‘stored work’) in that gold may be made into jewelry or tooth crowns or computer chips. Gold has “inherent demand”. Not so a crypto-solution. That is why I’ve never gotten excited about bitcoin. In some ways better than a paper currency, and much better if backed by a Nation as national currency; but not at all like a metal (despite the analogies made by the supporters of it…)
Store Of Work
Destructive Neutral Wasting Durable
war paper currency stored grains Gold, metals
demolition labor cars crypto currency
eating services Adult Workers iPhone, computers
redistribution oil production companies New Graduate
Note that I’ve taken “some” from in front of “demolition”. Even an eye-sore hovel has embodied work. It may be of “negative worth” or “negative value” even, and removal may in fact improve the economics of a property, but it STILL is a destruction of prior work. Depreciation is just nature doing that destruction while we watch.
It is forgetting the “embodied work” when indulging in “creative destruction” that is the large flaw in “renovation” projects and much of “mergers and acquisitions”. The worth may be going up, even as ‘work’ is destroyed and sometimes even as ‘value’ is destroyed with it. This difference has made the plot of many a movie, despite being poorly articulated in practice. Folks “get it” at an emotional level. It is the basis on which many historical preservation laws are built. As one example.
Note that here paper currencies are a neutral while crypto currencies are durable. That work unit is always yours in a crypto currency. While the paper currency has nearly no embodied work to store. IMHO this paradigm illustrates the difference between a paper currency, a crypto currency, and gold as money.
Eating is a necessary, but essentially destructive act. It does not matter if you cook at home, or eat at a 5 Star restaurant. It consumes work and does not store it.
Labor and “services” are used in the moment, and not storage vessels. Grains, cars, and even many companies slowly degrade over time. If constantly fed, some companies may “store work” for a long time; but mostly they consume work and fade into history. That, BTW, is why the “Nifty Fifty” stocks are not talked about today (that 50 stocks you could just buy and own ‘forever’) and why history is littered with names like Polaroid, DeSoto, Long’s Drugs, Wards, etc. etc.
An adult worker is a wasting asset. They diminish in stored work each year as they are obsoleted and used up. A new graduate can be thought of as a durable store of work. They have many decades of working life ahead of them and have spent 2 decades being filled with the work of child rearing and education. (Reminder: Worth is not work…) To some extent, all “durable” things wear out. Gold has a few atoms rub off each time handled. So a new graduate will eventually be ‘used up’, but a few decades of ‘stored work’ in the future, thus durable. IMHO this illustrates the basis for ‘age discrimination’ in workplaces. One could consider infants and children to be ‘destructive’ of work as they simply consume it for a decade… as any parent will attest…
Things (companies) like Youtube and Twitter are not stores of work. The entire service industry (of which video and tweets are examples) stores nothing of work. (And some would assert little of value…) While a movie is more of a “wasting store of work” as it DOES store work, but slowly decays in the can. (TCM making a business out of reversing that loss by restoration). WATCHING a movie, being a service, stores nothing.
IMHO, this is why a “service economy” can never survive. It does not store work, nor value, and that breaks the intergenerational contracts (not to mention government bonds…)
Note that while creating an oil field is durable value, production of that oil is neither stored value nor stored work. The oil is out and gone in too short a time scale to store anything. Yet that old computer or iPhone from 4 years back still has all the embodied work in it. It may be of little value as the replacement is soo much better, but yet the work is still in it and it still functions. Functional obsolescence is simply when “stored value” drops below the alternative, despite “stored work”… and worth heads to zero.
Grains, cars, and similar manufactures slowly decay (faster in the rust belt than in Arizona ;-) as to many other ‘assets’.
Then we have ‘redistribution’. Why do I have it as “destructive” of stored value? “Marginal propensity to invest”. Rich people buy companies, plants, equipment, oil fields, gold mines, and do R&D that increases our “intellectual capital” or “know how” that is also a durable store of work (and often a durable store of value). When their wealth, money, and labor is given to poor people, it is used for food and services and cars and clothes. All things they need, but not “investments”. The stored work and value in the society decreases and the consumption increases. We become more poor, collectively.
That, IMHO, is why such schemes always result in the eventual failure of the economy.
Please note: I don’t have to like that to recognize that it is reality.
This is a general sketch of a way of looking at the economy that I think has merit.
It makes clear many things that folks intuitively grasp, but lack a structure for explaining. I think it also illustrates where Progressives go off the rails, and also where all politicians make horrible economic errors.
Like Solindra and building a “bridge to nowhere” (Or Governor Jerry “Moonbeam” Brown’s high speed rail to nowhere). It isn’t enough just to put the label “infrastructure” on it. Does it create durable value? Is it enabling embodied labor to pay future debt payments? If it just redistributes wealth (even from poor to rich as many government boondoggles do: wind farms anyone?) it is still a gross under optimal thing to do with national treasure. Worse, borrowing “stored labor” or “stored value” from someone else, sticking it in a hole in the ground after destroying “stored work” in an existing structure and then expecting the children of today to pay back that labor in 30 years is nearly criminal stupidity.
Yet that is the accepted “consensus” of economics as practiced by governments around the world. It is also, IMHO, why capitalism works and socialism doesn’t. Folks running businesses who make those mistakes go out of business. Folks in government just run for higher office. Often funded by the benefactors of their largess. At least until the bonds come home to roost and a Greece Moment happens.
In the ’60s through to the ’80s or so, we had a bubble of productive age folks making excess production. That labor bubble is over and done. Now that bubble expects someone else to do the work. AND provide for their retirement with goods and services. To compensate those providers, they have stacked up all sorts of paper with promises. But promises do not a dinner make nor a heart bypass perform.
There are simply not enough laborers to provide the promised claims on goods and services. Not in the USA. Not in the EU. Not in China. Not in Japan.
Importing a load of Mexicans or Muslims or building a load of robots is not going to fix it. (Well… the robots might, IFF they ever work right). What will happen is simply that once they are a majority, they will repudiate the obligations that they never contracted to accept. We see that today via “voting with their feet” as a flood of young folks abandoned Detroit for “greener pastures”. The same thing is happening in California as folks with money leave and folks wanting welfare move in.
Demographics may be destiny, but it also has feet and a vote.
Hopefully there are some ideas or points of view in this that are helpful to folks. It is a level of abstraction that I use in looking at companies, countries, economies, etc. etc. that I’ve not seen in formal form anywhere. If it has been done by others too, I’d love a pointer to their works.
I find it a useful way to sort things (like crypto currencies vs paper vs gold) and understand future probabilities ( like $18 Trillion that will NEVER be repaid in real value terms – not enough future labor to do it….) and I hope it is of use, or at least entertainment, to others.
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