Under the title: “Senate Democrats Finally Take a Stand” the
editors of the New York Times wrote a piece on the 2014 U.S. budget, and
published it on March 16, 2013. They say the following in the first paragraph:
“...the result … at least makes most of the right choices and is a solid
rebuttal to the … House budget.” And they end the piece like this: “The Senate
now needs to make a strong defense of the principles it has put on paper.”
The core of the piece consists of contrasting the Senate
Democratic budget proposal against the House Republican budget proposal. It is obvious that the editors of the Times
favor the Democratic budget because, as they say, it rebuts “the heartless
collection of obsolete dogmas that is the House budget.” Fair enough.
But this, in itself,
will not be sufficient to sway the independent readers that the choice they
made is the right one simply because the opposition is heartless and dogmatic.
What the readers want is a more comprehensive explanation as to where the
budget fits in the larger context of where the American economy stands today.
This is truer than ever before because there is now a great deal of confusion
as to what an economy is and how it works.
What confuses people the most when economic matters are
discussed is that they fail to make out the difference between the economy and
its monetary expression. This is not a confusion that has always existed but
one that has evolved with time – becoming more pronounced as the economic
interactions among humans became more complex and more abstract.
At the start of human interactions, the neighbors bartered
goods. That is, if you had enough of something to satisfy your needs and had a
surplus, you could exchange that surplus for something I had that was a surplus
to me. For example, if you raised chicken and I grew tomatoes, we could
exchange the extra chicken you had for the extra tomatoes I had, and serve both
on your dinner table as well as mine.
When life was this simple, we could also compare your wealth
against mine. We could do so by stacking the number of chicken you had at the
end of the season against the number of tomato baskets I had. For example, if
we used to exchange one chicken for one basket of tomatoes, and you counted 10 chickens
while I counted 20 baskets, I was considered to be twice as wealthy as you. But
if the fortunes reversed the following season and you were left with 15 chickens
and I with 5 baskets, you were considered to be 3 times as wealthy as me. The
math was no more difficult than life itself.
But then life became more complicated. It started to happen
when people employed animals such as horses, donkeys or camels to travel long
distances taking with them heavy loads of goods. Because they did not need to
barter all their goods against other goods, they developed the more convenient
method of exchanging their goods for valuable objects such as pieces of gold or
silver, precious stones or colorful seashells, even feathers of rare and exotic
birds. These were small items considered to be stores of high value that the
bearers could exchange for goods or services anytime later on, anywhere close
to home or away from it, with someone they knew or someone they never saw
before.
That development was an important transformation in the way
that the economy was made to function from that moment on. For one thing, to be
considered wealthy, you no longer had to produce chicken or tomatoes or any of
the goods that people bought and paid for. And neither did you need to have a
skill that would allow you to render a service of any kind in exchange for the
goods or the services that you wished to acquire. It is that you now had an
alternative to the way you accumulated wealth, thus had the means to buy
anything you desired.
What you could do was go to the mountaintop and prospect for
gold and silver. You could also go to the beach and gather precious stones and
colorful seashells. And you could go hunt for rare and exotic birds plumed with
attractive feathers. These were the stores of high value – now called currency
or money – you could accumulate thus make yourself as wealthy as you want – in
accordance with the effort you put into the endeavor.
Another effect of the transformation was that the economy
started to be expressed less by the goods and services that were produced and
more by the amount of money that was in circulation. This is how economic
aberration was created in the sense that you could now have a small amount of
goods and services represented by a large amount of money. Or you could have it
the other way around when money became tight at a time when the amount of goods
and services increased or remained steady.
This is how and why people started to get confused about
what constitutes an economy. It is that they find it difficult to see the
difference between the real economy which is represented by the amount of goods
and services produced, and the monetary expression of that economy which is
represented by the amount of money in circulation. To make matters worse, the
aberration became even more acute when another big transformation took place.
This happened when paper money was invented, was made to
replace all forms of currency and was used to serve as legal tender. With this,
you could be wealthy overnight without having to gather precious metals,
colorful stones, or exotic feathers. It became the new reality because you
could now counterfeit the money by printing it illegally, or you could get a
job in a privileged place where you had the opportunity to beguile the central
bank and have it print the money for you legally without it being counterfeit.
The place to work and have that privilege is called financial services – a
place that has lately acquired a great deal of unwanted notoriety.
To see how this came to be, we need to remember that by the
time it was necessary to have a central bank that was in charge of printing the
money, have it set the nation's monetary policy and have it regulate the
financial services – the way that people did work had changed at least twice.
The change came once when the agrarian system gave way to mercantilism, and
came again when the system transformed into the industrial economy we see
around us today.
The mercantile economy was characterized by the fact that
most people were independent craftsmen who earned a living producing goods or
services they sold for money or traded for other goods and services. As to the industrial economy, it is
characterized by the large buildings where a number of workers operate fast machines
to produce goods in large quantities. This setup has created the need for
services that are themselves produced and delivered in large buildings. They
are the schools and places of worship, the hotels and restaurants, the
hospitals and hospices, and last but not least the financial institutions that
dispense the notorious financial services mentioned earlier.
These institutions were invented to function as utilities
and conduits that would channel money from the central bank to the productive
parts of the economy – the parts that actually made the goods and produced the
services that people bought and paid for. It was the function they filled till
the day when someone decided they were an integral part of the service industry
yet were underrated. Upon this, the financial institutions took on functions
that allowed them to change their status from utilities and conduits to
full-fledged players at par with the productive parts of the economy.
This gave them the opportunity to increase their control over
the money they were supposed to channel somewhere else in the economy. Having
the control, they gave themselves functions they were never meant to have, and
used them not to add to the nation's production of goods and services but add
to their own wealth. They did so by trading not in goods or services but
trading in equity and debt instruments. Doing so, and having complete control
over the entire operation, they won every bet they made because the clients
against whom they played, lost every bet in this zero-sum shell game.
The net result has been that the people who produced the
goods and services that made up the real economy ended having just enough money
to pay their employees and maintain their enterprises afloat. In the meantime,
those who were supposed to channel the money kept enough of it to buy for
themselves the means of production that were out there in the economy. It
happened because they became the arm that stretched to the spigot of the
central bank and turned it wide open. Indeed, free of a set of meaningful
regulations, these people repeatedly asked for any amount they dreamed of, got
it all each time and kept most of it.
This explains the phenomenon of aberration in the economy,
and explains why the rich get richer while the poor get poorer. When the
independent minded people understand it, they accept the role that the
government plays when trying to level the playing field, even if the exercise
begins to look like a redistribution of the wealth.
And if someone still maintains that the rich are envied
because they are successful, that someone will end up being laughed out of the
room.