Mental Mistakes

Chapter 3
Play Money

Imagine going to a moneyless flea market. The idea is to trade things you no longer want for things others no longer want. You load up the car, and see if there is anything at the market you want. Yes, that cart. You could use it to haul things around so you could trade them. It's probably worth more than your old chair, so you can offer the chair and also the old lamp. Hell, by the time you've made the trade for the cart, you'll be out of things to carry in it. This trading business is hard work.

Then you get to thinking. Everybody seems to like these jade rings at this booth. Why don't I offer this guy everything I've brought for as many jade rings as he'll give? Then I can carry around the jade rings and offer them in trade for what I want. If I don't find anything I want, I'll keep the rings for next week. After all, jade is pretty scarce, so it won't get worthless by then.

A thing like that could catch on. You might find signs on items announcing the price in jade rings. You might bargain in jade rings. "Well, why I don't give you two and a half rings for the rug, and half a ring for the poker? Here's three rings for both." That shows a problem with the jade rings: they are not easily divisible. But then, since they are no longer for wearing, but for trading, why not cut them in half? In fact, why not use various sizes of jade pieces and just call them half-rings, quarter-rings, and so on? Then the bargaining will be easier. "I'll give you a quarter for the ashtray, and a half for the colander."

It would be easy for a thoughtless person to decide that jade rings were the most popular thing in the market, and therefore the most valuable. He might decide to just trade for jade rings and more jade rings. He might amass enough jade rings to buy everything in the market. But if he did not want everything in the market, he would just be stuck with a lot of jade rings. He would have money, but no trades.

Money is a good candidate for the most valuable invention of all time, because it makes possible markets, trading, and the division of labor. It's value as money, however, is in what it does rather than in what it is. By using money, you can easily trade your daily effort for your daily groceries. If money has a value outside of its use, like the jade rings, then it can store up value for use in the future. Not only jade, but most things not too plentiful have been used for money at some time somewhere. The thing to note is that money cannot be imposed, because it must be popular enough that people will accept it in trade, as witness the debacle of the Susan B. Anthony dollar. It must also be divisible, and easy to carry around.

There is nothing complicated about money. It is an independently valuable commodity used as a tool of trade. Its commodity value comes from scarcity or usefulness. Its monetary value comes from its use as a medium of exchange. If it is so uncomplicated, why are so many so confused about it?

Look at money through the eyes of a passive non-thinker. It is something that everybody wants, so it must be valuable. Everybody has to have some, so they must have a right to it. Some have a lot, others not, so it must be unfair. It is issued by the government, which should issue more until everybody has enough.

Mental passivity leads to the money illusion: the idea that a tool of trade is better than trade. It sees the worker getting paid for effort, and the worker paying the supermarket for food. But it does not see the worker trading effort for food. Passivity does not put things together in the mind, so it sees parts and takes them for the whole. In this fragmented view, money looks more important than food. If the government would just issue more money, people could afford more food.

In reality, since it is effort that pays for the food, the amount of money issued makes no difference. If more money were paid for the same effort, then more money would be paid for the same food. Issuing more money causes inconvenience only.

Unless trickery is afoot. When subjective thinkers demand prosperity without effort, play money can, for a time, give that illusion.

The first step is to convert money into play money. What began as a commodity with a value of its own gradually becomes just a promise to pay. It can no longer store up value. It is as if those jade rings at the flea market gradually became plastic imitations of jade rings. If nobody noticed, they would be accepted as always. When people did notice, they could still be used for trade, but not kept to store up value. You would trade for your rings today and make sure you spent them today, since next week they might be worthless.

When money has become play money, it can be passed out to people who share the money illusion, and it will make them think they are suddenly rich. The boss gave them that raise without trouble. Prosperity is here! But hurry to the market, because prices are going up to match the raise. If wages go up before prices, then non-thinkers feel prosperous, and subjective thinkers feel that their demands are being met. But then merchants will try to recover their losses by raising prices faster than wages, and the cycle will have to begin again.

If you think that you trade your production for money, you have fallen prey to the money illusion. To see this, imagine that the government, as governments often have, suddenly declares the money worthless in favor of a new play money. "Wait!" you will say. "I have to pay my rent! I have to pay my car payment! I have to buy food!" You declare that you are in the middle of transactions which are not finished. You were trying to trade your production for living space, for transportation, and for food.

It is not money you trade your effort for, it is the effort of others. Money is an intermediate step in the trade. For example, imagine that you want to trade your effort now for your newborn's college education.

If the money is not play money, but, say, gold, then you have no problem. When you are paid in gold, you can set it aside to complete the transaction anytime in the future, without risk. The gold simply becomes what it was in the first place: a desired commodity that will keep its value. If it should happen that while your kid is growing up, gold stops being used for money, then you will sell it as a commodity whenever you want, and complete your trade of effort for education. Since the money value and the commodity value are both there, gold makes a very convenient money.

But it won't work as play money. Passive thinkers say it weighs down the purse or pocket, and costs too much. That is, they fail to identify the essential values, and get stuck on incidentals. Subjective thinkers say that gold is "rigid", and "unforgiving". They mean it cannot be manipulated to their advantage. They ignore the essential values, and say that money should be "managed".

If real money, a valuable commodity, is managed into play money, a promise to pay, then saving becomes more complicated. If you are a passive non-thinker, you put the play money in the bank, and find later that it is no longer enough to complete the transaction. So you join the subjective thinkers in demanding that somebody else pay for your child's education. Reasoning would tell you that you need an additional transaction. You can trade your effort now for a commodity that will stay valuable. Or you can become a lender.

If you were at the flea market using jade rings as money, you might meet a friend who asked a favor. "I don't have enough to buy this great leather coat. If you'll lend me ten of your jade rings, I'll give you back eleven next week." He is offering you a trade: one jade ring for a week of putting off your own trading. If you have noticed that the rings are not real jade any more, you ask yourself if eleven jade rings next week will be worth as much as ten jade rings this week. You might say, "Make it twelve, and it's a deal."

The interest you charge when lending out your money will depend on two things: what you think the money will be worth in the future, and what it takes to overcome your desire to use the money now. If three percent does the last for you, but you expect the money will lose two percent of its value every year, then you add the two percent as a risk premium, and charge five percent. So interest rates go up when the money is play money, and also when people are more eager to spend it than lend it. Turn that around, and you see the information value of money markets. If they are free markets, then the interest rates will tell you what people think of future money. When interest rates are high, people are losing confidence in the money, and in the future. When interest is low, people expect good times and good money.

If the money market is a pretend market, however, then interest rates are set by a should committee. If they are low, it means that the committee wants us to expect good times and good money, not that people do expect them. If prices for money are not market prices, they give propaganda rather than information. Passive minds will be fooled. Subjective minds will demand lower rates when they borrow, and higher rates when they lend. Nobody will know how much it is objectively worth to put off spending in favor of lending.

The biggest problem of a complex society is not how to trade or what to use for money. It is information. Good decisions depend on good information. The question that everybody—even the richest—must ask regularly is: "Can I afford it?" On the answer to that question mergers of world-wide corporations hang, as does your choice of lunch.

To decide what you can afford for lunch, you look at the prices and compare them to the contents of your wallet. To decide if they can afford to merge, giant corporations look at stock prices, material prices, transportation prices, money prices, wage prices, and many more. To see if they will profit from merging, they compare prices now to probable prices when merged. Probable prices are extrapolated from present prices.

Everything depends on prices. Should your factory make more shoes or more hats? Look at the prices. Shoe prices are going up; hat prices are going down. Unless you think your hats can reverse that trend, make more shoes. Should you buy a dream car or a budget car? Look at the prices. Compare the payments. Compare the costs of operation. Compare the costs of repair. Compare taxes. Will the luxury be worth that much, or not?

Subjective thinkers hate money, not because they hate trading, but because they hate the implacable, undeniable finality of prices. A market price is final because it is the record of a trade. When a series of trades have been made in a price range, then that range is the objective price. It was not set by the wishes of a committee, but by the actions of traders. It is not propaganda, but information. Base decisions on it, and they will be based on reality rather than illusion. Prices will tell you the truth. They will let you decide if you can afford something or not.

Subjective thinkers prefer wishes to truth. Passive non-thinkers don't notice the difference between wishes and truth. Neither attitude gets rid of the absolute need for the truthful information given by prices. Without that truth, you go broke. If, for example, the government passes out play money, and some of it comes to you before it has made prices go up, you feel rich. You buy the dream car. When you find that you can't afford to operate it, you try to sell it. But by now all prices have gone up, so nobody can afford to buy it. In desperation, you take a loss on the car, and say, "A boom is always followed by a bust."

The process of passing out play money is called inflation. It is often passed out first to the financial markets, where loans are made. In fact, in our present system, banks create money by making loans. "Your loan of ten thousand has been approved." Clickety-clack go the computer keys, and ten thousand appears on the books. With so much supply, interest goes down, which makes people think things are getting better. Aha! It must be a good time to build that new factory.

Phony prices tell lies. The factory gets built, and goes broke. Boom is followed by bust.

Passive non-thinkers go broke because they are easily fooled. Subjective thinkers go broke because they fool themselves. When they equate phony prices with real prices, they are equating lies with truth. Skilled thinkers soon learn one simple truth: whenever a market has a should committee, prices are phony. One purpose of the should committee is to tell lies.

Should committees pretend to repeal the law of supply and demand. The truth is the other way around. An artificial price below the market price tells a lie. It says that the supply of this item has increased. "Come and get me!" it says. "I'm a bargain!" If people do, they find that the supply has not increased, but the demand has. If the price is not allowed to rise, the supply is gone in a flash. The below market price created an instant shortage.

By the same mechanism, a price above the market creates instant glut. It lies that supply has decreased. "Pass me by!" it says. "Wait till I'm cheaper." So the supply stays the same, but demand is gone in a flash. If the price is not allowed to fall, the item sits there unsold.

The market price is the objective price because it is the price at which actual trades take place, decided on by real people with free will. The price is not set by government's hand or by an invisible hand. It is set by the actions of traders. Because it is objective, it reconciles your personal likes and dislikes with my personal likes and dislikes. Neither of us gets our way in everything, but both of us get what we want the most: what we are willing and able to afford.

The non-thinker lives by luck and guesses. The subjective thinker lives by wishing and guessing. Both have even more to gain than the rest of us from true information given by objective prices. People pay for their mental mistakes by having less prosperity. They cannot afford as much as others. Objective prices force them to decide what they need most and least. Real prices make the passive mind think, and the subjective mind look outside. Eventually, if all prices were real prices, mental mistakes would get corrected. The passive mind, in comparing prices, would be practicing the rudiments of thought. The subjective mind, in accepting prices, would be inching toward objectivity.

Unfortunately for passivity and subjectivity, few prices at present are objective. Interest rates are managed, which means they give us no information about what people expect, but only information about what a should committee wants people to expect. Cigarette prices are artificially high, while rents are artificially low. Hence the cigarette glut and the housing shortage. Various committees try to make sure that prices do not get "too high," or "too low," or "too uniform." That is, they try to fulfill subjective desires without messing things up too much. The vital information conveyed by prices is conveyed as through a glass, darkly.

In the circumstances, business analysis is mostly guesswork. Hence the regular spectacle of mergers falling apart, and the highest bankruptcy rate in history. It is a very dangerous time to be mentally passive, or mentally subjective. Prudent people will examine their thinking for these mistakes, and find out what to do about them.

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