(Week 24 - Monday, Jan. 19 / 2009)
In the last column I introduced to this discussion the concept of "value-added", which is an expression used to describe the actual value that accrues to a resource from the earth as it is transformed, at first into a commodity (some would say "raw material"), and thence in successive steps to a finished product that is finally consumed. The value-added process has two parallel streams.
The first is a material stream, which is the series of incremental increases in the material worth of a product-in-the-making that results from the physical and intellectual contribution of each worker in the production chain as it evolves. The second is a monetary stream whereby each worker is compensated according to his net cost of production (i.e. expenses incidental to performing his step in the process), plus receives a profit to cover his living expenses, plus has enough left over monetarily to seed his next round of production.
"Value-added monetization" is the process by which the material and monetary streams of value-added are coordinated. Ideally, the result should be that monetary value accrues proportionally to material value at every step in the production process, and in such a way that it is equitable with respect to the efforts and needs of those who perform the work. The key to making the value-added monetization process work, then, is to maintain this equitable proportionality from raw-material inception to final-product consumption. The key to making this happen is to understand the concept of value-added from both private (micro-economic) and national (macro-economic) perspectives.
"Value-added monetization" in the Private (micro) Economy:
"Value-added monetization" in the private (micro) economy is the process by which the prices of different products relative to each other evolve through the exchange process in the marketplace, given the amount of money in circulation. The price for any given product will tend towards an equilibrium which determines essentially the monetary value-added of each step in the production chain.
To illustrate, if there was a high level of money in circulation relative to economic activity at current prices, then prices would trend upward until a new equilibrium is reached. Economists would describe this upward readjustment of prices to fit the money supply as "inflation".
Conversely, if there a low level of money in circulation relative to economic activity at current prices, then prices would trend downward until a new equilibrium is reached. Economists would describe this downward readjustment of prices to fit the money supply as "deflation".
Ideally, this tendency in the marketplace to seek a new equilibrium has the effect of each product arriving at a price that truly expresses a balance between the material value-added involved in its production, and the monetary value-added that would reflect it. The principle is analogous to the water on two sides of a porous dam seeking its own level. According to whether the amount of currency in the monetary pool is high or low, the material worth vs. the monetary prices of all products will readjust until a new equilibrium is reached.
"Value-added monetization" in the National (macro) Economy:
"Value-added monetization" in the national (macro) economy is the process by which a determination is made of the amount of money to be issued into or withdrawn from circulation that would promote stable prices, given the total activity participants in the economy would be inclined to undertake. The object is to adjust the amount of currency in the monetary pool such that overall prices remain essentially stable. If a good balance between money supply and economic activity is struck, the price that each producer receives for his value-added contribution to the material worth of whatever product he is working with will tend to be predictable, equitable and sufficient.
This description of how the respective value-added monetization processes would correlate with each other from the private (micro) and national (macro) perspectives is, of course, ideal, but in my view the principle is understandable, sound, and practical. Correlation with this principle in the real world can be observed, but it has been very approximate at best. Indeed, it has broken down many times for individual sectors of the economy, and in the current financial crisis, the breakdown has become general. The reason for this is that the national (macro) economic function of creating, issuing and controlling money has been unwisely transferred to a private (micro) corporation. This is an unnatural economic order that breaks the correlation between the micro and macro monetization streams (due to the loss of monetary value-added through the "interest" charge on bank loans), that cannot help but result in the financial troubles the nation, and the world, are experiencing at present.
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The complete set of columns from this series is posted at the following websites.