One of the fathers of modern day economics, David Ricardo, was not a big fan of landlords.* He believed that they were an unfortunate drain on a productive economy. They were only involved in the economy by virtue of their ownership of land, which of course was (is) a necessary factor of production. So, as recompense for their ownership, a landlord charged rent to anyone who wanted to produce something that originated from the land. In Ricardo’s view, this was a drain on the overall economy and was unjust because the landlords did nothing productive—they simply sat idly on their ownership and profited from it.
In the modern era, land was privatized so long ago (at least in the Western industrialized world) that resentment has dimmed against its owners for unjustly privatizing what had been commonly owned. And these days, agriculture is increasingly concentrated in the hands of a few large corporations that direct the entire process of production of food and other natural goods. So a class of idle landlords, remnants from a feudal era, have been replaced with a class of agricultural industrialists distinguishable from other industrialists only by the sector of their activities.
But the general principle of an idle class of owners may still be very relevant to the modern era. In today’s economy, the scarce factor of production for industry appears to be credit. Money. Financing. And that, of course, has to be borrowed in one manner or another from somewhere.
I must admit that I find finance and banking absolutely baffling. Even the relatively simple concept of a money multiplier seems baffling. If I put my $100 in a bank, they’ll lend out $80 of it. Now, I believe I have $100 to spend, and someone else just got a loan so she has $80 to spend. Now the economy magically has $180 in it. And this continues ad inifinitum because that person with $80 will put it in her bank (or spend it and the seller of goods will put the $80 in his bank) so that bank can lend out another $64 of it. Now the economy has $244 to play with. Crazy!
Now this only works because the bank knows from experience that only about 20% of the people who have deposits in the bank are going to come in on any particular day and ask for their money (or people will only request 20% of their deposits on any given day—same difference). If we want more, we’re out of luck, at least until we appeal to the FDIC. Because the rest of our collective money is gone, out working in someone else’s interest.
The stock market is an even more baffling manifestation of the same concept. If I put my $100 in the stock market instead of a bank, I’m going to expect that when I’m ready to take it out, my investment will be worth more than I originally put in because someone somewhere will be willing to pay more for my stock, based on the assumption of still further growth. So if I see that my stock purchase of $100 is valued at $150, I will feel as though I have $150 dollars in my possession. Just like the magical bank example, money has mysteriously grown from nothing. And like the magical bank example, this only works when more people want in to the market than want out. If too many people try to simultaneously cash in on their earnings, the market will collapse and those earnings (and much of the original investment) will disappear.
Unlike the bank example, no one has any responsibility to pay anything back, however. In the case of the stock market, I am in a sense “loaning” my $100 to a company for its responsible use in the course of doing its business. But unlike that $80 loan that the bank made based on my deposit, the money I shared with the business never has to be paid back. Rather than expecting the loanee to eventually pay me back (with some interest as recompense for my willingness to part with my money for a while), I am expecting that I will be able to recoup my investment by passing it along to someone else.
I can understand the concepts simply enough, but it just strikes me as fishy, because it feels as though these magical multipliers are unaccounted for in the elementary parts of economics where everything is about goods and services and economies actually produces stuff rather than just figures on paper. There are these nice, neat little models in the book that show circular flow between businesses and individuals.** Consumer spending becomes business income when we buy firms’ goods and services. Businesses then use that money to purchase the things they need, the raw materials, labor, etc. that they use. From whom do they purchase these things? From individuals who own them, of course, so we’re back where we started. Even business profits go to the individuals who own the business—outright or as stockholders. So now individuals have more money for consumer spending, which becomes business income, which businesses use to buy the things they need, and the oceans evaporate and form clouds, which rain and water falls back to earth, where it collects in rivers and runs out to the oceans, where it evaporates and forms clouds which rain and water falls back to the earth… In economics or climatology, it’s a nice little model well suited to fourth grader diagrams. But it’s a closed system, where money is finite like the number of H2O molecules on this planet. And that doesn’t jive well with magical multipliers. Unlike water, money apparently is not permanent and finite. It is not constantly moving through this neat little diagramable system of purchase of goods and services and factors of production. It occasionally gets diverted into shadowy underground reservoirs where it inscrutably reproduces itself and bubbles back into the economy through untraceable springs.
Then, the question becomes, how could one incorporate these reservoirs into our neat little diagram? And what is the overall effect? Are we at a net creating value for the economy, as measurable in the actual goods and services and labor we are able to produce/employ (since these concrete things make up standard of living, and as such matter much more to the common person than abstract figures on paper)? Or, like rent to a landlord, are we diverting money out of the productive parts of the economy to simply reward idle ownership? Since the systems of bank multipliers and stock transferability only work when a majority of the population leaves their deposits/investments untouched, wouldn’t it seem as though we might be better off keeping our money above ground?
These are some pretty huge questions that probably require a more sophisticated knowledge of the financial system and macroeconomics in general than I have to answer. If anyone has figured it out, please tell me. I will simply leave it at: I’m suspicious. Having seen the recent devastation of the reservoir caving in (in the form of the financial crisis of confidence that sparked the recession), I wonder if the financial system is truly a life giving part of our economy, or a parasitical aspect that we all put up with because occasionally we are rewarded with our own little allowance of blood money. If so, like all parasites, we unwittingly run the risk of killing our host, or at the very least, sapping its vitality to a point that benefits no one. Let’s hope we’re smarter than that.
*Heilbroner, Robert. The Worldly Philosophers: The lives, times and ideas of the great economic thinkers. Rev. 7th Ed.
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