Material living standards are a function of three main variables – net throughput (Tn), population, and the prevailing distribution (D) of Tn among different social and occupational groups.
Tn is a function of available wealth, the state of technology, wealth renewal rates, human values, D and the proportionate flow of money through different economic channels.
The value of money is determined by Tn and money supply. Increases in money supply greater than increases in Tn lead to devaluation of money. This and only this is true inflation.
Money is an agent of throughput in that its existence facilitates the exchange and consumption of goods and services which is Tn. However, as long as there is plenty, the actual quantity of money is irrelevant as a determinant of throughput. What is relevant is (related to D) the relative proportion of the total money supply flowing through different channels of the economic system – government, investment, wages and salaries. Consumer spending, welfare transfer payments, and savings.
Changes in money supply affect throughput but not because the overall quantity is changed, rather because the means of changing the quantity has always involved changing the relative proportions flowing through different economic channels.
An increase in the money supply isn’t necessarily inflationary. That depends on its effect on throughput, since inflation only takes place if the money supply rises faster than throughput, or if throughput falls faster than the money supply. A fall in the money supply could be inflationary if that fall took place in such a way as to cause a greater fall in the throughput rate.
The statement that actual money supply is irrelevant as a determinant of throughput may appear to contradict the definition of true inflation, since the true inflation rate is one determinant of throughput, as will be discussed later.
There is no contradiction because the true inflation rate is determined by the relation between the rates of change of money supply and Tn. The rate of change, the first derivative of the quantity, is relevant; the actual quantity itself is not.
Incoming search terms:
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Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons