Part I of Nationalist Alternative's Economics Series
"A Consideration of Value and Money in Society"
by Michael Kennedy
On what ‘Value’ means
Money can be seen as a representation of the inherit value of human labour, thought and of raw materials. Money itself is a conceptual tool created in order to quantify the value of goods and services which are traded. Currency can be considered as the form that money takes, whether dollars, pounds, beads, gold or poker chips.
Understanding the relationship between money and conceptions of value is vital in understanding broader economic trends, and the impact that those trends have on society.
Monetary value exists quite simply because there is a desire or a need for something that is not freely available. This object or service can only come about through labour, manipulating materials or from the minds creative process. Food has value to us because it is useful to us, it sustains life, stops hunger and is enjoyable. Its monetary value however comes from the fact that food is not freely available. It must be grown, transported, picked, cooked, stored etc. That is, in order for food to be available someone must use their intellect, labour and their materials. Air on the other hand, is so freely available and abundant, that nothing at all needs to be done to have it. Therefore, despite the fact that one would die faster without air than without food, air might have value to life, but monetarily it is worthless. A portion of air does not represent any labour or thought and the materials are too abundant to require any labour or thought to acquire. Though the gases that air comprises of do have value, you cannot sell air. The only air that is sold, is air that has been manipulated, either filtered air or compressed air and the value is increased because of the processing and addition of a storage container.
The three sources of value:
There are three common sources of value. Intellect, labour and materials. Intellect is the thought processes which either create new tools or objects, new structures, or the process by which materials are manipulated to create objects which are useful to people. Labour is the manipulation of matter and energy to provide goods and services of value, and materials is the matter and energy used and the final products.
Money is a means of exchange, essentially an intermediary between objects of value. While bartering goods is essentially identical to paying for goods with money, bartering has limitations. Namely that it is harder to value objects and services consistently and fairly and that bartering requires one to store the goods they are bartering with, and hope the providers of goods and services they require will accept their goods as payment. A child care worker for instance, would not be able to barter his or her services with a plumber who has no children. A farmer who grows fruit seasonally would come across difficulties because essentially he or she only has wealth so long as the fruit keeps.
Money becomes the intermediate storage of value, and it becomes the promise of goods and labour in the future. The farmer with seasonal fruit can offload the fruit, acquire money which essentially is a store of value, and then exchange that value stored in the money for goods and services at a future point in time, at his discretion. In these simplistic scenarios, we highlight that money, or more specifically, the currency, has a fixed value and that money is a tool used to encapsulate that value by representing value in a specific quantity of currency. So a shirt sells for $60 because $60 is the quantity of money (in dollars) which the seller believes represents the value of the materials, the labour put into the materials and the intellectual effort expended in order to create the shirt. The profit margin is really nothing more than an over valuation of the labour and intellectual effort behind the product or service. This is an over valuation which the customer is willing to accept and which the seller can use to expand their wealth and their business capabilities.
To go back to the barter example to make this point clearer, if a farmer with oranges was to trade his fruit with an apple farmer who for some reason REALLY wanted an orange, the orange farmer would be able to get more apples than usual for the trade. This might seem irrational but is in fact perfectly logical because valuation is a personal judgement that varies from person to person. As we by nature will seek the most desirable outcome, we are willing to spend large quantities on drugs if we are addicted to them, because the 'cost' of not having the next fix is greater than the cost of getting the drugs. Someone with an expensive drug habit, even if it is alcohol has made the decision that the experience of drinking, or avoiding abstinence is worth a large portion of their labour.
The example mentioned previously regarding the shirt shows an idealistic scenario where the buyer is aware of the true value of the shirt and is free to make the decision. In reality, this is rarely the case, as corporations collude to restrict choice, as they obscure knowledge about the product and monopolies arise which can essentially create a scenario where the customer cannot have any say in judging the worth of the product or service being supplied by the monopoly. Microsoft for instance, by engaging in monopolistic practices, has managed to dominate the PC market by making sure it is the ONLY software company distributing operating systems pre-installed on PC's. Ignorance of alternatives leaves people with the false conclusion that the prices charged are necessary, and Microsoft's advertising and PR statements, by creating fear, uncertainty and doubt about other products create in peoples minds a distorted and incorrect framework by which they judge the value or the worth of the product. This can occur at smaller levels too, with small businesses, agents and independent sellers taking advantage of the poorer bargaining position the buyer is in. There are many examples as such, i.e., any product advertised by creating fear in the customer that choosing a competitors product will lead to undesirable outcomes or any product sold at extraordinarily high prices because it is in shortage. A housing market bubble created due to shortages, or perceived impending shortages is another clear example.
The issuing of money
Much has been said about how central banks can seemingly issue money from thin air. Many point to this as some form of global scam, or sleight of hand. While the conditions by which the money is issued, and the quantity issued is certainly open to criticism, the fact that the money supply is increasing and that money comes seemingly from thin air is perfectly logical.
In any growing society, valuable goods and services are created. People are born, and with them come the capacity for labour, invention and the creation of new goods and services. Materials are extracted from the earth, processed and used to manufacture goods which are of greater use than the raw materials that comprise them. Human labour combined with materials creates useful products and services of value where none existed before. The fact is, the vast quantities of food produced, cities, technology, knives, clothes, automobiles, roads, statues, toothbrushes, art, and music all seemingly came out of thin air. Settlements were built where little else existed. A deposit of copper ore has limited value to people because of its limited usefulness, but processing that copper ore can create electrical cabling which is of far greater use. This ore is dug from the ground, turned into wire, and this copper wire enters the economy. This wire which did not exist as part of the economy is introduced into the economy.
As money is a representation of value and wealth, as the wealth increases, extra money must be issued into the economy to be used as an intermediary. The money is backed by the goods and services within the economy, which theoretically can increase indefinitely. Therefore, the mental tool used to represent the value within the economy, money, must be able to keep up. Currency appears to be issued from thin air because from casual observation, items enter the economy from thin air. Having currency backed by gold only backs one object with theoretical value, with another object of theoretical value of which there is a finite amount. The confusion comes from a lack of distinction between money and currency. Money is an intellectual construct whereby value can be quantified and where a trade can be carried out in two stages, where an employee provides labour for the economy, receives money which is a promise of access to future goods and services and then later uses that money to redeem those goods and services. Currency is the physical, or paper or electronic representation of money, the actual dollars used, or the actual gold. Currency does not need to have intrinsic value and only really has value because of a universal recognition that this item can be used to trade valuables for other valuables. Gold is no exception, though it is more useful than paper notes, but not because gold bullion is useful, but because gold is useful in the manufacture of electronic components. Gold however has been considered valuable in the Old World universally and historically, for quite a long period of time. Gold is the only precious metal available in alluvial form and which can be extracted from the ground in a metallic state instead of an ore. This, and it's lustre, malleability (useful in making jewellery) and long standing reputation as a precious metal, a symbol of wealth and status has ensured that gold remains valuable.
The concept of value extended
If human beings were so simple as to only require goods, services and materials then we could fairly easily qualify what goods are of value and what aren't.You could rely on a vast centrally planned economy like in some Communist examples (Chile) to describe and set an enormous array of prices, in one document for any conceivable good, service or material. In reality, the situation is far more complex. People need more than just bread, water and shelter and certainly people want more than just mere survival. People desire status, entertainment, desirable surrounds, security, social bonds, contentment, among many other things. In a simple economy, money acts as an intermediary for trade between tangible goods and services. As an intellectual construct it serves this purpose, but psychologically speaking the distinction people draw between the value of a potato grown from the ground, and the value of a house which has a view is somewhat vague. The monetary system is quite simply not suited to deal with the complexities of the human mind and the way the mind assigns value.
So far, we have looked at wealth creation through the introduction of goods and services into the economy which did not exist. However, as we have become accustomed to using money as a panacea to assign value, we have also used money to represent other more ambiguous forms of value.
The house by the beach cost a fixed quantity of money to build, however upon being sold, the price paid does not reflect the actual value of the house, but rather the perception of value. If beach front property becomes more popular, then people can be convinced that is of greater value. To a degree this is true; however it is not true in the same way that cotton in the form of a shirt is of greater value than a cotton plant. The former is temporary, a mental construct from based on perceived changes in value due to competitive pressures or social standing, the latter represents an increase in value to the economy which is tangible and usable.
So the increase in housing cost as witnessed in the early years of the 21st century led to the following scenario. A fixed item, in this case the house, demanded a greater proportion of goods and labour in order to acquire it even though the house in question essentially remains unchanged. This is a different scenario to the once off profit made when an item is given a fixed value. Someone purchasing a house for $250,000 and then selling the exact same property in the roughly the same condition for $450,000 would claim they have 'made' $200,000 dollars. But wealth is created through the intellectual and physical labour of people, and the creation of goods. Earlier it was discussed that food grown, ore extracted and services rendered enter the economy from 'thin air'. Here we have another value which enters the economy from thin air, the perception of the increase in value of an item of static value. However, unlike goods and services, which you can see, touch, buy or at least make measurable use of, this value is purely theoretical.
What 'wealth' is created here? The answer is none, though modern economic systems allow one to use that wealth and convert it into goods and services. In this scenario someone hasn't made wealth, but rather appropriated money, the promise of future goods and services, without inputting the equivalent value of goods and services back into the economy. This is essentially how people can 'make a living' without working, and many people who are taken in by this allure of 'wealth creation' do not understand that there is no wealth creation, but rather it is appropriating wealth which existed elsewhere. The financial systems in place, have allowed such a transaction to take place. So the seller sells the house and the buyer is put into a position where they must input more into the economy than was originally required. As this increase in value also is considered an increase in value of the total value of the state, an asset bubble can lead to additional money being issued into the economy and in wealth being stored in property. Given this situation, the bubble must be maintained to prevent economic problems caused by the re-evaluation of the asset in question, and as the bubble cannot grow indefinitely, the conditions for an inevitable crash are created.
The important point is that people do not draw distinctions between a micro-economy growing due to the creation of wealth, and a micro-economy growing to people perceiving a rising value. As money is missed into the economy to accommodate for the inflating value of static items such as properties, or shares in a company who's performance has not substantially altered, this money is backed by very little other than the whims of the market. With nothing more than a change in opinion, this value can disappear and the value that entered the economy, also disappears. The money that was issued to facilitate these transactions remains, so we are left with more money representing an economy of less value. The value of the currency adjusts accordingly and inflation occurs.
No free lunch
To illustrate the following point, assume there are two nations on an island. Nation A enjoys a high standard of living. The people who live within this nation are relatively productive, civilised, tend not to commit many crimes and create a pleasant society. Nation B has a lower standard of living. Nation B has higher crime, greater disparity between rich and poor, is dirtier and has less developed infrastructure. The people in nation B are just as productive as nation A, but tend to maintain and accept, a much lower standard of living. Whereas people in nation A expect low population densities, people in nation B are more tolerant of crowding. People are free to move from one nation to the other and the two nations trade with each other. People in nation A earn more than nation B.
The first obvious point is that citizens of nation A are much less likely to move to nation B, than vice versa. The second one, is that due to the better quality of life in nation A, nation A is of greater value, that is, the home environment is of greater value because it is more desirable. This form of intrinsic value is often unmeasured and disregarded, and not considered as the measurable value held in the economy is, particularly in the "modern" Western World.
A contemporary real life counter example is the small Asian nation of Bhutan, where a former King of Bhutan, King Jigme Singye Wangchuck coined the phrase “Gross National Happiness” in 1972. This index is a collection of various measurable and qualitative factors such as political, social and mental wellness, among others. While all these factors essentially become qualitative when factored into an index, it can be argued that the intrinsic value in living in such a society would increase or decrease more or less in line with such an index. This index is considered so important, that the new constitution adopted in 2008 states that government programs must be measured by the happiness they produce, and not by the economic benefits that might arise.
Recently, this index has been falling, paradoxically due to economic growth. British economist Sir Richard Layard who has specialised in the Nation’s happiness index states
“There's a lot of evidence that a rather cohesive societies often experience falls in psychological well-being when they go into economic take-off.”
While this might appear counter intuitive, what is happening is that the intrinsic value in their social structure, their culture and way of life is being sacrificed at the expense of more immediate economic value. This is occurring largely due to increasing commercialisation, which may be beyond the control of Bhutan's government. Value in one area (the economy) is growing at the expense of value elsewhere (value of culture, of the traditional lifestyle). In the economic sphere, there appears to be growth, but at the other side of the equilibrium is the loss of quality of life, the loss of happiness and contentment, something often ignored. Has the overall value of the nation increased? Or has the wealth and value of the nation simply been transformed and moved elsewhere?
Back to the example of nations A and B, people running companies in nation A might realise that people in nation B are working the exact same jobs, and being just as productive, yet willing to accept a much lower wage. Companies in nation A then engage either in off shoring and outsourcing, or recruiting citizens of nation B to live and work in nation A. The citizens move to nation A and allow the companies to increase their profits. A familiar scenario for anyone who lives in the western world. The government of nation A exclaims that this is good for the economy, as companies are making more money and driving up the stock market and the population generally agrees.
However, gains such as these don't come for free. Someone has to pay, somewhere, somehow. There is no such thing as a free lunch. Citizens of nation B move to nation A to certain areas and those areas start to become more and more like the areas found in nation B. Working conditions in nation A lower as its citizens have to compete with nation B Like the equilibrium discussed earlier, the apparent economic gains made by nation A, are mitigated by the loss of quality of life, of the peoples well being and happiness. This loss then directly translates into financial terms, as some suburbs lose value, as peoples wages lower, as lack of job security prevents people establishing loans and so forth.
The value of the area drops, and the value, or quality of life drops as well. Job security drops as jobs disappear overseas and competition for jobs and space increases. Crime increases, wages are lowered or curbed, forcing citizens of nation A to compromise their quality of life. Essentially, to allow economic gain in one area of the nation (within the companies balance books), a cost has been borne elsewhere, amongst the citizens of the nation.
At its most basic level, a financial transaction has taken place. The quality of life that one would normally expect to afford for their particular income is lowered, as the income which others can gain, is increased. Because the correlation between these two is abstract, a direct link is rarely made and people just see it as social progress. The economic progress experienced by some is made possible by others accepting corresponding regressions. Value has been transferred from one entity (the community) to another. The problem with this transaction is that it is usually done without the full understanding of the community, or their consent.
Another example would be changes to urban planning to allow for greater population density. While greater population density can lead to savings in building infrastructure, these savings are negated by the lower quality of living in high density areas. Subdividing property can seem to increase the value of land, but the increase in density leads to additional costs.
Good economic policy must look not merely at dollars and cents, but the total value of the nation which goes far beyond things which are held as being traditionally of monetary value. Changes in living conditions, in the demographic make up of the country, in the quality of life actually have very real economic impacts in ways which are overlooked.
Looking at the bigger picture
If you only look at the dollars and cents of any national economy, you are only looking at a portion of the equation. By only looking at a portion of the equation, what can appear to be a boom in reality isn't when non-fiscal ramifications of economic policy are taken into account. These aspects are usually the most important to people, as a good economy is only useful in that it provides a better standard of living. To have economic growth and greater profit at the expense of living standards is counter productive. Taking as an example, the off shoring of employment to other nations where a lower standard of living is maintained, and thereby lower wages, might appear good policy in terms of direct measurable metrics, it comes with a sacrifice which negates any financial advantage. From a nationalist perspective, this arrangement is undesirable as it is a transfer of opportunity out of the nation into another nation for the benefit of what is usually a handful of individuals.
The economic systems and conventions that a nation adopts should first and foremost be those which allow the nation the greatest opportunity to improve living conditions. The economic system and conventions, much like the concept of money itself, must remain tools which serve the people, rather than systems requiring the servitude of the people.
“The economy is not an end in itself. It is an element in the life of societies, among the principal ones but only one element”
http://www.developments.org.uk/articles/bhutan-where-happiness-outranks-wealth/
http://www.buddhistchannel.tv/index.php?id=40,8113,0,0,1,0
http://marketplace.publicradio.org/display/web/2007/11/14/consumed5_mmr_1
“Bhutans falling Happiness Index”
