Created Tuesday 27 March 2018
The Actual Concept - Money Curve (Mind) – Laws of Economics
Economics is usually defined as the social science that studies economic activity, measured in money, to gain an understanding of the processes that govern the production, distribution and consumption of goods and services in an economy. But money is a “map of value” and not value itself. Money is therefore a concept or a creation of the mind. And concepts lend themselves to the formation of all kinds of laws, like time-value of money and compounding interest, which we create in our minds and therefore may not be achievable in real terms. These economic concepts intrinsically imply and demand perpetual exponential growth which is impossible and dangerous.
At some point in the history of Civilization, man came up with the Concept of money, making it a symbolic token to represent the value of goods and services, facilitating trade. This apparently innocuous creation of the mind inadvertently spawned a chain of Concepts that defined how money must behave.
So let us trace the evolution of these Concepts.
Concept 1: Money is a TRUE representation of value of a good or service.
Reason: Maybe… maybe not. But it certainly makes trade easier so we accepted this rule.
Concept 2: Money must GROW with time by a factor of P%.
Reason: This concept again did not intrinsically originate out of greed, but out of a natural desire to be productive. For instance, a hard-working person sees a lazy person doing nothing with his money. So he tells the lazy person: “If you don’t do something productive with your money then I can”. Quickly and naturally, the idea of enterprising people taking a loan from lazy people, then producing goods or services (usually through hard work) and then earning profits, became common place. The lazy person was happy to be an onlooker to his money earning a component of the profit called interest. The mutual benefit of lender and borrower facilitated this rule to be embodied and useful goods to be made.
In time, this consolidated into the non-negotiable law of the Time-Value of Money.
So Money MUST grow. The Growth is linear. It goes up in a straight line.
Concept 3: Growth of money must COMPOUND and grow faster and faster with time.
Reason: This is the tricky one! This was nothing but a recursion of Concept 2. The logical mind could not have avoided this application of a concept to a concept. Add the earned interest to the capital. Earn interest on the interest. Ad infinitum! Compounding makes money increase exponentially. Faster and faster with each step.
So naturally, the compounding of money was applauded as an inherent beauty of Concepts
Getting rich is one thing. But getting richer, faster by the minute, every minute, is magic. That is how the Linear Growth embodied in Concept 2 became Exponential – accelerating with each step.
Concept 4: Compounding growth must be PERPETUAL – go on forever and ever and ever.
Reason: Well, why not? Such an elegantly profitable concept MUST always hold true.
And so, the bold and audacious Money Curve was defined as an Exponential.
Now you know why we selected the Exponential Curve as the Concept Curve.
By definition, money starts growing slowly, yet increases its speed by turning its nose closer to the vertical with each step.
Faster and faster is the climb. Sky-bound. Without limits. Forever. Or so the idea goes.
That is why I illustrated the same through a Runner and his Coach. The Coach had a similar exponential scheme. You will see as we go along, there is a lot in common between the Coach-Runner analogy and the reality of our economic model.
Money must follow Perpetual Exponential Quantitative Growth. I call it PEQG for short.
Most people simply call it Growth but that is as misleading as calling a nuclear bomb a large firecracker.
PEQG is a monster, overruling all other laws.
That monster, cleverly wrapped in layers of concepts, happens to be the founding principle of Modern Economics. And Modern Economics, my dear readers, is the very bedrock of the belief of Modern Industrial Civilization.
Why do we love this monster called PEQG?
Just like the runner was lured by a crazy concept with dreams of achieving unbelievable speeds, so also are we drawn by the obsession for limitless growth in our economic model. Because it is not just growth we are talking about. It is Perpetual Exponential Quantitative Growth (PEQG). And this monster promises to make you unbelievably rich… very often without doing anything.
Let us say you put Rs. 10 lakhs in a fixed deposit that gives 7% compound interest and then just wait. It doubles in 10 years. So at the end of a decade you have 20 lakhs.
And then, in another decade the 20 lakhs doubles to become 40 lakhs. And so on. In just 10 decades, a century later, your capital of 10 lakhs becomes more than 100 crores!
That is 1024 times the original capital in 100 years! Now who would not want that?
The more we produce, the more we use.
And one of the prime components to perpetuate growth in an Industrial World is Energy.
Take a look at the graph below that shows the direct correlation between money growth and energy consumption over the last 150 years. So if money has to grow 1024 times then we also use 1024 times the energy, which is mainly fossil fuels: Coal, Oil and Natural Gas.
And where do the inputs that drive this Money Concept come from?
They come from the BODY. The body of the Earth.
And can the body of the Earth give us all this in the exponential quantities that we demand? Forever?
To examine that, it is time to move back to the Reality Curve.
It is time for us now to shift our examination to the principles of Energy called Energetics.
Next: Energy and Energetics.