Dev.SN ♥ developers
Sections
Dev.SN
Anonymous Coward writes:
"http://www.theguardian.com/commentisfree/2014/mar/ 18/truth-money-iou-bank-of-england-austerity
Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, 'there'd be a revolution before tomorrow morning.'
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window."
(Score: 5, Informative) by Thexalon on Tuesday March 25 2014, @08:00AM
That's not actually true. It's understandable why you might think it's true, but there are two things that can actually be taken into account when deciding what something is really truly worth:
1. Its actual usefulness, what economists call "utility". For example, a house is valuable because I can eat and sleep and put most of the other stuff I own in it and be reasonably certain most of the time that me and my stuff will be a comfortable temperature, dry, and not destroyed when I'm not paying attention.
2. What it takes to make one, what is roughly what economists call "marginal cost of production" (MCP). For example, a car is far more valuable than a sink faucet because the car takes more materials and labor to make.
The challenge, of course, is that neither the utility or the MCP can easily be measured. So the best you can do is pick some sort of way of measuring utility and MCP. The best way we know to measure utility by the price that customers are willing to pay for something in a market where there are lots of buyers, and the best way we know of to measure MCP is the price that vendors are willing to sell at in a market where there are lots of sellers. This works really well for handling anything where there are lots of buyers and sellers: The price of an apple at the store really does reflect the work involved in getting an apple from not-yet-existing to in-your-hands at the store.
This is far from perfect, and it gets all screwed up when:
- There are costs that aren't paid by the sellers. For example, if I spill poisonous chemicals into the local water supply as part of my production process, I'm not paying the costs of dealing with that unless a government takes steps to force me to do so, and that allows my prices to be lower than they really should be.
- There are few buyers or even one buyer in the market. Under those conditions, the buyers will be able to pay less than they otherwise would, because the alternative for sellers is to either accept the buyers' lower price or not sell at all. This is one of the reasons why there was a time in the not too distant past where companies loved being the only really large employer in town: that enabled employers to dictate wages, because the alternative was not working.
- There are few sellers or even one seller in a market. Under those conditions, the sellers will be able to charge more than they otherwise would, because the alternative for buyers is doing without. Think cell phone service - all of the major carriers suck, but because everyone "needs" a cell phone these days it doesn't matter much that they all overcharge.
- When price is part of what you're buying. The ultimate example of this has to be the $999.00 "I'm Rich" phone app, which doesn't do much of anything except announce to the world that you have the means to spend a grand on something useless.
- When the seller can lie about what they're selling. Yes, caveat emptor and all that, but the fact is that the seller is always in a better position to evaluate whatever they're selling than the buyer is, because the seller has it and has typically had it for a while.
- When a bubble forms. That's when something becomes valuable primarily because buyers think that somebody else will pay even more for it a little while down the road. Dutch tulips, mortgage backed securities, web company stocks back in 1999, etc.
Every task is easy if somebody else is doing it.
(Score: 1) by monster on Tuesday March 25 2014, @11:12AM
MCP is quite bad at measuring the value of items, because first, it can change over time, usually to be lower, and second, because many times how much you spent to make an item doesn't translate into how much anybody is willing to pay for said item. You may have spent a lot, be in time and/or in money, and got something nobody else values at that price, or you may have spent very little and get something which other people are willing to pay a lot for.
(Score: 2) by Thexalon on Tuesday March 25 2014, @11:44AM
MCP is what the situation looks like solely from the seller's point of view, also known as the supply curve. If it costs me $120 to make a widget, I might sell the prototype for $60 if it turns out that it was a bad idea and nobody wants to buy a widget for more than that, but I'm certainly not going to set up a production line to spend $120 per widget to gain $60 per widget in sales in any significant quantity.
The question of how much other people value my widget is the demand curve, and has no bearing on MCP. That's where the usefulness of the product comes in to determining the actual price.
Every task is easy if somebody else is doing it.
(Score: 1) by monster on Tuesday March 25 2014, @12:26PM
Yes, but the point I was making is that if making your widget costs you $120 but the very same widget using other production methods or providers can be built for $50, what is the real MCP of the widget? That is why I think it's not a good mark for 'value'.
(Score: 2) by Thexalon on Tuesday March 25 2014, @12:39PM
For the purposes of pricing, $50, because the MCP, industry-wide, is $50. If it costs me $120 because I'm a really bad widget-maker, then my MCP is $120, but the industry's MCP is $50, so they'll happily sell for $55 and I'll be out of business.
If I was a really good widget-maker, and got my costs down to $40 per widget, it will take a while before the industry-wide MCP drops to $40, which means my profits will go up by $10 until the industry adopts my methods. Once a lot of other sellers have my methods, though, then the selling price of a widget will drop down to $45, and those that fail to adapt will again lose out. This is a feature of capitalism that's definitely worthwhile, since it encourages innovation and technological growth.
Every task is easy if somebody else is doing it.