Economic Efficiency

My first precept is about the value of money.  I’ve been talking about the value of money, by which I mean all the money in circulation in the world.  What is the meaningful amount?  Does it reflect the total wealth of the world?  Is it possible to create more real wealth?

I play games, often economic games, which provide me with insights in economic systems. In many games, paper money is used.  The denomination does not really matter.  The value of money depends on what is available to buy.  The same, I feel, must be true of the world. 

Everything we buy is the result of other people’s effort, either present or past.  So, my thought of the day is that the value of money is sum of everybody’s effort. 

Exactly how does that work in practice?  There must be a subsistence level of effort. An individual could expend their productive effort just feeding himself, which would consume the product of labour and thus not create wealth. 

Effort beyond subsistence, which could be simply doing the same and offering the excess for sale, or through specialisation doing something which can be traded for subsistence living and then perhaps some comforts, arts and luxuries.  If the effort exceeds subsistence, we are creating wealth.  Money is our unit of trade for the excess effort.

So it doesn’t matter if governments decide to print money or banks lend each other more units of currency, the real value is determined by the gross effort of the world’s population.

Note well, that I am talking about productive effort.  That does not mean time spent at work.  If someone mans a shop all day, they are serving the shop owner, but if (together) they sell nothing, there is no productive effort.  The shop of course will eventually go out of business, but the employee may have been laid off long before that. 

However, a civil servant who processes applications for social security is doing something that society may desire to be done and it is therefore productive, because it meets a need for which others are prepared to pay taxes.

Where am I going?  What about the title of the article, economic efficiency?  If we can get machines to do the productive work better than people, then provided the effort that goes into the machines is less than would have been spent in the manual task, automation creates wealth.  But don’t forget the human effort and investment that goes into operating and maintaining the machines.

World Solutions is to think about how economies can be structured to maximise the real wealth, which means avoiding having people do un-productive tasks, even if on the face of it they may appear to be putting in a lot of time and effort.