Bootstraps and the Meaning of Money

Of course, physics tells us that we cant pull ourselves up…

There’s a peculiar little saying that many of you have probably heard, and that is “to pull yourself up by your bootstraps”. The implication here is that, without any help from others, you can work hard and make it in the world etc. etc. It is an especially favourite refrain of libertarian and other politically-conservative movements who like to frame “I believe in hard work” against “I believe in government handouts”. Herein lies one of the fundamental problems with any kid of libertarianism-based economic doctrine, and that is that there is a tacit assumption of the independence of individuals in an economy. On the surface of it, this all seems great. Work hard and you’ll do well… and if you’re not doing well, then you’re obviously not working hard enough.

Of course, large scale economies inevitably have their ups and downs. When there’s a down, it’s all the fault of big bad government, and when there’s an up, it is all on the shoulders of the hard working people. It surprises me that such simplistic, and obviously incorrect, reasoning can still pass as an “argument” from a politician… although, having observed similarly simplistic “kindergarten politics” at work at the pointy-end of climate negotiations, maybe I shouldn’t be so surprised. The truth of the matter, is that no single person can be successful without the cooperation and help of many others. And I’m not just talking about the obvious sources of help, like your immediate family, or emotional support from friends or a spouse, I’m talking about countless numbers of complete strangers who you will never meet, and who may not even speak the same language as you.

This is the result of globalization, and it is a good thing. Globalization has allowed us to distribute labour and resources like never before. This allows for spectacular increases in efficiency, and therefore productivity. So why do so many people protest globalization? Well, the productivity pie has certainly gotten bigger, but the slices of that pie that people have been getting have not always followed suit. Why has this happened? It’s because of democracy. When people come to vote, it will always be for their own best interests and that will often mean that governments will be encouraged to pursue foreign policy which is “not nice” towards the interests of workers in other countries. I was recently in a discussion about an upcoming election (which may or may not have been mentioned previously on this website) and one of my friends asked me “should I vote for myself or for my country?”, implying that she had to choose between her own self interest and the longer term interest of the country. Of course, the choice of voting in the interests of “the world” isn’t even on the table.

Environmentalism pretty much never makes it to the table as far as election issues is concerned. Sometimes small pockets of voters will make it important to an equally small pocket of politicians, but it probably won’t become a major issue until the environment begins to affect everybody’s everyday lives in an obvious way. The economy is where it’s at. Anyone who’s had to sit through one or two elections in any country knows that the hip pocket is the surest way to any citizen’s vote. Whenever a politician has to frame a debate or a policy decision, it must always be in terms of a voter’s (often) first response – “what’s in it for me?”

Recently, something that everyone seems to be getting rather obsessed about is the budget deficit. I’m not referring to any country in particular in fact, as most countries run some amount of deficit. Everytime a government opens its purse strings to spend some money (as is inevitable in the running of a country), this falls under “deficit spending”. Deficits are easy tools for the politically-minded. First of all, the nonsensical comparison between personal debt and a national deficit is an easy one to make and use. It makes it easy to convince people that the deficit is “bad” and adding to it in any way is “worse”. The inability of most people to think much further than their own personal affairs only makes this psychological trick an easier one to pull off. Of course, if a government really needs to spend money, then this can be a problem.

I’ve been thinking a lot about what this actually all means. I have concluded that these deficits are simply “tomorrow’s money” being spent today. We shouldn’t be frightened of large numbers, which is something that deficit scaremongers have a tendency to try to make us scared of. Deficit numbers are often very big, but they should be taken in context of other things, like growth and GDP, and happiness index, for example.

I was thinking about what money actually means. We make stuff, and we have to exchange it, so we start swapping bits of gold. Eventually, it becomes too inconvenient to cart around lots of bits of gold, so we swap it for receipts, and just swap those instead. So by that logic, we should have stayed on the gold standard right? Well, no. Gold was only a convenient medium of exchange because it was rare and didn’t corrode easily (at the time that currency was invented, it may have been the *only* metal that man had access to). It is only a medium of exchange, it doesn’t *mean* anything. This is no compelling reason to tie up our money supply to gold. I think the only reason that the gold standard appeared to work as well as it did for as long as it did, was because the world’s economic productivity remained essentially the same up until the industrial revolution.

Of course, fiat money has its own problems. Nobody really knows how much it is worth. In fact, the only real definition for how much it is worth is “how much you can get for it”. During my time at Columbia University, we had many and frequent discussions about ending poverty. One of the more insane ideas that came up was to print lots of money and give it to poor people. Obviously, this wouldn’t work because as you print more money, with nothing to back it, it is effectively worthless.

What does back our money up? Is it the amount of stuff in the world? I don’t think so. When we take a raw material and make it into something useful, we add value to it. Perhaps the amount of money is somehow reflective of the amount of capital + labour in the world? Maybe. I was thinking about the growth in financial markets recently and about the value of speculating. I have determined that there really isn’t very much value to all the speculating, and that all of this extra growth in the economy which has supposedly come from the financial sector is actually a fraud. Moreover, all the extra money has gone into the coffers of some very mediocre people who think the world of themselves in the form of obscene bonuses which are not-at-all representative of their contribution to the economy.

So if the value in our economy doesn’t come from ego-inflated investment bankers and hedge fund managers, then where does it come from? If we go back to the econ 101 definition of economics as the way in which we distribute scarce resources, then perhaps the value in our economy just comes from stuff. Or stuff + the value that is added by labour. However, if you think about this deeply for a while, you come to the inevitable conclusion that the system will blow up in our faces because we will eventually run out of stuff. Oil, metals, and minerals will eventually run out.

Of course, one can argue that we can recycle a lot of those things, but the truth of the matter is that we don’t. Our economic system should make it prohibitively expensive NOT to recycle these non-renewable resources, but it doesn’t, because the system is created and shaped by myopic idiots. Of course, that’s not exactly fair, the people who dreamed up this economic system never had to deal with 6 billion people and lived at a time when these resources were virtually limitless. Also, everything is renewable is you take a long enough time frame…

So what is really happening? When we burn oil, we’re not burning money, we’re simply borrowing it from the distant future at a time when that oil replenishes itself. The same can be said of other supposedly non-renewable sources. So now we’ve reduced all consumable resources into practically the same terms. Obviously, fish stocks replenish themselves much more quickly than iron ore would (but that doesn’t stop us from overfishing, does it?). Perhaps an interesting intellectual experiment would be to consider this “borrowing from the future” in the same terms as taking out a loan from a bank. The interest rate would be tied to how quickly you could pay it back AND how quickly the resource replenishes itself, which in the case of something like iron ore or oil, would be extremely slow, therefore making these loans extremely expensive. (which is how they should be)

So, for all resources, we have some kind of “sustainable” carrying capacity and anything above that is borrowing from the future. What determines this carrying capacity? Now I get to use a common refrain of the climate science skeptics – it’s the sun, stupid! Those of you who paid attention in high school physics will be familiar with the concept of the conservation of mass. Thanks to gravity, very little mass from the earth escapes into space (the weight of all our artificial satellites is negligible) and even on very long time-scales, very little mass is ever added to the earth. The sun provides all the energy for converting one kind of matter into another kind, therefore the “budget” of the earth is ultimately limited by what the sun provides (there is a rather big exception here, in nuclear energy, but I’m going to ignore it for the moment).

So there you have it. Somewhat counterintuitively, the amount of value in the economy shouldn’t be determined by the amount of “stuff” in it. When you think about it, it actually makes a lot of sense. Under the current system if I dig a lump of gold out of the ground, I can sell it and become richer. If you really think about that for a while, you realize just how absurd the concept is. However, if I take the energy of the sun and use it to produce something that we can eat, then I am converting something that is useless into something that is useful and actually making a contribution towards the world economy. Likewise, any process requiring labour is using energy to add value to something and so contributes to the economy as a whole. Speculating can be useful to a point, because it encourages investment in (it is assumed) more efficient enterprises over less efficient ones (here, the questionable substitution of “efficient” for “profitable” is made) but we are well past that point.

Of course, you try explaining all of this to an i-banker… they’ll think you’re crazy, and you probably are. But this all sounds so crazy, it just might work.

1 Comment on Bootstraps and the Meaning of Money

  1. I like in particular two economist’s sayings: “There’s no such thing as a free lunch” and “Anything is worth what its purchaser will pay for it”. I think they apply to this post pretty readily, as you have implied.

    First of all, it’s been apparent to me that the winners under any system will claim that the system is good, right, and fair (making themselves feel better and deserving of their standing), while the losers will claim the opposite. The “winners” of the economic system (i.e. the ones with tons of money, whether from luck, circumstance, family resources, or genuine hard work) therefore claim that their success is due to their hard work and pure awesomeness, while the “losers” claim that their failure is due to the faults of the system. It is no surprise then to see that people who have done well claim to have “pulled themselves up by their bootstraps” while conveniently ignoring luck, circumstance, and the advantages they started with. Usually it is the worse-off who see the faults of the system (other than the small minority of so-called “welfare queens” who actually blame the system for their own failures). Then of course there are all the nameless sweatshop/factory workers who produce the cheap goods that enable the “winners” to live like they do while oblivious to the real world and connectedness of the system.

    As far as I can understand, the reason for the gold standard was that it was useful to have some tangible asset to back up the currency system (gold was used because the gold market is fairly stable over time and therefore approximates “value” relatively well). So if the government (through the Fed blah blah blah) loans someone currency that has been impressed with abstract value, said person can feel confident that there is real value in the currency because at any point they could trade it back in for gold, which is stable in value. It also makes it more difficult to hyperinflate the market by printing more money because you need more gold to back it up (though there’s always lying about it if you’re that desperate). It’s a way of naturally restraining and stabilizing the monetary supply system. If there is no gold/other standard upon which the currency system is based, then the feds could essentially get way into debt through credit or hyperinflate the market to pay back debt or whatever. Not having a gold standard spurs growth but makes the system a bit more volatile and unstable (heard of bankrupt countries like Greece? shouldn’t happen on a gold standard, though I’m not an econ major or anything, so correct me if I’m wrong).

    And of course deficit spending is like spending tomorrow’s money, assuming you’ll actually pay back the money you’ll have to take out on loan. Future programs have to be cut or taxes have to be raised or value has to be destroyed through hyperinflation in order to pay it back (unless productivity increases manifold). The problem with deficit spending is the irresponsibility and myopia it engenders (here’s a DailyShow segment that pretty much sums this up: It is natural and convenient and even smart when done properly for a government to run a deficit, but problems quickly arise when deficit spending gets out of control to the point where the government has to pay back money faster than value is being created. At this point, the government can either go farther into debt (feasible up to a point, further destroying future value, weakening the currency, and deincentivizing future investment), inflate the market (destroying value–or, perhaps, letting the “value bubble” crash down to its realistic level), or not funding certain liabilities (say, Social Security).

    The growth coming from the financial sector may not be as fraudulent as you think. I think both the growth it creates and certainly the bonuses received by those working the system are overrated and overvalued, but the growth is important. The growth doesn’t just come from huge corporations getting huger; it comes from the small businesses that get started, projects that get initiated, and houses that get bought using loans. Because there is usually such a prohibitively high barrier (think of it like an activation energy) to creating a profitable business or industry from scratch without loans, lowering this barrier with the financial industry (think of them like enzymes) speeds the rate of growth enormously. The incredible power they have (from all their money) does create problems when their interests falls out of line with those of society or its individual members (such as lobbying for poor policies–this is the price to pay for such growth). Their ability to leverage amplifies this growth immensely and can build/industrialize/post-industrialize a nation at quick a remarkable rate, leading to superpowerdom, but the price to pay comes in the form of “holes” in the economy that are created when leveraged deals default and phantom money disappears and bubbles pop (such as the current crisis).

    The natural replenishing rate of material goods is obviously the limiting factor when it comes to sustainability in the extreme long term. Therefore, as you have described, an industrial society is ultimately limited by replenishing energy sources/negentropy, such as the sun and nuclear energy. However, post-industrial societies do not necessarily produce tangible goods. Think of the “culture” produced by New York and California in the US. It adds “nothing” to the economy in the sense that it does not engender further value multipliers or market fluidity in the same way that technology and industrial growth does, but it is still a good on the marketplace that has value. What worries me is that there is a certain tangible stability to material industries, and the US has moved farther and farther away from industrial production, leaving it to the rising BRIC nations (Brazil, Russia, India, China), which puts us at enormous risk for market fluctuations and drastic depressions. Material goods are not entirely recession-proof because there is less market fluidity to purchase them, but the market for non-material goods is inherently volatile and could take a harsh dip when people decide to buy food instead of entertainment.

    Industrializing in an unsustainable way is actually a good idea provided that given the technology and growth that has been created by the unsustainable development enable us to at some point “pay back our debt” in the form of natural resources and the environment. A problem occurs when growth that is too unsustainable occurs for too long, damaging the environment and endangering our civilization, and people raised on the habits of unsustainable development find it hard to pay back their debt because they don’t realize it exists. My current anxiety over the climate change phenomenon is not that human beings chose to industrialize through unsustainable means, but rather that we have gotten too far sucked into the mentality of unsustainable growth to stop before the disasters that the rational parts of our minds tell us will happen actually occur. I’m waiting impatiently for a massive investment in alternative and sustainable energy and the breakthroughs in technology that will spark this change.

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