1000 CASTAWAYS: Fundamentals of Economics

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How Your Professor Should Have Explained

The Principles of Macroeconomics

But Didn’t

It took over 9,000 years from the earliest human settlements to the dawning of modern states and modern banking systems circa 1500 AD.

It took several more centuries for the gradual appearance of reasonably accurate albeit sporadic descriptions of the role of states and banks in the creation of currencies and their profound roles of capital development and social coordination in both the public and private spheres.

This progress was briefly interrupted by an intellectual decline of Economics into a period of real-world irrelevance (1950-2000). However, led by a handful of pioneering economists, and not yet in classrooms or textbooks, earlier partial theories of the two coordinating systems of the macroeconomy were revived in the 1990s and then, more crucially, consolidated into a unified understanding of how real-world economies actually function. Economic understanding emerged into a Golden Age of which the present generation is in the exciting midst of.

1000 Castaways compresses this 10,000 years of economic development into several years and a society small enough to allow an illuminating overview, yet large enough to feature the institutions essential to modern economies. Centuries of economic thought are distilled for the reader to the essence of how the macroeconomy functions (and malfunctions).

net w fish[Draft of the forthcoming book 1000 Castaways: Fundamentals of Economics. I am posting chapters online to have it available as soon as possible and to receive input before a final version is released. I will be rolling out Chapters and linking them to this Table of Contents]

Future Book Website (under construction)shutterstock_122255668

 

for editing - copy

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Crusoe gets excellent advice from Friday :)

Crusoe is getting excellent advice from Friday, I plan on integrating it all, thank you.

“Friday

User Info

This is all very good. I can’t really find anything in these last four chapters worth quibbling with.
I did spot one typo here: eveident

I do think inflation needs more discussion, some people really care about it. You say both systems are not inflationary. I’m not convinced that is always true, but if it is where does inflation come from? And how can it be prevented or stopped?

I have revisited Chapter 1. I think it most important to eliminate commodity money entirely. It is not necessary for establishing a unit of account. Commodity money thinking is the source of the “inherited beliefs” you wish to dispel so why allow it a foot in the door.

“Promises to pay” is better than “promissory notes” but I think “IOUs” is better still. You should introduce them at the point you introduce commodity money, instead of it, which then allows ledgers to naturally develop as a record of who is owed what rather than appear as if by magic.

And I don’t think you’ve made it sufficiently explicit that the bank, er–the Farmers Group, is issuing IOUs (ie. money) based entirely on its good name (ie. nothing) rather than on its stock of barley or IOUs that have been lodged with it. This is another thing that commodity money thinking has trouble understanding.

You want to do this by showing a balance sheet. Tricky without having a whole (boring) Introduction to Accounting section. I think you need a lot more text describing how it actually works (taking deposits enables ex nihilo lending through the magic of accounting). And you want your readers to realise that you are talking about banks without actually saying so. A tall order, I know.”

My quick reply:
Clint Ballinger

Friday – thanks! I was just looking at trying to change the commodity money bit – just takes time to get to everything. I love the work of Graeber and Hudson, and want it to be reflected properly.
On inflation – you might have noticed I did an “internet only” section (Ch 5)? I also have a whole section written but that I cut on inflation. I felt it was too obvious for the readers I am aiming at (breadfruit trees with the crop ruined by a cyclone, that type of thing. That actually happened to me in Fiji lol!), but might still use it. I am still reading your comment and will get back to you, thanks again.

1000 Castaways, Additional Material (Chapter 5)

[The following was cut from the book but I thought I would make it available online]

The Slings and Arrows of Outrageous Fortune (The Real World)

Consider our little Island with its well-balanced System One and System Two. What if instead it had had to grow its little economy in the midst of 9 other islands?

If they were 9 other completely peaceful Islands, and all endowed with the same abundant materials and climate that our Island had, things might have worked out about the same, for all 10 islands.

But imagine the other 9 islands had constant, murderous intent to invade your little island. Now there would be a sustained need to raise and maintain a military. Now imagine that often they were your immediate land neighbors rather than distant islands, generally ready to march into your territory, and often larger, richer, and more powerful than you.

Now further imagine that there are large differences in the amounts and types of raw materials between different territories. And your territory might have lacked not some but perhaps even most of the basics needed to feed and house and clothe a growing population. From the earliest stages of emerging states there would exist strong pressures for “international” trade and with that many added layers of complexity such as many different types of “money” (from commodity-based coins to various types of notes of credit) and thus foreign exchange, bills of exchange, and other complex credit- and insurance- instruments related to long-distance trade. [note that “commodity based coins” themselves were rarely if ever {ingot form} actually valued for their commodity value – the value was in practice from taxation/fine/tribute or the use of precious metals was a form of anti- counterfeiting, making “fakes” difficult, but not giving the actual value to the coins] Continue reading “1000 Castaways, Additional Material (Chapter 5)”

1000 Castaways, Chapter 5: The Real World, System Two

(←Chapter 4    Additional Material→)

System Two

The other main reason our real-world economies do not function as well as the Island is that we simply do not understand System Two, which organizes public projects and creates the vertical component of modern currency systems. The reasons for this stem from the long, complex process by which our modern economies emerged.

It might be expected that I will say that the inherited structure of our real-world System Two is sub-optimal and must be changed for our economy to run as efficiently as the Island economy. But the primary problem is actually our inherited beliefs, not structure.

The Island developed in isolation and quickly developed the most advanced version of System Two possible. Its imaginary small population is well-informed on how it developed and how it functions. And thus, most crucially, the 1000 Castaways are able to elect representatives who likewise understand how to use System Two correctly, and do so. Continue reading “1000 Castaways, Chapter 5: The Real World, System Two”

1000 Castaways, Chapter 4: The Real World, System One

(Chapter 3       Chapter 5)

Chapter 4

The Real World, System One

We have seen how our Island of 1000 Castaways developed an economy that, within the potential of their technology and resources, maximizes their wellbeing.

Our real-world economies are not organized so efficiently, and create countries where wellbeing is, given some set of resources and technology, less than it could be.

Why?

There are two primary reasons:

1) The Islanders efficiently manage System One, allowing it to grow to its maximum useful size but no more. In the real world we allow the finance sector to be much larger than is efficient, with everything beyond its maximum size reducing rather than raising wellbeing.

2) The Islanders understand how to use System Two. In the real world, quite simply, we do not.

System One

The primary reason for (1) above is simply that Continue reading “1000 Castaways, Chapter 4: The Real World, System One”

1000 Castaways, Chapter 3: Balancing the Two Systems

(←Chapter 2    Chapter 4→)

Balancing The Two Systems

IN THE INTRODUCTION WE discussed how, in order to maximize their material wellbeing, a small group of people would want both to organize their private activities and their group activities efficiently. This is relatively easy with ten people but becomes exponentially harder as a group scales up in size.

Two different systems emerged to overcome the difficulty of scaling-up private and group coordination and make modern economies. The horizontal (credit-money) system serves to allow the islanders to coordinate their private activities more efficiently. The vertical (government tax-credit; “crusoes” on the Island) system both allows public projects to be coordinated more efficiently and these in turn also amplify the productivity of the private system.

A third goal, directly related to the two systems above, would be to make sure that the group are not wasting available resources, reducing everyone’s wellbeing below what it could be. Let’s consider this third point in greater detail. Continue reading “1000 Castaways, Chapter 3: Balancing the Two Systems”

1000 Castaways, Chapter 2: System Two

(Chapter 1       Chapter 3)

Chapter 2

System Two

SO FAR WE HAVE SEEN how a system can emerge naturally that functions to help individuals better coordinate the use of real resources and thus increase the private production of society overall (Chapter 1). This increases the production of real goods and services for everyone. The “money” system (promises-to-pay) this creates is very useful in itself. But of more fundamental importance is the role of this system in helping coordinate the private sector’s use of resources in a way that can increase the material wellbeing of the whole group.small farm

Some projects, however, are much larger or longer-term than John’s fishing nets, much too large for any one person or even group of people to want to engage in. And some projects are less obviously profitable to any one person but still desired by the group as a whole, especially as they often increase, sometimes by many times, the productivity of the private sector. Continue reading “1000 Castaways, Chapter 2: System Two”

1000 Castaways, Chapter 1: System One

(Introduction       Chapter 2)

Chapter 1

System One

FLEET OF A THOUSAND COLONISTS are blown off course for weeks by a series of violent cyclones, eventually crashing onto the reefs of a large uncharted island. All of their ships and provisions are lost to sea. They wash ashore, all surviving the stormy night. As morning breaks they begin their search for water and possible food sources.

The survivors struggle in this foreign land at first. They collect crabs at the rocky tideline, forage along the dense forest-edge, and weave simple palm leaf baskets to collect the many unidentifiable fruits they find in the forest. Eventually they begin to be more successful at fishing and manage to get some shoots of wild yam-like tubers to sprout in small raised-mound gardens. Eventually they begin to have enough food and to build stronger, larger, and more permanent shelters. Continue reading “1000 Castaways, Chapter 1: System One”