The Theory of Money, Part 11

Photo by Jannis Knorr on

I introduced so many new things last week that I might need to take a few weeks to process them before progressing further in our society.

First, I said that this new gas cars business venture will be very beneficial to society if it works. Why?

Remember how I said many weeks ago 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 Labor Units (LUs)? Well, what happens to those LUs after they’ve been gleaned is they get distributed throughout society as people provide goods/services for each other and get compensated.

So the LUs are spreading around from person to person, but do those LUs ever get consumed/lost from society? Or do they just keep circulating around and around forever?

Think of the blacksmith that painted 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 paint cost 10 LUs to make, those 10 LUs 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 LUs from society.

Or think of the farmer feeding his family with part of his harvest. Every bit of food that is eaten is LUs that are lost from society.

Maintaining a human society costs LUs every day. All things are depreciating, so they are all dissolving away LUs each day. And if there are lifestyle changes (for example, that people decide they want to live in larger houses that now depreciate more LUs 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. 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 LUs from the land (say, he expands the number of acres he uses the next season), this innovation has now increased the overall wealth of society. I’m assuming here that the depreciation cost of the tractor is lower than the additional LUs it enabled the farmer to glean.

Ultimately, this is how we progressed from hunter-gatherer and agrarian societies to our modern-day societies filled with more wealth (and spending more LUs 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.

And inventions often require capital to develop and disseminate. 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. All of his loans have a chance of paying off bigtime to society.

But these loans come at a cost as well. We’ll talk more about that next week.

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