I introduced so many new things in Part 10 that it will take several posts to process them before progressing Avaria’s monetary system further.
First, I said that this new gas-powered vehicle business venture will be very beneficial to society if it works. Why?
Remember how I said way back in Part 1 that all of society’s wealth originally is gleaned from the land (mixed with labor)? And remember how we are quantifying wealth in units that I’ve been calling Wealth Units (WUs)? Well, what happens to those WUs after they’ve been gleaned is they get distributed throughout society as people provide goods/services for each other and get compensated.
So the WUs are spreading around from person to person, but do those WUs ever get consumed/lost from society? Or do they just keep circulating around and around forever?
We discussed this already when we talked about the blacksmith painting his house black. That paint is slowly going to wear off over the next several years, and then he’s going to have to paint his house again. So if the materials used to make the paint cost 4 WUs, those 4 WUs are now lost from society. But that’s better than not painting his house and the whole thing rotting, which might lead to a loss of 10,000 WUs from society.
Or think of the farmer feeding his family with part of his harvest. Every bit of food that is eaten is WUs that are lost from society.
Maintaining a human society costs WUs every day. All things are depreciating, so they are all dissolving away WUs each day. And if there are lifestyle changes (for example, that people decide they want to live in larger houses that now depreciate more WUs per year than their previous smaller houses), the daily cost of maintaining that society increases. And as long as the society can afford it, this is not a problem.
But it’s wonderful when there are innovations that decrease the daily cost of maintaining a society . . . innovations like gas-powered cars and tractors that can decrease the cost of travel and farm work. If the farmer and his farmhands used to spend an accumulated 800 hours of labor per year harvesting grain, but then the farmer buys a tractor that cuts the harvesting time down to 200 total hours, he has just saved 600 hours of labor. And assuming at least some of that extra time is put into working to glean more wealth from the land (say, he expands the number of acres he farms the next season), this innovation has now increased the overall wealth entering society. By the way, I’m assuming here that the depreciation of the tractor is lower than the additional WUs it enabled the farmer to glean.
So, like I explained in Part 4, the inventions that make a society wealthier do so by lowering the cost of maintaining their standard of living. And any invention that does that for the wealth-gleaners and frees up more of their time so they can glean more wealth per year is especially helpful for increasing society’s wealth.
I haven’t added in the extra layer of complexity of considering trade with other societies, but it shouldn’t be too difficult to see that if Avaria starts actively trading with other societies, this will increase its wealth even more as Avarians start to specialize in things that they are particularly good at making and then achieve even greater efficiency gains through economies of scale while also receiving goods from other societies doing the same (assuming travel costs don’t outweigh the lower wealth prices they’re getting from imports).
An important point about how trade increases wealth is this: When two people or two societies make a willing trade, it’s not like one is getting wealth and the other is getting goods. Both are trading things that they see as approximately equivalent value, which means that there is not automatically a net flow of wealth in one direction or the other. The exception to that is the profit that the business owner is receiving. For example, if the blacksmith starts exporting his excellent cook pots to another society, and he’s charging 10 gold coins per pot, with 1 of those being his profit, then when he gives up a pot that cost 9 gold coins to make (including the materials and his time) and gets 10 gold coins in return, there has been a net transfer of 1 gold coin to Avaria. And if the WU:gold coin exchange rate is 5:1, that means Avaria has netted positive 5 Wealth Units as a result of the trade. Of course, businesses based in the other societies are also receiving profits, so it all may be a wash. It really just depends on where the business owners live, because that’s where the profits from the business are getting sent to.
Ultimately, this is how we progressed from hunter-gatherer and agrarian societies to our modern-day societies filled with more wealth (and spending more WUs per day) than humans even a couple hundred years ago would ever have imagined. It happened one invention at a time–the loom, the printing press, electricity, the lightbulb, the internet, etc.
So that was the first thing I wanted to spell out a little more clearly.
And the second thing, related to all of that, is this: Inventions often require capital to develop and disseminate them. Without enough investment into these ideas, nothing happens with them, and the wealth of a society doesn’t progress.
So that’s why I said the banker’s loan to the entrepreneur provided a great service to society. Each of his loans have a chance of paying off bigtime to society.
And my final point of this post is to point out the difference between money and wealth in a new context by asking, What pays for things–money or wealth? I hope it’s obvious by now that money doesn’t pay for things; wealth pays for things. Money is just the medium we use to store that wealth. I hope this makes it clear why I emphasized that so much early on–that money has two purposes, and the second one that many people forget is that it is a store of wealth.
So, when you pay for something by giving money, you’re doing that because the money is storing wealth. And people need to be compensated for their work (and the goods and services they’re providing) with wealth because wealth is the only thing that can be traded for other forms of wealth, such as food and clothing and shelter.
For example, if you live in Avaria and are hungry, you can go to the general store and exchange some wealth (stored in the form of a gold coin) for another form of wealth–food. Contrast that with if you brought in some Monopoly money to the general store and tried to buy food with it. Why would the store owner refuse? It’s not because it’s the wrong kind of money; it’s because that money is storing no wealth. (Clearly Avaria is not in Canada because Monopoly money is basically is what we use there.)
I’m explaining this last point specifically and thoroughly because it’s another insight that modern monetary theorists don’t understand–they think that money is what buys things, so they think printing more of it will be able to buy everything everyone in society needs. I hope I’ve thoroughly debunked that misunderstanding by now.
That’s all for this post. In Part 12, we’ll talk about the downsides of the banker giving all of those loans.
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