jprussell | [Book] The Wealth of Nature: Economics as If Survival Mattered

Thanks for sharing your thoughts on Wealth of Nature. When a cow dies, its corpse is eaten by predators like humans or crows. What's left becomes compost and is used by plant growth. I wonder how those dinosaurs sunk all the way into the crust of the earth!

One interesting aspect of stocks is that stocks are not really money. The pool of money is distinct from the pool of stocks. So I can buy a share for $100 and then all other shares get valued at $100. But there may not be enough money to buy them all!

I learned from Varoufakis and John Titus that money is created by commercial bank loans. Given that there is not enough money to repay both the loan and the interest, repayment of loans depends on the issuance of new loans. This keeps the economy moving!

Thanks very much!

1) From my understanding, the vast majority of fossil fuels were formed not by literal dinosaurs, but more often plant material, and most often in seas and swamps. Basically, some amount of biological matter fell into places that didn't support the normal processes of decomposition, and were instead eventually buried in things like sediment. Given geological timescales, the combination of more and more sediment piling on top, along with tectonic forces like subduction, led to what might have once been the floor of a shallow sea instead being a formation of limestone (as happened to most of Texas for example). So while it's poetically evocative to talk about "burning dinosaur bones," to quote a Soundgarden song, it's mostly burning phytoplankton :)

2) That's true, but it becomes complicated when markets for stocks are easy and fast enough (or as they say in the biz, "liquid" enough) that you can effectively trade stocks for stocks at their current nominal value. It's also further complicated by the fact that modern accounting treats stocks as a "cash-like asset" on the assumption that you can always sell them for their current market value and get cash instead, so why not just treat them as the cash they're one step away from? These assumptions, of course, ignore the role that fast changes in the market can have, and even more ignore that if you have enough of them, the very act of selling them is likely to change the market price. There's more complex financial analysis that tries to model all of this, but it's rather hairy.

3) Looks like you anticipated Scotlyn's point below! That is true for current "fiat currencies," which most major currencies (very much including the dollar) are. There are strains of economic thought that argue that such fiat currencies are inherently inflationary (almost impossible to disagree with), subject to dramatic changes in value, usually in a bad way (fairly widely accepted), and overall bad for the "real" economy of human weal (much more controversial). If you want to dig more into this, check out cryptocurrency enthusiasts, most especially "bitcoin maximalists," or go straight to the source and read folks from the Austrian School of Economics like Mises, who are the folks crypto types most heavily draw on.

1) There are many theories! I read that Germans created artificial oil during WW2 using the Fischer–Tropsch process. The author suggested that this process is what happens in the crust of the earth, so that oil is not a fossil fuel, but something the earth continuously produces. If he's right, Peak Oil would not mean the beginning of the end of oil, but merely flattening out at a sustainable level.

2) Wow, yeah, those financial assumptions lead to a complex abstraction. Yet it is still a human construct, and in the end nobody will accept an unacceptable outcome. So if one of the assumptions fail, and there are not enough buyers for stock, the government would step in to keep the economy working.

3) Money is a claim on future goods. How can crypto provide that? It all seems so unreal. I don't think society will feel bound to respect crypto like it respects the dollar or the yuan.

Thanks for your reply, and looking forward to your next blog!

Edited 2023-07-26 18:42 (UTC)

1) Is that the same as the "biotic oil" theory? If true, that would certainly be good news for mankind, but I'm skeptical - oil companies employ geologists who use the mainstream theory of formation (compacted organic matter from millions of years ago) to find where to drill, and they get pretty good results.

2) You have far more faith in the government's ability to "keep the economy working" than I do - again, a place I wouldn't mind being wrong.

3) Sorry, I wasn't explicitly advocating for cryptocurrencies by bringing this up (I was very bullish on them for a while, but now I don't think their energy requirements will let them work in the long run), instead I was saying that folks in that space have thought a lot about what makes money "money" and why fiat currencies are bad at doing that, at least in the long run, and I think most of their critique is useful, even if I no longer buy their prescription. As for whether crypto could work as a claim on future goods, that all depends on whether folks are willing to treat it that way, of course, since money's day-to-day value is largely intersubjective.

And thank you! Working on it now!

1) After looking it up, the slow transformation of animal and plant matter into oil is called "biotic". The natural physical and chemical thermodynamic process involving just heat and pressure is called "abiotic".

I came across multiple claims that the "abiotic" theory is actually the consensus among Russian scientists. For example:

8. A Dissertation by J.F. Kenney(Joint Institute of the Physics of the Earth Russian Academy of Sciences, Moscow). Here is an extract:

ABSTRACT: For almost a century, various predictions have been made that the human race is imminently going to run out of available petroleum. The passing of time has proven all those predictions to have been utterly wrong. It is pointed out here how all predictions have depended fundamentally upon anarchaic hypothesis from the 18th century that petroleum somehow (miraculously) evolve from biological detritus, and is accordingly limited in abundance. That hypothesis has been replaced during the past forty years by the modern Russian-Ukrainian theory of deep, abiotic petroleum origins which has established that petroleum is a primordial material erupted from great depth. Therefore, petroleum abundances are limited by little more than the quantities of its constituents as were incorporated into the Earth at the time of its formation; and its availability depends upon technological development and exploration competence.

From https://www.getbig.com/boards/index.php?topic=278159.0

Edited 2023-07-29 13:04 (UTC)

::forehead slap:: Duh, abiotic, of course. I'm going to have to give back my Classics degree.

With that embarrassment out of the way, I did not know that about it being generally accepted by the Russians. I suppose time will tell.

Hi Jeff.
This is a good post and a good topic, and I have been reflecting on the matter of money (which as you point out is not the same as wealth). It was an archdruid report post a long time ago that started me thinking about the three economies you mention, but the revelation that I've had lately is the realisation that if I wish to increase the "weal" of myself and others, it is important for me to aspire to have and to use LESS money, not more.

The reason for this is that money is debt. For anyone to HAVE a dollar to spend (whether it is cash, or a pixel denoting a balance in a bank account), that farmer has to have borrowed it from a bank and put it into circulation. The bank created the loan from nothing, as two opposite ledger entries (one being dollars into the farmer's account, the other being the value of the bank's "asset" - which consists of the farmer's work to pay off the loan+interest and/or the value of the land the farmer used as collateral). But the bank is also entitled in legally enforceable ways, to look for the repayment of the principle - equivalent to the money it created with the loan - AND the agreed interest - which it did not create, and which does not, in fact, exist. It is a game of musical chairs which only continues through the endless addition of new chairs and occupants, even as some of the old ones are taken away, and some of the old participants *must* lose and fall out of the game.

There are two important points to notice here. The first is that when you multiply this out you realise that *by definition* there can NEVER be as much money currently in circulation as is currently owed. A money supply based on the creation of debt+interest must - eventually - eat itself. Because every dollar in circulation *by definition* represents (say) a dollar and 10 cents owed. Where can that extra 10 cents come from? Only from ongoing exploitation - by turning every living being, and its wealth-making activity, into a "resource" to extract. And this makes me think that debt-based money, specifically, IS the engine by means of which the third economy co-opts the energies and best intentions of the second economy, into the never-ending "extraction of value" from the first economy which is eroding the basis of our life on this earth.

And two, this specifically means that every dollar in circulation represents a legally enforceable creditor's claim upon the work and/or the possessions of a debtor. It is this that makes me realise that if I personally want to see LESS coerced labour, and LESS repossession, it follows that I must strive to need to use LESS money. And look to enhancing "weal" in other ways.

First off, thanks very much the kind words, I'm glad you found it helpful.

Secondly, hmmmm. I agree that what you say is 100% true of all modern fiat currencies, but I'm not positive without thinking about it harder if "money = debt" is necessarily true for all forms of currency (as we brushed against when discussing Graeber before - I still haven't gotten to him!). It is less obvious to me that a gold coin carried around and accepted because of its literal weight in gold is necessarily a debt. Now, of course, even with notionally very hard currencies (coins literally made of something like their market value in precious metal), you very quickly get into those coins being valued "as coins," which has all kinds of market dynamics and reliance on trust in the issuing entity. In fact, historically, all notionally hard currencies have succumbed to some kind of debasement due to these facts, as far as I know. Those complications might work out to effectively being "debt" as you've defined it here (more claims on productive labor/time/thought/skills/goods than exists), but as I said, I'm going to have to think it through more.

Third, yeah, I likely should have mentioned that I believe JMG goes into how to rely less on money in The Wealth Of Nature similarly to how he does in The Long Decline (and both of which most likely appeared largely in draft form on ADR before being collected into books), so I'm not shocked your thinking would head in that direction. Borrowing from what he says in those books, though, I'd argue that working to become less reliant on money for your weal makes good sense even without the "all money is a debt ponzi scheme" argument. For most of human history, most weal was not mediated by the monetary economy. You found work by having neighbors that needed the skills you had or by working your land (whether you technically owned it or not). You didn't need money to be able to get to that work because everyone lived within walking distance of work. You didn't need money for childcare, because your family, friends, and neighbors all pitched in, and the kids started following you around doing certain kinds of work earlier. You didn't need money for "vacation," because feast days were provided by the local equivalent of a lord. And so on and so forth. Now, we live in very different times, but JMG points out a lot of ways we can become less dependent on the monetary economy: grow some of your own food, learn skills that folks can use some help with, get to know your neighbors and help them out so they can help you out, locate somewhere where you can cut back on commuting or the like, find community answers for childcare, and so forth. I have also started to take baby steps in this direction, but in a world that has decided to solve all problems with money and where most of us don't have the built-in non-monetary options our ancestors had, it's tough!

Of course, the question there is whether you can HAVE a gold coin to carry around and spend, withOUT having mines, and slaves, and armed warriors to keep the slaves at their mining...

In other words, money is NOT weal, and it often seems both inimical to weal and actually destructive of it.

Also, yes, you are absolutely right that we do live in "a world that has decided to solve all problems with money" and which has also decided to remove from "most of us... the built in non-monetary options our ancestors had."

So, I agree. It is tough to roll all of that back and regain the freedom of one's own ability to trade, serve and thrive, without the pernicious mediation of money.

I certainly have not achieved it!

So, what have I done? I have deliberately set my own business prices extremely low, am very strict about paying the appropriate tax on every penny, as the "dues" to Ceasar for my use of money, I have paid off all loans, I raise some food, I give many gifts, and many gifts find their way back to me, and I am thankful for the ample blessing of enough. These are only beginnings... not accomplishments... but what I hope is to become a little bit contagious in helping other people to be more cognizant of their powers and competences, so that they can swap them in for dependencies upon systems run by strangers.

The narrative that banks create money out of nothing leaves out many details. A farmer and a banker negotiate a loan. The money the farmer gets will buy land, a tractor, and hire workers. The farmer uses this to create value, a part of which he will share with the banker. Where does the money come from? People trust the system enough to trade real goods for its money. So money is the goodwill the system has build up.

I think a better description of what bankers do is that they bet on the future. Which farmer has the best prospects, what factories should we build, who can be expected to pay off how much mortgage? Someone who can make good bets is valuable, and a country that follows his bets will do better than others.

The description of what bankers do is they place enforceable claims on the future earnings and possessions of you and me.

In my experience, as a farmer, I've noticed that it is more frequent for a farmer's loan-taking to lead to a LOSS of land than it is to lead to a GAIN in land. Wendell Berry is a good source of wisdom on how the 3rd economy deals with farming...

That sounds like the bankers want to reduce farming. They will structure their bets to do just that. This appears to happen in The Netherlands at the moment. Many farmers end up in debt, and their children do not think farming is a good future.

When bankers want to increase farming, there will be fat times for farmers again.

And why should the viability of farming be the bankers shout?

The bankers make bets based on the state of the world. If the state of the world is that a country is better off betting less of its future on farming, that's how they will bet.

For example, if there's not enough people willing to farm, if there's not enough demand for farm products, or if other countries are better positioned. There will be less pleasant but no less real reasons, like a bigger power demanding you reduce farming, an economic conspiracy to create scarcity to drive up prices, or lands that were poisoned by past farming practices.

At least, that's the model I came up with! Creating money out of thin air seemed ridiculous to me, and this theory strikes me as less so.

Edited 2023-07-26 19:17 (UTC)

Well, it is important to realise that the method banks use to create money by lending - which does not "lend" actually existing money, but which creates money into existence - is explained in detail by the Bank of England, in their 2014 Q1 Quarterly Bulletin.

This is the source of my "theory" as you call it. Although I cannot think of a theory that comes more directly from the horse's mouth.

Of course, it IS ridiculous, but it also IS a principle means for the third economy to spur/encourage the second economy to extract all possible value from the 1st economy, and to the third economy it is not ridiculous, so much as profitable. Takiing the short term view. (Gamblers do not tend to take long term views).

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf

On page 16 - in the box labelled "overview" - it says:

"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits."

As to your other points, I agree that bankers are good at gambling - at least, they are keen gamblers. Whether I like their turning of me, my farm, my family, my community, and all of our livelihoods, into their gambling chips, is a value judgment upon which we may disagree. ;) Do gamblers *really* care where the chips fall?

Thanks for your thoughts! This reminds me of the story about how to recognize an honest insurer. You can tell by insuring something and its opposite. For example, ask for a policy that pays out when your house burns down, and a policy for when your house does not burn down. An honest insurer will offer both policies. Insurance really is betting.

So the central bank tells us money is created out of thin air. You will have trouble reproducing that recipe. The substance money is made of is trust, and it is in finite supply. Banks that run out of trust can no longer create money. You can create money yourself: ask a friend for a tool and promise to pay him later. Your promise is a claim on future payment, your friend can trade the promise to someone else, and other people can bet on the value of your promise. That sounds like hard work, and so is banking.

The future is always uncertain. Banks do not turn livelihoods into gambling chips. Livelihoods already are gambling chips. Banks are pools of trust that start enterprises (= bets.) Farmers that accept those bets do better. Market knowledge is valuable, the local government more forthcoming, and interest payments a great motivator.

There are always people who start enterprises without banks, and some of them are very successful. If you don't like bankers you can go to a rich family for a proposal. I doubt they will be able to offer you better terms.

If I may put on my druid hat for a moment, the contrast of "making money out of nothing" and "banks convert trust in future value into money" strikes me as a potentially unhelpful binary. To make this a ternary, let me offer a blended option: a large part of what allows money and banking to work is societal trust. In a well-functioning economy, that trust is often-enough correct to allow banks to make money and farmers, businesses, and others to get the capital they need to create wealth/value. However, bankers are humans, who make mistakes, the economy is not always "well-functioning" for any of a zillion reasons, and the amount of uncertainty and complexity involved in a highly globalized economy is absolutely enormous. To say nothing of the fact that the banks and their can customers have wildly different goals and incentives. As such, while an ideal loan crystallizes some amount of "trust" into a monetized agreement, many loans end up being valued with money that is, in some way, not actually based on trust, based in misplaced trust, or is based on trust in the money, rather than in the underlying bet.

At any rate, reasonable folks may disagree.

My theory is based on classifying the "bankers are evil" story as a Fake Invisible Catastrophes and Threats of Doom. So I just tried to take it out of the air and ground it in actual living bankers I remember. They were very conservative, aware of social status, and obsessed with trust.

A ternary is a great way to add more nuance!

It might be worth pointing out that there is an existing slightly different 3 sector model (I was taught it in Economics classes way back decades ago) where the secondary sector is manufacturing and the tertiary sector is services (which includes financial services). This classification grew out of the three sector model of growth (see here for more info).
The separation of manufacturing/services from financial services reminds me of Thorstein Veblen's concepts of 'business' and 'industry' from his Theory of Business Enterprise. Essentially, he saw the financial owners ('business') as constraining the ability of 'industry' (manufacturing and services) to serve society's needs because of the former's focus on extracting profits (even limiting production or closing plants if it were profitable). But unlike Marx, Veblen saw the engineers and not the workers as the ones who should be in control.
The discussion of banking above is interesting as I've just been editing a translation of the chapters on money for volume 2 of Werner Sombart's Modern Capitalism (hoping to get it out in November - I started work on this volume in 2019 so I've made good progress, the first volume took 8 years!). It is quite a complex area even in terms of the history of money and monetary policy prior to the 19th century. Suffice to say that it can't be addressed in isolation from the history of extraction of natural resources.

Thank you. This is interesting. It is true that few economists grapple with what money itself actually is, and how it functions. It is just assumed to be necessary, and largely goes unexamined. It is good news to hear about an economist studying the matter.

Best wishes with the translation and editing work!

Ah, interesting. That is likely a useful tool for analysis in a lot of ways, since all of these models are abstractions, after all. Some differences that I like about JMG's model, though:

1) the primary economy is not only the extraction of natural resources. For example, San Diego, California has low temperatures around 65 - 70 degrees F (~18-21 C) and high temperatures around 80-85 F (~27-29 C), some fog in the morning, and partial clouds clearing to sunlight by the afternoon all year round. Also, it's on the coast and has beautiful beaches. A huge amount of the wealth to the folks who live there and come to visit there rests on the lovely conditions, which don't need to be "extracted."

2) I think lumping all "services" together is almost equivalent to JMG's Tertiary economy, but there are a few wrinkles. For one, it doesn't account for any financialization happening in the manufacturing industry, necessarily - Ford makes a huge amount of money on the loans it offers directly to folks buying their cars. Basically, there's a bank inside Ford - does that get counted with the service sector, or manufacturing? Another big example is futures markets - resource extraction companies and agriculture engage in a lot of futures trading to hedge price risks for their primary business. Futures are definitely tertiary, but would they be counted as the services sector if being engaged in by ExxonMobil? For another, not all services are as liable to the positive feedback loops of financial markets - do things like barbers and lawn services get counted as part of the service sector? Or even snooty PMC work like management consulting is still subject to fairly-normal negative feedback loop corrections.

3) Hinted at with that last point, I find the heuristic that the secondary economy covers things subject to negative feedback loops, and the secondary economy those things subject to positive feedback loops to be very helpful, and make a lot of sense of tough questions.

As for your translation work, congrats on the progress so far, and good luck wrapping this one up! As Scotlyn said, it is nice to see a work that takes those complexities into account.

[Book] The Wealth of Nature: Economics as If Survival Mattered

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