I use recirculation for the simple reason that on the scale of an economy money is a fluid. It is a peculiar fluid as it has strange sticky resistances to flow, but it is still a fluid. Movements of money through an economy are better thought of as flows of a similar substance rather than discrete movements of particles, such as dollars.
There is a corollary to that theorem, if a curve has the same value at its endpoints, the curve must; be equal everywhere or have at least one maximum or minimum point. A curve could have an enormous number of both maximums and minimums.
I will now construct such a function. If a person has no money, they have no economic activity, clearly they cannot, at least in the cash economy. If a person had all the money in an economy, that economy could be a country or the entire world, that person also has no economic activity. Economic activity is the transfer of money from one entity to another, if one entity has all the money, there can be no transfer and therefore no activity.
Interestingly, that argument holds for both holding all the money value, which is static, and if that entity intercepts the flow of money through the economy, which is dynamic. In either case, there is a zero value at zero and another zero value at 100% of the money. Because of this, since it makes no sense that there is never any economic activity, zero everywhere, and there can be no activity below zero, there must be a maximum point.
That point has to be at less than the 50% point if the flow, gross product is the measure being used. At greater than 50% more money is being withdrawn by the entity than is being recirculated, eventually the flow must decrease and cease as the entity must turn a portion of the flow into a static holding. If the entity absorbs 60% of the flow, only 40% can be returned to circulation, the remaining 20% has to be statically held, reducing the flow of the economy. Unless there is a reduction to the intercept of money, eventually the economy will spiral down to zero.
The upper curve above illustrates this maximizing and then flow back to zero. The lower curve is actually more interesting, it is the normalized curve. It consists of the ordinate, vertical measure, of the upper curve, divided by the abscissa, horizontal measurement, or the upper curve rise divided by run. It is the tangent of the angle measured form the origin to a point on the curve and the x axis. Because the curve must flatten, after its initial rise, in its slope, the tangent will rise to a maximum value and then fall eventually back to zero. I believe that maximum value occurs at about $75 000 / yr, the same point at which choice starts to become inefficient (see post Economics). This is the most efficient pint of economic activity, it represents the minimum recirculation time. At its lower point, at point zero-zero, the curve is flattened before steepening. If this were not true then the most rapid growth of the economy would occur with the the slightest, initial, insertion of money into the economy, historically that is not true, the economy only growing rapidly after significant money is already in the economy.
The reason for why the two values of choice and total economic efficiency should coincide is that they ae both ultimately tied to the same variable, time. The reason why economic activity becomes less efficient with increasing money is that there is not enough time to spend the money.
An economy, at any given time, is constrained in the amount of service it can provide at any given level. Some levels are capable of meeting much higher demand than others. An economy can meet a demand for 50 million
$10 lunches but could not meet a demand for 50 million $500 lunches. If there is a constant level of demand eventually the economy will meet it. But that requires both time and capital expenditure. This means that for an economy to be effective, people's demands must roughly coincide with available production.
Most people could spend $100 per day if it were given to them, they could buy an expensive lunch with a couple of overpriced drinks. If given $1 000 per day they might be able to invite they might be able to invite their friends to lunch. At $10 000 per day most people would be lost. For every spending decision, no matter how small, time must be spent in making that decision, otherwise it is not a decision but a random purchase. A random purchase does not increase choice and is therefore economically worthless. The only way to increase the amount of money spent is to make increasingly expensive purchases. At some point the amount of money overwhelms even that and the economy can only adjust to a certain number of expensive purchases until it jams with an inability to meet demand. At some point the money cannot be spent rationally and it accumulates and is economically inefficient. That leaves the point at which people can make the maximum of smooth decisions that match current economic output at around $75 000 / year. It is the highest point of economic efficiency. It will shift with increasing gross product, but that shifting takes time. It might be somewhat higher than $75 000/yr, maybe $100 000/yr, but it will be relatively close.
In the lower curve, m, is the maximal point. Most likely the curve above m will look like b and not d, the curve will change slowly in a decreasing manner creating a plateau of high efficiency. Anywhere on that plateau would be almost equally good for the economy, however, the number of people at the lowest point can be increased most quickly, since it requires the least amount of money to create them, so it is the point at which one would focus to increase economic activity.
On the lower end, a represents a curve recommending free trade, since the loss of efficiency from jobs created at these lower levels does not seriously impede activity. Curve c would make free trade stupid. It would mean that jobs created at lower wages would significantly slow activity. Before free trade agreements are created, it would be a good idea to know what the shape of the lower curve is. If the money under trade with a developing country creates comparable rates of recirculation, the trade would be a guaranteed positive since it would increase choice in the form of lower prices for a given product. If the curve has a sudden drop the choice would be reduced since part of choice is making a next choice. The saving of money on a given product has to be considered in terms of the out years.
As a simplistic example: say that a person has a recirculation time of one year. That person makes a $100 purchase once a year, assume the choice is 100 george. Every year, for five years, that person has the $100, he makes a purchase, the money recirculates in one year, he makes another purchase. Five purchases at 100 george each equals 500 george. Now, let us say that person buys the same product for $50, for $50 he has 100 george of choice and another $50. He makes another 50 george purchase. But assume it takes three years for the money to recirculate. That would mean in year 1; 150 george of choice, year 2, 50 george, year 3, 50 george, year four, the money finally returns, 100 george, year 5, 100 george., total = 150 + 50 + 50 + 100 + 100 = 450 george, which is less than 500.
It is more complicated than that since a choice made today is worth more than a choice made tomorrow. But the point is that it is not just the price it is the return of the money.
The reason why recirculation is so important is that it allows for the economy to function without continuously printing money, all money that does not recirculate drains the money available and requires the printing of more money to maintain economic activity. That is potentially inflationary and inflation reduces choice by denying people the ability to save and plan. The potential for inflation is the danger of the money sloshing back into the economy, particularly all at once. With China the recirculation is in Chines purchase of debt which is hardly ideal as that is a debt which must be repaid instead of a credit in terms of purchase.
No comments:
Post a Comment