145 lines
7.6 KiB
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145 lines
7.6 KiB
Standard ML
From nol.net!news.sprintlink.net!howland.reston.ans.net!agate!news.ucdavis.edu!csus.edu!netcom.com!atanu Tue May 16 01:33:55 1995
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Newsgroups: alt.buddha.short.fat.guy
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Path: nol.net!news.sprintlink.net!howland.reston.ans.net!agate!news.ucdavis.edu!csus.edu!netcom.com!atanu
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From: atanu@netcom.com (Atanu Dey)
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Subject: A puzzle. Who paid for the Englishman's Vacation?
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Message-ID: <atanuD8J4II.2yG@netcom.com>
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Organization: the Center of the Known Universe
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X-Newsreader: TIN [version 1.2 PL1]
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Date: Sat, 13 May 1995 18:25:30 GMT
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Lines: 131
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Sender: atanu@netcom16.netcom.com
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I found this on sci.econ and liked the viewpoint of the
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author. I asked for his permission to cross-post it to my
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favorite group. I hope you like it too.
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Cheers,
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Atanu
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----------------------------------------------
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[ Article crossposted from sci.econ ]
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[ Author was Gustave Rabson ]
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[ Posted on Thu, 11 May 1995 15:04:02 GMT ]
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I have a puzzle for you. According to Maurice Levi in his book
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"Economics Deciphered" it was a Ph.D. exam question in economics at
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the University of Chicago. I guess I would never have gotten my
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Ph.D. in Economics from the University of Chicago because I think
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their answer is wrong. But more of that later. First let me present the
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question.
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I will use Maurice Levi's wording verbatim:
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"There once was an upright and very proper Englishman who
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regularly took his summer vacation on a tiny, agreeable, Aegean
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island. The Englishman had returned to the island so many times that
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his credit worthiness had been established beyond any possible
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doubt. There was absolutely no chance that this Englishman's bank
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would fail to honor his checks and, indeed, all of them had always
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been honored promptly.
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"Since the Englishman's credit was so sound, the islanders were
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totally happy to allow him to pay by check, with the certain
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knowledge that they were good checks. Indeed, so well known and
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trusted was the Englishman on this tiny island that the islanders
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were happy to accept the Englishman's checks from each other. For
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example, if the restaurateur wished to pay the grocer partly with a
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check he had received in payment for a meal, the grocer was happy
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to accept the check. The grocer was then able to buy gas with the
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check, and the Englishman's checks circulated in this way around the
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island. Indeed, the checks were never returned to the Englishman's
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London bank for collection.
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"Who paid for the Englishman's holiday?"
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Well, who did? Here is Maurice Levi's answer:
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"Clearly, the Englishman did not pay, since the checks were
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never returned to London. Then it was obviously the islanders, but
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which one of them? Because there is no last person to hold the
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checks - since everyone can spend the checks and everyone will
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accept them - it is not the last people holding the checks. O.K., then,
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who?
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"The answer is that all the islanders paid, and not just the ones
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who sold things to the Englishman. They all paid because their
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willingness to accept the Englishman's checks had put the Englishman
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in the position of being able to "print" money. He had become like the
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central bank in every country, which can print money that people
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are willing to hold. (Indeed, they must hold central bank money
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since it is legal tender. It is against the law not to accept it.) By
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"printing" money, the Englishman had raised the tiny island's money
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supply. And as we know from the quantity theory of money, if we
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print more money, we raise prices. How, then, had the islanders paid
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for the holiday? They paid by being left with reduced buying power
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because of the higher prices. They paid through the inflation brought
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about by the circulation of the checks.
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"The goods and services consumed by the Englishman with his
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newly created 'money' - **given an unchanged output of goods and
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services on the island** [emphasis mine, G.R.] - leaves fewer goods and
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services for the islanders to enjoy."
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My Comment:
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Well - it sounds reasonable. The Englishman increased inflation
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on the island and that was essentially a tax that everybody paid.
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But wait. What if the "output of goods and services on the island"
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increased because of the influx of capital. What if the waiter who
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served the Englishman his kippers every morning used the checks he
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got from the Englishman to complete the down payment on a new
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ceramics factory he had dreamed about opening. Suppose the general
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wealth (in goods and services) of the islanders increased because the
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Englishman's "money" made investments possible that were not
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possible before. Then inflation would have hurt nobody. Who paid in
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that case?
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In fact, is that so different from what happens when an
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American entrepreneur borrows $60,000 to modernize his factory.
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The bank loans him the money, that is they add $60,000 to his
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account. But who paid for that $60,000? Well, the Federal Reserve
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System requires that the bank have $10,000 in reserve, but where
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does the extra $50,000 come from? [See Secrets of the Temple by
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William Greider, pp.59 - 61.] And who pays the banker's salary? The
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bank can create money because people trust it. Just like the
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Englishman on his beloved Aegean island.
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On the other hand, suppose the Englishman (by the way, no
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racial slurs are intended, some of my best friends are English) had
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paid with pound notes, instead of personal checks. Then everybody
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would say that HE clearly paid. But the islanders would circulate the
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pound notes among themselves, just like his checks. And if the notes
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never left the island the situation with respect to them would have
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been exactly the same as it was with the checks. Would you say that,
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in this case, the Englishman's holiday was paid for twice? Once by the
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Englishman himself and once by the islanders?
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So what's the answer? The answer is that the question is
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wrong. The crowd that calls itself conservative
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has been trying to convince us that everything must
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be paid for. That, in any interaction somebody wins and somebody
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loses. If something good happens then something bad has to happen
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in order to balance the books. Somebody must pay. They seem to
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believe this although it is plain to everybody who cares to look that
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the air is free, the sunrise is free, the rain is free. Good friends are
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free. Love is free. Water used to be free. Wild berries are free. Who
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pays the wood thrush for his concert?
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Who pays for the wonderful gifts of our forbears? Language,
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literature, art, music, mathematics, the wheel, the idea of money,
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science, central heating, plumbing, the idea of machines - all that.
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We accept it all and exploit it, yet nobody pays.
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It is the task of economists to trace and explain the flow of
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goods and money. To do this they must deal with the fact that
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sometimes goods and money are created out of nothing more than
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trust, sometimes not even that - and sometimes they are destroyed.
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But the question "who pays" is a religious question not an economic
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one. I believe this is always the case. I believe that asking who is
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going to pay for health care, welfare, education, etc. makes no more
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sense than asking "who pays for our delight when we spend an
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evening with our friends?" Or "who paid for the Englishman's
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vacation?"
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I believe that there is such a thing as a free lunch. Indeed we
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are all guests, every moment of our lives, at a sumptuous free feast.
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We can contribute to it, if we wish, and make it even more
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sumptuous for everybody. All it takes is a certain amount of respect
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for our fellow guests at the banquet table.
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--
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Show me a business that is not in debt
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and I will show you a business headed for bankruptcy.
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Gus
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