Monday, October 25, 2010

Zero Summary

The last post (Money is a Zeron Sum Game) provides a great example of how we get tied up with words.

We use the word "capital" for both physical resources in the economy and as a synonym for money.

With the application of our creativity, rationality and time, we can invest physical resources to create more physical resources.

The real economy is a plus sum game. Playing the game well creates wealth.

Money, however, is zero sum game. Money is simply a tool we use to simplify trade. The value of money comes from its scarcity. The value of the dollar in your pocket depends a limited supply of dollars on the market.

The creation of new money shows up in the system as inflation.

Clever schemes that make money from money show up in the system as a wealth transfer or as inflation.

As the word capital refers to both real goods and paper money, the use of the word can get confusing. Real capital produces benefits when properly re-invested. Clever schemes that make money from money simply generate fluff.

This confusion can translates into broader economic and philosophical debates. In the Wealth of Nations, Adam Smith was talking primarily about the investment and re-investment of real capital. In Marx's Das Kapital, he spoke primarily about a ruling class that gains power through the manipulation of paper capital.

The unraveling of the American financial system shows an extremely corrupt system in which a ruling class is looting our nation through the manipulation of paper capital.

Unfortunately, our culture war focusses exclusively on the question of whether or not capital should be owned by the state or privately owned. In this war, the culture warriors fail to make subtle distinctions about the quality of the capital.

To win the war for freedom, people engaged in the debate need to ask what a person means by "capitalism" before defending capitalism. The monetary manipulation going on in our nation's bank is simply paper fluff that is sytematically impoverishing our nation.

It is the health of our real physical capital and not the health of the corrupt financial service sector that matters, yet our politicians rush to the aid of the banks to the cost of the industry and small businesses that produce the real wealth.

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