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

[jprussell]

I outlined this post back in December 2021, apparently, but I never got around to handling it. "Luckily" this week I was struck with no idea what to write, so I went looking in my drafts folder in desperation and decided this would work. It's my thoughts on JMG's The Wealth of Nature, which packs an exceptional amount of helpful, smart thinking into a pretty neat package. As always, I'd love to hear what you think.

Comments

[scotlyn]

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?

[thinking_turtle]

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.

[jprussell]

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.

[thinking_turtle]

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!