Insulting your intelligence again, let me share my latest textbook perplexity. In chapter two (of Krugman, Wells and Graddy’s ‘Economics: European Edition’) I was introduced to ‘the circular-flow diagram’ of the movement of money, goods and services in the economy. [Sorry about the appallingly ugly images, the result of a hasty google search. I can't seem to access the images on Krugman et al's web page.]
Worth noting here, perhaps, the basic institutional divisions. Polanyi would tell us that the market for goods and services is a real market, and that factor markets are in some sense ‘fictional’. I’m not sure I altogether agree with that; but let’s focus on the division between firms and households. One of my longstanding questions is something along the lines of: why does economic liberalism so often ally itself with social illiberalism – why, when we talk of the ‘right’, do we refer both to free market dogmatists and to homophobes, misogynists and racists? I’m no closer to answering that question (or understanding why it’s ill-posed…) but it is perhaps worth noting that the ‘household’ is an institution as important in the creation of this diagram as the ‘firm’.
Be that as it may, there’s a double-movement in this diagram: of money, circulating in one direction, and goods, services and factors, circulating in the other. One of my biggest perplexities, when studying (pre-elementary) economics, is the relation between the ‘real’ and the ‘money’ economies. This perplexity is only heightened when I reach a more sophisticated version of the ‘circular flow’ diagram, in chapter 24.
The issue is basically this: what do we mean by the creation of value? I find all this incredibly hard to think through, but let me start with the problem that money is at one and the same time a representation of value and value itself. We could find countless locations of the production of subtly different kinds of ‘value’ in this diagram. For instance: isn’t the household – the family unit – considered, at least in certain dominant ways of thinking (which I by no means want to renounce, but…) the locus of the most important values? Consider, if you want to, that ‘labour’ means not only the work purchased by a capitalist employer, but also the ‘work’ of childbirth. (Some connections here, no doubt, with the previous post on Nabokov…) If we think that life is what we value more than anything else – and, above all, the lives of our loved ones – then the family is the locus of the creation and nurturing of this value.
I think it’s fairly grotesque to write like this: the assimilation of important things to the language of economics, and their misrepresentation in so doing. But I also think…
(The production of commodities by means of commodities. Where commodities = us.)
My specific bafflement, today, is focused on this sentence of my textbook. “By our basic rule of accounting, which says that flows out of any box are equal to flows into the box, the flow of funds out of the markets for goods and services to firms is equal to the total flow of funds into the markets for goods and services from other sectors.” (p. 585). In fact, my bafflement is focused on the first half of the sentence: “By our basic rule of accounting, which says that flows out of any box are equal to flows into the box…”
Surely this ‘basic rule of accounting’ has to be complete nonsense. Our ‘circular flow diagram’ illustrates a closed system. If the flows out of any box in the diagram are equal to the flows into this box (assuming each arrow in the diagram depicts an unchanging quantity [and, I guess, velocity?] of funds) then the amount of ‘funds’ in the system is a constant. This is an economy involving no production (or loss of value). What nonsense.
(I’ve been corrected on this blog before (in a friendly and helpful way :) ), when I’ve complained about elementary textbooks in this way – so I should say that, yes, I know that Krugman, Wells and Graddy don’t actually hold the stupid opinions that their teacher-personas ask us to take seriously. I know they’re being simplistic in the interests of pedagogy. But the bottom line is: don’t lie. If you’re trying to teach a subject, don’t lie. I mean – this lie is completely transparent. It isn’t fooling anyone. Why lie like this? Why treat your readers or students as if you think they’re worse than idiots? One of the strangest and most sinister features of all the education I’ve been subjected to: you progress by demonstrating your willingness to accept falsehoods. Let’s have no more of that, please.)
Plainly, the amount of ‘value’ in the economy can increase and decrease. But we can, provisionally, going along with the unacceptable formulations of vulgar economics, distinguish between two types of ‘value’: real value and monetary value. This isn’t a distinction between the value of money as adjusted for inflation, and the value of money on its own terms. It’s the distinction between the two movements of circular flow: the movement of the ‘real’ economy (goods and services) and the movement of the ‘money’ economy (money).
If the general value in an economy, let’s say, increases, then there are two forms of ‘production’ here. [We are bracketing off the many different alternative understandings of value – focusing only on the value of commodities/services and the value of money, as economists ask us to]. On the one hand: real production. The production of cars, say. On the other hand: monetary production. The production of money, in the financial sector.
In the circular-flow diagram Krugman, Wells and Graddy have chosen to illustrate their textbook, you have [going along with vulgar economics and bracketing out perhaps more pressing and important understandings of the meaning of ‘value’] two locations of the production of value.
1) The firm
2) The financial sector.
The amount of ‘value’ in the economy can increase in two ways.
1) The production of valuable goods (/services)
2) The production of money.
What’s fascinating and deeply weird is that these two different forms of the production of value are both almost entirely distinct and completely inseparable. Economic, capitalist value is created by the relation between money and commodities. If you didn’t have a money economy, you wouldn’t have value in the capitalist sense – the economists’ sense – at all. Value as economists understand it can’t be applied to goods in themselves, independent of the mediation of the money economy. But money in itself has no value independent of its relation of representation to ‘real’ value.
The current financial crisis is, obviously enough, an example of the production of money running far ahead of the production of commodities – to the point at which the ‘value’ of that money became unsustainable, it was so distant from the ‘real’ value that must (ultimately, in some sense) anchor all ‘monetary’ value. A crisis of overproduction is, perhaps, the opposite. [Though I need to do more reading...] So it can be tempting to say: well, ‘money’ value and ‘real’ value must, in some way, eventually, coincide (in the long run). While this reaction is, no doubt, appropriate enough, I think it can easily underestimate the sheer weirdness of the relation between the ‘money’ and the ‘real’ economies.
I, too, find the analogy I’m about to use both pretentious and (more to the point) stupid; but I’m going to use it anyway. If our economy exhibits a ‘circular flow’, this flow isn’t a double-movement in which two separate forms of value travel in opposite directions. It more closely resembles a Moebius strip, in which a single form of value is transformed, by its movement, into its opposite. (And that analogy needs to be immediately abolished, in favour of a less stupid, more helpful formulation.)
Obviously enough, I’m just trying things out for size here. One day, I promise, I’ll know what I’m talking about.