From: Foundation for Economic Growth

eMails To The Editor
To The Listener
By Phil Scott
Oct 11, 2007, 15:04

Dear Pamela,

In the “Economy” section of your magazine (Sept 22nd), Brian Easton says, “Economists have long struggled with the conundrum of the meaning of price.” And talks about his “circular theory”.

Price is the amount of money paid by a willing buyer to a willing seller. Most people think of this as the market price. When you sell your house on the open market the price of your house is the amount of money you get for it. Very simple.

Money is the medium of exchange used for financial transactions between people. It has been measured in gold and sometimes silver over the millennia since trading started, but since 1971 when America went off the gold standard our paper money has just been taken on trust as being worth what the government says it is worth.

Unfortunately governments around the world have discovered that they can produce as much money as they wish and the costs seem to be zero. Certainly the political benefits are great as they can print money and spend it to get elected and after that they can blame the resulting inflation on other things. (Our government is currently holding an enquiry into what causes inflation. As if they didn’t understand this simple relationship.)

The unfortunate consequence of printing money (and issuing credit) is that this extra money lowers the average price of money. (Increase the supply of anything and the price of it drops.) So your house of constant value needs more paper money to buy it.

Easton’s conundrum is solved. The value of money is decreasing. The price of things measured in this devaluing currency will therefore rise. We do not have a steady value of money. This makes measuring things in terms of paper money very difficult. If you look at what is happening in Zimbabwe you will see the extreme case of printing too much paper money.

It is not that the value of our houses have doubled since 1999 but that the value of the paper money we use has halved.

Yours sincerely,

Phil Scott

Foundation for Economic Growth Incorporated

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