by Angela Lovell

Mar 9, 2010

How the economy really works.


 I don't usually share things that are sent to me by e-mail but this one was so good I just had to. I have no idea who the original author is so sorry can't give credit where it is due.
 
FINALLY--I understand how the economy really works...

It's a slow day in some little town........
The sun is hot....the streets are deserted.
Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich tourist from back west is driving thru town.
He stops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. 
The pig farmer takes the $100 and heads off to pay his bill at the feed store. 

The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit.
She, in a flash rushes to the motel and pays off her room bill with the motel owner.
The motel proprietor now places the $100 back on the counter so the rich traveler will not suspect anything.

At that moment the the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money & leaves.

NOW,... no one produced anything...and no one earned anything...however the whole town is out of debt and is looking to the future with much optimism.
And that, ladies and gentlemen is precisely how the U.S. and Canadian Governments are conducting business today!
Picture by: John Mahoney/Canwest News Service


24 comments:

  1. This comment has been removed by the author.

    ReplyDelete
  2. It is possible, that in a small town, like the one in the story, a prostitute can run on credit. I don't think it would work in a place like Winnipeg though.

    ReplyDelete
  3. I'm sure that there's a catch in there somewhere...but it certainly sounds good to me.

    ReplyDelete
  4. The hotel owner still owes $20 in taxes to the government.

    ReplyDelete
  5. Actually in this example everyone provided something to every one else and so there was an exchange of real value. The money is just representational of the actual services or goods provided.

    ReplyDelete
  6. wait this doesn't work cause now the motel owner is out 100 dollars because the prostitutes debt to him is not given to the buisnessman....

    ReplyDelete
  7. Read somewhere that is how our banks operate too.

    ReplyDelete
  8. Hi LaoziSailor
    Thanks for sharing that again - a story worth sahring about greed.

    John
    Thanks for commenting - no I agree - no such thing as a "free ride" - pardon the pun!

    Cerulean Bill
    Thanks for commenting. It works as long as the value of the services or goods are equal I suppose.

    Anonymous
    Haha - maybe 30%!

    Johnny Canuck
    Thanks for commenting. Yes that's true and indeed trade systems work well until the perceived value of the goods becomes unequal and that's where money is required and the problems begin.

    Jon Alfred
    Thanks for comenting. I believe the businessman got his $100 back did he not?

    Agapelife
    Hey good to see you online again Agapelife. That's a true comment except banks also charge interest so this could never work with a bank involved.

    ReplyDelete
  9. This story makes no sense. Each person provided services or created goods for another. This does show how much a small amount of money can do for a poor nation. A small investment trickles down to so many people. All they need is a jump to get started.

    ReplyDelete
  10. Pretty lame conclusion. The hoteler got an interest free loan and, as a result, paid off a debt. And so on down the line of commerce. In the end, the economic ripples resulted in a net plus to the hoteler. So, I don't get the point of the email? Is the emailer mad because the prostitute represents illegality and the hoteler had to break the law to break even? Curious. Very curious.

    ReplyDelete
  11. The whole town is out of debt? The whole town was never in debt.
    Sure, each had a liability of $100, but each, in turn had an asset of $100 as well.

    Their net debt was zero, and it took the introduction of a numeraire (a commonly accepted store of value- commonly known as money) to do the accounting.

    This piece simultaneously explodes the myth that a barter economy is sustainable, and also correctly assumes the necessity of a credit system- each person gave something of value in advance of getting paid. An astute reader will also realize that any object would do- as long as it was commonly accepted. sure, it could have been a nugget of gold, but it didn't have to be.

    It is the single most elegant illustration of the virtues of the monetary and credit economy and fiat money I've ever read.

    ReplyDelete
  12. Hi Lumpynifkin
    Thank you for commenting.
    I think it shows how we all have a value and it works as long as we value each other - once we value things we have a problem.

    BilloGoods
    Thank you for commenting.
    Again in my opinion it's not a moralistic issue but a human one - why is one product or service valued over another - all are necessary - why can we not just assign value to the whole rather than the individual pieces?

    ReplyDelete
  13. Meta Kaizen
    Thank you for commenting.
    I have responded (I think) in my post today.
    Thanks again.
    Angela

    ReplyDelete
  14. erm, this is not how the American money system works at all.

    You entirely forgot about the federal reserve bank, interest and fractional reserve - the three main reasons why the economy is and always will be thoroughly shafted.

    ReplyDelete
  15. Hi Lardarz
    Thanks for the comment.
    "You entirely forgot about the federal reserve bank, interest and fractional reserve - the three main reasons why the economy is and always will be thoroughly shafted."

    Absolutely - hence my subsequent post about the control of surplus in an economic system.

    ReplyDelete
  16. your an idiot, stick to writing and stop trying to figure out the banking system.
    The businessman never gets paid.

    ReplyDelete
  17. Thanks for the tip Gil
    (I actually did not rite this piece - just passing on something I thought might interest people - which it did - it got over 5000 views - wish I had written it myself!)

    You are quite corect - the businessman never gains or loses in this scenario - he ends up just getting his money back - no interest for anyone.

    If you will read my subsequent post you may see what my intention was.

    But thank you again for your comments - that is why I write - to provoke discussion.

    ReplyDelete
  18. The problem with just about every economic model out there is this little assumption that every player in the room is and will act rationally... *FAIL*

    For example, what if just one person decides to spend their $100 instead of paying their dues?
    (I mean, who would do such a thing, right?)

    ReplyDelete
  19. Hi Golema
    Of course no one would do that!
    Thanks for commenting.

    ReplyDelete
  20. There is nothing particularly impressive about this piece. Meta Kaizen has already made the essential point there is no net debt in this economy. Everyone owes as much as they are owed. The only thing stopping everyone cancel out the debt is that this is apparently a barter economy and so suffers a problem of double coincidence of wants. Transactions can only take place if the other side provide the exact good that you want and you want to trade the exact good they want. The beauty of indirect exchange through a commodity designated money is because everyone accepts it you don't have to wait until two trade partners have perfectly complementary wants. Your follow on post suggest you still haven't grasped this basic economic concept.

    ReplyDelete
  21. Hi Tim

    "Transactions can only take place if the other side provide the exact good that you want and you want to trade the exact good they want. The beauty of indirect exchange through a commodity designated money is because everyone accepts it you don't have to wait until two trade partners have perfectly complementary wants. Your follow on post suggest you still haven't grasped this basic economic concept."

    I think I understand the concept - the designated monetary system of course balances out the problem of assigning some sort of currency to denote the value of the items to be traded in relation to each other.

    My point is not about the need to assign value but how control of a surplus of tradable items becomes subject to price (and value) manipulation by a very small number of people who will quickly take advantage of need created by shortages in supply that may be real or artificially created.

    Either way, he who controls the supply sets the value and it has nothing to do with any tangible value in real terms.Any currency system is based on reserves is it not?

    If I am not explaining it well my apologies.
    Thanks again
    Angela

    ReplyDelete
  22. There is one little restriction that makes it work: Everyone has only one debt to one other person and one person may only have one debt (also, all debts are equally high).

    This also begs the question: Why do they have a debt at all? Instead of money, they could have just traded services or invent some kind of local money. And they wouldn't even need a stranger...

    So, I don't understand what this example shows, except that fiat money has no value in itself...

    ReplyDelete
  23. Max
    Thanks for the comment
    Yes in my next post I looked at the very issues you rasie - in a perfect world we wouldtrade our services and goods and figure out a system that works without one person burdening another with debt.
    But that's not the system we live in - yet.

    ReplyDelete

My Blog List