Economics: The Art Of Complicating What Is Incredibly Simple
The sole use of money is to circulate consumable goods.
Those are the words of Adam Smith. It was a throwaway line in Wealth of Nations so over-the-top obvious was it. Money only has a purpose insofar as there’s already production. Money doesn’t instigate production; rather money is a consequence of it. Producers have long needed a common measure or language to enable exchange, and money was the result. It made possible the rapid circulation of actual production.
Economists Need Us to Forget the Obvious
The sad truth is that economists have been hard at work trying to get the non-credentialed to forget Smith’s statement of the obvious ever since. It’s not hard to see why. Professions need to perpetuate themselves. Complication is their friend.
That’s why in a political sense there will likely never be a flat federal income tax, or even better, a flat sales tax that replaces all other federal levies. Politicians need to perpetuate their prestigious existence that includes having people much smarter and accomplished than they are standing up every time they enter the room. Politicians also want cushy retirements. What’s comfy for politicians after politics is a complicated tax code that they can lobby minor changes of once out of office. For very good pay. This basic truth also ensures that federal spending will never decline. There’s lots of money in lobbying the allocation of what grows all the time.
Growth is as Simple as Removing Barriers to Production
We have infinite wants, production is what enables the accession of some of those wants, so get out of the way of producers. Since wants are once again endless, and evolving, the natural state of humans is to grow. They’ll strive to produce more in order to get more.
In that case, reduce what limits production, which is the penalties placed on it: taxes. Don’t penalize work with an income tax, don’t penalize investment in enhanced productivity with the capital gains tax, don’t shrink the capital necessary to produce with government spending, don’t tax the purpose of work with tariffs, don’t harass workers with inept regulation since competition already handles the latter expertly, and don’t limit the exchange of production (and productivity-enhancing specialization that results) with money that bounces around in value. Economics is basic.
Economists Work Tirelessly to Complicate the ‘Purpose of Money’
Of course, the credentialed in the economics space want to live well just as politicians do. So they complicate things. They do so most notably with money.
Though the purpose of money is blindingly simple to anyone who bothers to understand it, economists work tirelessly to make it opaque. They pretend that the creation of money itself is the instigator of growth, they more laughably claim that economic growth can be centrally planned via fixed annual increases of the so-called “money supply” (these are the “free market” monetarists) by central bankers, and then some of the truly dense claim that devaluation of money stimulates growth by rendering producers more competitive. Which is the equivalent of a 5’5” NBA aspirant claiming he would make the League if the Weights and Measures division of the federal government would just shrink the inch.
Back to reality, currency devaluation is by its very name anti-growth precisely because it creates uncertainty about the unit; in our case, the dollar. This uncertainty means less trade, and less productivity-enhancing specialization. Also, devaluation is inflation. When the value of the unit is shrunken, the dollar we all earn exchanges for fewer goods and services. Inflation is a tax on work, and it is by extension a tax on the investment that enhances the quality of our work. Only members of the economics profession could actually believe devaluation boosts growth.
Economists: Redefining Inflation
Worse is that in elevating devaluation, economists have tried to redefine what inflation is. To Keynesians, inflation is caused by too much economic growth. They claim it’s when demand outstrips supply. Which is an impossibility. All demand begins with supply. They balance. By definition. Furthermore, economic growth springs from the very investment that enables more production at lower and lower costs. In short, economic growth is the surest sign of falling prices.
The “free market” monetarists aren’t much better on this score. Call them Keynesians turned inside out. Eager to complicate what is simple while arrogating to themselves a role in planning economies in “free market” fashion, they claim that inflation is caused by too much money. They then comically throw around all sorts of impressive sounding words like “velocity” to make their case that inflation results from them not controlling the so-called “money supply.” More troubling, “free market” monetarists claim that they can centrally plan economic growth given their professed ability to know what the actual supply of money should be.
In reality, presumptions about “money supply” are as conceited as were the Five Year plans crafted by Soviet central planners. To see why, return to the Adam Smith statement that begins this write-up. “The sole use of money is to circulate consumable goods.” Since money is a consequence of production, planning its supply is as impossible as is the planning of production. Translated, it can’t be done.
“Velocity”? Money movements once again signal exchange of real goods and services. Which means that rising “velocity” isn’t inflationary as so many economists assume. Quite the opposite, really. Money that’s rapidly changing hands is logically trusted, non-inflationary money precisely because producers will take it in exchange for market goods. They wouldn’t do so if its value were in decline. Few work to give others more in return for less.
Good Money is Circulated in Abundant Supply
One economist, Texas Tech professor Alexander Salter, claimed in a recent letter-to-the-editor in the Wall Street Journal that “all the new money in the world won’t drive up prices if it doesn’t circulate.” His assertion is backwards. Money that’s heavily circulated is generally the opposite of inflationary. See above. Good money is circulated in abundant supply precisely because money flows signal goods flows. Salter’s letter implies that he knows how much production should take place in an economy, and subsequently how much money should be circulated. Trust me, he doesn’t know this.
Money isn’t Complicated. Economists Just Make It So
Money isn’t complicated. Neither is inflation. It’s a policy choice. So is cessation of inflation. The shame is that what’s so basic isn’t acknowledged by economists. It seems they want cushy retirements too.
Much of the above content was originally published here on Forbes.com.
Check Out My Books
When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason (Post Hill, 2021).
Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics (Regnery, 2015), a primer on economics.
Who Needs the Fed? What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter, 2016), about the central bank’s onrushing irrelevance.
The End of Work: Why Your Passion Can Become Your Job (Regnery, 2018), which discusses the exciting evolution of jobs that don’t feel at all like work.