Opinion Forum

Eating Your Seed Corn

October 27th, 2009

In today’s complex global economy, it can be easy to forget the root and the meaning of money. In fact, it can be so easy that there is an entire school of economics, Keynesianism, that is devoted to the theory that it is the consumer that drives the economy and spending money is the best way to produce wealth. This of course, is absolute bunk. Don’t believe me? Keep reading.

For the sake of illustration, let’s pretend that all money is corn, and that corn is the only thing that people can eat. There are still a lot of other things people need, such as clothing, shelter and medical care, but if you are going to get them, you have to pay in corn. Similarly, if you are going to eat, you have to eat corn. And if you want anything extra, such as a book, a piece of jewelry or a college education, you will have to pay in corn for that as well.

In an agrarian society, where corn comes from is very easy and simple to follow. Some people grow it full time, some people trade goods and services for it, and others do a little bit of both. But remember that all of these people have to eat every night, and they are going to be eating corn. All of that corn has to come from somewhere. So in order for the money supply to remain constant and to keep people from starving, everyone who grows corn has to make sure that they put aside a certain amount of corn … let’s call it the “basic level”… for the purpose of planting next year.

Now as long as the total amount of seed corn in the economy stays above the basic level, everyone is happy. However, if the stock total should ever fall below the basic level, then next year people are going to get hungry. Unfortunately, that doesn’t matter. Because no matter how hungry those people get, the producers of corn absolutely cannot, under pain of death, touch their seed corn in order to feed those hungry people. To do otherwise is to ensure that the amount of seed corn in the farmers’ possession will only fall further below the basic level, which means that less corn will be planted next year, which means that the famines will only get worse.

Now fast forward to a modern national economy run on corn. People have taken their savings in corn and either put them in grain silos, which keep your corn safe for a fee, or put them in planting banks, so that the corn they’re not using today can be planted, increased, and returned to them with interest. This corn is also used to fuel other types of producers, such as research scientists trying to find ways to get bigger yields and budding entrepreneurs trying to start their own planting businesses; ditto for all other types of researchers and entrepreneurs. On the consumer side, loans of corn are made so that people can purchase houses and cars, pay unexpected bills, put themselves through college, and if they’re really in a pinch, eat dinner. But the same adage still applies. If everyone in this society wants to eat tomorrow, they must make absolutely certain that they never allow the total amount of seed corn in the system to fall below the basic level, because to do otherwise is to condemn themselves to death by starvation.

Finally, let’s put these people in a recession. National corn levels are down and people are withdrawing their savings from the planting banks. Not the silos, of course; the silos are fine because they never did anything to their corn stocks except make sure the corn stayed edible. But the planting banks are in trouble. Their corn wasn’t being saved; it was being invested and planted, and now they don’t have enough on hand. Some of the planting banks fail. Some of the people whose corn savings were in the planting banks lose them. Other planting banks aren’t making as many loans, which means less investment in both planting and other fields. Jobs are lost. People go hungry. Everybody is worried.

Then a new politician arrives on the scene. He proclaims that the system is broken and must be fixed. He says that it is unconscionable that there are people going hungry when there is clearly so much corn saved up with the planting banks, the big farmers, and especially the silos. He says there must be a national silo/planting bank, to control corn flow and make sure the planting banks never fail to reimburse their depositors’ corn again. He says that people must spend their corn in order to strengthen the economy. He tells the people that they must share their corn with others, so that nobody goes hungry. A few people object. They point out that such policies will bring the total seed corn stored away below the basic level. “The basic level?” the politician replies. “How can you talk advanced economics when people are losing their jobs and their savings? How can you dare to hoard your corn when people are going hungry?”

Eventually the greedy corn hoarders are defeated and the grain silos cracked open by the great politician and the will of the people. For a while everything goes swimmingly. The nation had been very rich before the corn recession, with very high levels of seed corn stored away, so there is a lot of corn to go around. Everybody is very happy and the politician is hailed as a hero … until of course, the famines start ten years later.

In the end, money isn’t so different from corn. Nor is the corn economy described above really so different from ours. Recessions are supposed to be a warning to the free-market system that we are eating too much of our seed corn. The solution is to retrench, save our money, and reallocate resources to better producers of money than the people who had previously been using it. But Keynesian economics holds that the solution to a recession is to hand out stimulus packages in order to keep the bad businesses from going under, because they are “too big to fail.” It says you must spend money in order to keep the economy strong. Its advocates proclaim that it is your moral duty to deplete your savings in order to help the hungry and the jobless. And depending on how much wealth you and your nation have, it might even work for a while.

But as any free-market economist will tell you, that wealth, that seed corn, will eventually run out. And then the question is no longer if the famines will start, but when?

Articles written by Brianna Aubin
Tags: bailouts, corn, economy, free market, Keynesian, monetary policy, recession
Categories: Economics, Politics | Comments (8) | Home

8 Responses to “Eating Your Seed Corn”

Kevin | October 27th, 2009 at 3:16 pm

If the money supply were still based on the Gold standard, the earlier Sherman Silver Purchase act or some comparable commodity value system then your analogy might work. Corn, of course, can’t simultaneously have commodity value and have no commodity value (ie, be credit).

Anonymous | October 27th, 2009 at 4:20 pm

“Corn, of course, can’t simultaneously have commodity value and have no commodity value (ie, be credit).”

Really? Then how do you think credit worked in the 1920’s when we were still on the gold standard? Or between 1945 and 1971 when we were still kinda-sorta on the gold standard via the Bretton-Woods system.

Credit is based on the assumption that the value you are borrowing today will be paid for with future production. Money is paid by a third party to purchase an item, and you eventually pay back that third party with interest, ’cause if there’s no profit in loaning money, then why should I bother? That is the same in both a commodity and a fiat system. The only difference between a commodity and a fiat system is that a fiat system gives the government a lot more room to screw around with the money supply (which I might add, has worked out oh-so-well for our economy so far).

Brianna | October 27th, 2009 at 4:22 pm

That was me, sorry.

Tom | October 27th, 2009 at 7:43 pm

Well, I’m still digesting the article (couldn’t resist the pun), and I’m not sure I see how the analogy works if money isn’t based on some commodity standard (like gold, or maybe corn).

Brian | October 27th, 2009 at 8:01 pm

Tom, that’s kind of putting the cart before the horse. Our money was not “based” on a commodity standard, the commodity and the paper that represented that commodity were legally and in practice the same thing. While it is true that even back then there was more money on deposit than gold to back it, fractional reserve systems, without being fiat, have been in existence since the days of the Templar Knights, and perhaps even before that. And they all worked reasonably well.

You can only have fluctuations in gold prices (not gold value, only its price) when gold is no longer used as money. How would you have a fluctuation in the value of gold against gold? Similarly, when the value and quantity of paper currency is fixed, by law, to a certain quantity of gold, the value of neither the gold nor its paper EQUIVALENT can change relative to each other, for they are, legally and practically speaking, the same thing.

Brianna | October 27th, 2009 at 8:30 pm

“Well, I’m still digesting the article (couldn’t resist the pun), and I’m not sure I see how the analogy works if money isn’t based on some commodity standard (like gold, or maybe corn).”

Tom, the point of my article is this: money (no matter what it’s form) stands for wealth, and wealth can be used for one of two things. Either you can consume it, or you can invest it to produce more wealth. As your infrastructure grows, so does both your net output of wealth and the amount of wealth needed to keep it going. In order to stay level, a certain amount of that wealth *must* be used each year to maintain the infrastructure that created it. In order to stay alive a certain amount of wealth *must* be consumed (in my story, literally; in real life, by exchanging symbolic pieces of paper for food). The rest you can either consume or invest, and most societies usually choose to do a bit of both. A recession can be caused by either a natural disaster which wipes out crops or infrastructure, by a literal loss of commodity money (such as when a ship of gold sank in 1857, which helped to precipitate the crash of that year), or both. It can also be caused by bad government policy, like when the Fed kept interest rates artificially low in the 20’s, thus facilitating over investment and bad investment which precipitated the crash of 1929 (that can happen in a free market too, btw, but it corrects itself more easily when it does). But any way you cut it, a recession means that some wealth has been lost and that in order to preserve our infrastructure, we must save more wealth than usual and be very careful about how we allocate the wealth we do spend. We should not, no matter what emotional appeals are made, spend that wealth in consumption because the lower we drive our net wealth, the less wealth we will have available for investment, and the harder this recession will be to get out of.

All money is based on the fact that there is a value (food, a house, a factory) in the market to back it up with. Even gold wouldn’t work in the middle of an empty plain; fiat money only works because people trust it to work as well as the real thing. This is its downfall, because inevitably politicians will always use the fiat money system to pretend wealth that doesn’t exist, and you can only cheat reality for so long before the world catches on and erupts into chaos.

If you look back into history you will see that the way governments have always paid for wars and spending programs by devaluing the money supply. We did it in the Civil War, we did it when we created the Fed and the fractional reserve system and it caused the Depression, we did it again *during* the Depression when Roosevelt confiscated the nation’s gold, we did it again when we abolished Bretton-Woods so we could inflate the money supply to pay for Vietnam and LBJ’s “Great Society”, and we’re doing it now in an attempt to cover our butts with the national debt from Iraq, Afghanistan, the housing insanity, the stimulus package, the bailouts, etc. Having a fiat money supply is like telling the people in my allegory that they should attempt to replace their corn with sawdust, and eat that instead. It might fill their stomachs for a while, but it won’t work forever.

Harvey | October 27th, 2009 at 11:05 pm

Brianna,

That was a brilliant analogy!

(Your last post reminds me of telling a joke and then having to explain the joke to those who didn’t understand it — it kind of spoils the joke!)