Concepts of Economics Change in Meaning Over Time
Segmenting our thinking can help with understanding money, economics, trading, and investments! What do I mean?
Clear logic and reasoning is essential prior to making decisions – especially financial decisions and trading decisions. The six key concepts within economics that need to be internalized are: ’barter‘, ’value’, ‘money’, ’currency unit’, ‘trading’, and ‘calculation’. If we visualize our planet as one round ball with some 7 billion people residing or living on this planet, we get a big picture of our social situation. Economics is based on ‘people’, ‘places’, ‘things’, and ‘events’. Economics is basically part science (measurement and calculation) and part psychology (trading, exchange, valuation, and emotion). This makes economics a difficult profession to master and internalize fully. Since human beings are emotional, subjective, somewhat irrational, and always changing their ideas…it is impossible to master economics, trading, valuation, and all the interconnections between all these subjects. Economics is not pure science and is not totally objective or logical. This makes it dynamic and changing over time; but also very interesting and challenging.
The starting point for survival within economics is a bartering environment. Barter develops as people ‘own’ things and then need to exchange with others to grow a community or marketplace. People produce wealth from the land and then exchange this wealth within a marketplace. People seek out natural resources for exploration, development, and then production into final products (goods). This process starts out without any ‘money’ (initially). People just produce, consume, and exchange among themselves. Later in time someone receives an ‘idea’ called ‘money’ which then develops into a ‘tool’ for measuring and/or calculating exchange ’value’. So the key concepts which emerge from a barter environment are the concepts of ‘value’, ‘standard of value’, ‘medium of exchange’, and ‘money’. Money is usually a ’thing’ from the marketplace which most everyone is willing to accept as a proxy for the ‘value’ that they perceive is inherent within their good or product. This means ‘money’ (a currency unit) is a tool for calculating ‘value’ and/or ‘price’.
Price or Value is calculated via a currency unit!
Value is initially perceived as a ‘thing’ that is intrinsic and/or inherent within items that are produced and exchanged. The question then emerges: wouldn’t it be nice to measure or calculate this ‘value’ via some ‘standard’. In time someone suggests and develops the logic for a ‘standard’ of value that most view as acceptable. Some item emerges and is then called ‘money’. This item could be a special bead (wampum) that is perceived as ‘valuable’ and ‘special’ psychologically. The item could be an animal or some agricultural product (sheep, chickens, wheat, cotton, or tobacco). It could be items like deerskins as people desire the leather goods produced from deerskins. And it could be a mined metal like silver which people desire for its beauty, durability, fungibility, scarcity, etc. Whatever emerges works for a particular marketplace and community for a time.
As human beings become more prosperous and goods become more abundant, the State may desire to control and monitor this prosperity for the benefit of everyone (a form of Welfare Capitalism). This can be accomplished by centralizing the money creation process and by creating money as new production develops. This desire for centralized control results in new banking laws and new financial institutions. In the United States of America this change started with the creation of the Federal Reserve Act of 1913 and then the removal of gold as legal tender in 1933 with FDR’s policies. Gold was confiscated and given to our Central Bank as one form of reserve. Later, the people were forced to accept paper notes (called Federal Reserve Notes) as their official money or legal tender. This process of centralization continued and expanded globally with the closing of the gold window in 1971.
All these changes within our financial system created new concepts of ‘value’ and new concepts of ‘money’. As the American Dollar became merely a paper note (after Nixon’s closing of the gold window), this decision created an exponential inflating of ‘prices’ and of DEBT. Since our currency unit (the dollar) was no longer limited by being defined in terms of gold, central bankers and their surrogates could expand the currency supply exponentially. This flexible currency expansion then allowed our Central Banking authorities to manipulate the economy and the prices with new methods and formulae. The model of fiat currencies created the largest expansion of wealth in history and also a series of financial bubbles. There is no solution, however, to our DEBT problem as we now must deflate all this debt and experience this result (many experts now recognize that our debt has reached levels which prevent us from growing out of this predicament)!
Since goods (after 1934 and especially after 1971) are valued with currencies that expand and inflate an economy, the concept of ‘value’ changed also. When a currency unit such as our dollar was defined and convertible into gold or silver, values of goods were calculated based on the idea of money being a thing of intrinsic value. But after the centralization of money in 1913, 1934, and 1971; money became merely a medium of exchange and a price discovery tool. The concept of intrinsic value gradually diminished and vanished. Later in the 1980′s and early 1990′s our computer technology emerged and became ubiquitous. Banking and finance became digitized and our currency units became digits in the computer screen. This further changed the concepts of ‘value’, ‘price’ discovery, ‘price’ calculation, and the ‘stability’ of the overall financial system. We now use digitized units to manipulate and to create all kinds of ‘price’ distortions within our global marketplace. These units are created mostly by one person and ‘out of nothing’!