The Monetary Economics of Thurston Howell III

DLWormwood writes "In what has to be the Strangest... Essay... Ever... The libertarian Ludwig von Mises Institute website has posted an essay which goes way too in-depth over the topic of why the castaways of Gilligan's Island used Thurston Howell III's 'worthless paper' instead of gold or seashells."

Comments

Mises Institute rails against fiat abuses

[Ars-Fartsica]

I am an avid reader of most of what comes out of the Mises institute, which is often listed at SafeHaven.com, a bearish commentary site.

Their point is that fiat currencies are subject to abuse as they are not secured to a physical entity which limits its growth.

Note that for for one hundred years prior to the existance of The Fed, the purchasing value of a dollar was virtually unchanged!

Post Fed, post gold standard, post secured currency, the value of the dollar's purchasing power has dropped 97%. With Greenspan's current uber-loose credit scheme and our fractioanl reserve (aka fractional safety) banking system, this has vastly increased the amount of money circulating even in the last decade, secured now mostly by residential real estate.

Good timing

[Malor]

Heh, it's interesting that this was posted now. I just changed my .sig a few days ago to touch on this topic. I'll repeat it here in case I someday change it:

"US Dollar, n: A politician's promise to pay nothing on demand."

This is one of the few government promises you can be ABSOLUTELY CERTAIN will be kept.

What the article is talking about is, indirectly, that the paper money you use every day has no inherent value, so why on earth would anyone accept it as money? A currency that is unbacked by anything, but is decreed by law to be a medium of exchange, is called a 'fiat currency', because it obtains its value from executive fiat (decree). Basically, the government is forcing you to accept the US Dollar at gunpoint. If you do not, they can arrest you. (seriously, they can!)

At one time, money was mostly gold, and to a lesser degree, silver. The way it basically worked was this: you, the gold miner (or perhaps, trader with foreign gold currencies), brought your gold to the government mint. In exchange, they gave you a certain number of gold coins, less some percentage to cover the costs of coinage. Gold must be alloyed with other metals, generally copper, to have enough hardness to last through day-to-day wear, and coins were rated based on their 'fineness', or how much actual gold they had in them. Offhand, I think an 8% copper mix was fairly common, and I believe it was often the case that a 1:1 trade was executed; for every ounce of gold you brought in, you received .92 of an ounce, plus .08 ounce of copper, in the form of a coin. The .08 was, in essence, the coinage fee.

Well, over time, monarchs and governments figured out that they could increase that percentage a very great deal; for every one ounce of gold they took in, they only had to give out, say, half that much gold, if they mixed in enough copper. Historically, this has been a major sign of economic distress, sometimes presaging the complete failure of the government. Henry VIII is often cited as an egregious example; his 'silver' coins were actually copper with a very thin coat of silver. The high points would often wear off, leading to his nickname of 'Old Copper-Nose'. He did terrible damage to England's economy through this practice. There is a specific word for this form of taxation, but I cannot remember it or find it with Google right now. But it is very, very lucrative; the more you debase your currency, the more of the real value in the economy you can extract through deceit. Over the long haul, the strongest economies were always the ones with the strongest currencies, likely due to the fact that more of the money stayed in the hands of the population. A hidden tax is still tax, and taxes are bad, on the whole, for an economy.

Now, consider what we have now. Instead of anyone doing (a great deal of!) work to mine gold or some other metal out of the ground, instead, the governments of the world can simply wave their hands and create new currency at will. This is absolutely wonderful for the governments in question, because it allows them to extract, at zero cost, value from their own, and other economies. By printing up bills marked '100', they can extract 10 times as much value as from bills marked '10', at zero extra cost. The US is taking huge advantage of this; we are importing vast quantities of goods from all over the globe, and in exchange we're shipping back worthless green paper, to the tune of over a billion dollars a day. This is great for us, but foreign readers... you and your countries are being RAPED. If you think the US is hated now, wait until the world figures out out just how bad it's been rooked.

As a quick aside, I got my very first 'flamebait' mod awhile back for observing, in a discussion about using ink-jet printers to print money, that of COURSE the government hates that! They don't want anyone muscling in on their turf. Printing fifties on your inkjet and spending them

Diff-eq, etc. are common in Economics

[garyebickford]

There's enough math and computational expertise required in advanced economics to keep any math geek satisfied. It's not a coincidence that large numbers of Physics PhD's are working on Wall Street these days. The cookbook economics you hear on the tube is not the economics being done in research today; it's the economics that politicians and TV newshosts can understand, and communicate in soundbites.

As you alluded, much of basic Econ can be described as a bunch of rules-of-thumb and ad hoc arguments, of the sort, "If we ignore all these things here, and assume that they are constant, we can pretend that this here happens." The problem is that economic systems are complex systems (analogous to the brain's neural network), and can't be modeled well using "billiard ball" physics models. Until recently the only alternative has been to use statistical, "gas law" models and other simplifications of the systems.

Example: a small town may have 1000 citizens, 200 businesses, and perhaps 500 formal and informal groups/organizations. Each of those individuals and organizations has over 1000 'inputs' and 1000 'outputs' - relations with each other and outside entities, that may be considered as economic factors. (Relations may be financial or other.) You have a social network with something like 10^13 relations/interconnections. And that's just a small town or neighborhood.

I'm embarking on a PhD in Econ shortly, after many years in computing, and my math skills are being stretched like they haven't in a long time. Differential equations is a prerequisite for several of the introductory graduate level courses, along with linear algebra and a bunch of statistics and game theory. Thomas Bayes' much appreciated Bayesian Theorem probability is a tool of economists. Vilfredo Pareto (Pareto-optimal" game outcomes) was an economist. Many elements of modern statistics, probability and game theory were developed by economists.

The problem faced by economists has been not that it was too simple, but that the systems under study have been too complex to delve into very deeply until both the mathematical tools and the computational power became available. It was necessary to drastically simplify the models in order to get any sense at all. And, of course, there is a strong philosophical and social-studies thread throughout economics.

Nowadays there is a strong thrust into new approaches to Economics, including complex adaptive systems, agent based systems, Neuroeconomics, Experimental Economics (vis. Vernon Smith, 2002 Bank of Sweden "Nobel" and social network economics.

Often in addition to training and/or experience in biology, physics, systems theory and other disciplines, these approaches require a good understanding of differential equations, comfort in manipulating long chains of partial derivatives, and working with multi-layered irregular networks. Interestingly, even fluid dynamics equations are applicable in some cases.