A brief history of Money

Money has its origins lost in the immense stretches of time. Its invention is almost as legendary and fabled as the inventions of fire and the wheel. No less were its impacts on the economic life of people, than of fire on the scientific life of people. Money opened doors that have never closed, and gave us wings to fly. Whether we flew too close to the sun or not, is a question for another time. The legend of money rests in its ability to organize and structure the productive activities of society. Without money, we would have never been able to procure more than a few goods and services that we are able to procure today. The concept of money is as old as the mountains and the trees, and probably more important to our everyday lives. So where did it all begin?

Chocolaty Commodity Money

Barter

A good guess would place the arrival of the first form of money, when a certain object or animal finds itself very central to the society’s culture. This type of money is called ‘Commodity Money’. Similar to how the cocoa bean was to the Aztec and the African bull was to the Africans. Before the advent of money, the society survives by complex network of barter.

“I give you what you want, you give her what she wants, and she gives him what he wants so that he gives me what I want”

Cocoa bean was abundant and important to the Aztec. It had great use for the family too. Its first use might have arisen with the need to balance the value of barter. When one party feels the barter is unfair, cocoa beans could be added to the barter to make the trade fair. It’s similar to adjusting weights so that a beam balance is at rest. Proceeding from this use of cocoa, society might have had to evaluate every commodity available in terms of cocoa so that the balance may be achieved. This is the way commodity money becomes a measure of value.  Soon, commodity money may be used to completely balance the trade. This is the moment when the use of cocoa completely replaces barter, and cocoa beans become money. Similarly, cows and other religious or important animals would slowly take the place of barter and be used as money. Any commodity that was available and of special importance to all members of society, could be used as money.

Cowrie Shells

Cocoa Beans

Commodity money had two major problems. One, often commodity money was irregular; cocoa beans were not identical in shape and form. This lead to disputes in trade and money had to be weighted each and every time a trade took place to verify. Two, commodity money is not very durable. Cows and bulls die in a few years, and cocoa beans turned bad in a few months. The Lydian Kingdom found the solution to these two problems in 640 BC.

Constrained Coin Money

The Lydians were the first to mint coin money using a combination of gold and silver. A official stamp would be placed on the coin to ensure weight, value and authenticity to all people of the society. This enabled people to trade and carry out commercial activities very easily. It was no surprise that the Lydians were very rich and commercially successful. Although the Lydians did not survive long, their methods of coinage were adopted by the Roman Empire. 

Coin money although is more useful than commodity money, it has a few drawbacks. Coin money is heavy and hence difficult to transport. It could be stolen easily on highways and counterfeited. Coins could get irregular and worn out. The solution to this came much later in the 1300’s when banks became popular.

Copper Coins

Painless Paper Money

Banks have a simple job, they borrow money from the people who save and lend to those who want to spend. After a saver put his money in the bank, he would get a deposit receipt. Soon people began to trade deposit receipts, instead of coins themselves. It was easier and safer to transfer pieces of paper instead of heavy bags of coins. Receipts could be replaced easily too if the parchment wore out. Once people had found this simple method of saving themselves the trouble of going to a bank every time they wanted to purchase something expensive, nobody used coins anymore. Paper money is just pieces of worthless paper that represents the ownership of gold and silver coins kept safely in some bank far away. It is important to note that paper money had value if there was some gold kept safely in the bank. If the gold was lost then paper money had no value. The world followed this method of using worthless pieces of paper back with gold till the 1930’s.

Early Bank Note

Fraudulent Fiat Money

The western countries faced the great depression, which forced their governments to print more and more of paper money, which was not backed with gold. It was an easy way of having more purchasing power, in return for nothing. Soon the world had too much paper money representing too less gold. Finally, most governments decided to make paper money into fiat money. Fiat money is not backed by gold, but on the promise that the current government will prevail. Fiat is Latin for –“Let it be done”, and its value only lasts as long as the government. It cannot be returned for gold or silver equivalents. Most governments of today employ fiat money. However fiat money also has a major problem. Fiat money’s value usually seems to fall, as the government creates more and more of it. The more the money in the hands of the people the higher the resulting prices. Often in places like post-war Germany or present-day Zimbabwe, fiat money loses its value so fast that people must deal in hundreds and thousands of notes for day-to-day transactions. Imagine if the cost of coffee rose by 10,000 units in just a few days! When larger and larger piles of notes are needed, fiat money is not very useful. 

Currencies of the World

Dashing Digital Money

A Credit Card

The problem of all physical money like commodity money, coin money, paper money and fiat money was solved by the dawn of digital money. The era began in the 1960’s when banks began to transfer money electronically. Banks were searching for methods to simplify the huge workload involved in mue form of digital money began with the development of powerful computers that would readily calculate, process, manage and store thousands of electronic records. Digital money is stored in the memory chips in computers and transferred via electronic pulses over cable and air. Money is sent across continents and oceans with the press of a button. Most of all large transactions are done via digital money and not fiat money. Its easier and simpler to pay with a flash of a card. The VISA and MASTERCARD are accepted globally, and are great relief to the daily traveller.

Dangerous Debt Money

It is a startling fact that most digital money is now mostly debt. This means that you could donate 1000 Rs to me for writing this blog so well, even if you didn’t have that in your bank account. I receive the thousand even if you do not have that much with you at that moment. The transaction only means that you will give me 1000 Rs in the future. The surprising fact about this debt is that I can still use it to purchase anything. This second transaction implies that I have passed the ownership of my money to someone else, and now you owe this someone else the 1000 Rs. And so on and so forth the circulation proceeds. Although it is widely used, some experts believe that using debt as money, is not very good in the long run.

Old money, New money

Although the largest part of all transactions is done by digital money, all others forms of money are still used in some areas of the world. Gold and silver coins are still used in certain areas of the world. Fiat money also survives mostly for the poor people who need small quantities of money everyday. Even commodity money does exist in isolated tribal areas. This peaceful coexistence of the various forms of money tells us that our needs and wishes have changed over time and money changes to be able to address that need.

Money is a promise that can mean everything or nothing…

Money has connected us in ways we do even yet understand. Right from the beginning it has brought our society together by providing a way for each individual to be useful to the other. There would be no way a carpenter and a comedian could be useful to each other unless the poor carpenter really valued a good laugh. Shortly after people found use for one another, society was truly able to help itself produce more and consume more. Money allowed us to fully utilize goodwill and trust in the form of credit and loans. People could help each other even without having a single thing to do with the other person's life. We rely on money so much that we barely notice. Money is just a promise that society keeps with us. We all believe in this promise hence it exists. If people lose faith in money, it has lesser value. Money can be everything- food, shelter, education and prosperity or it can be nothing but an empty promise.

Money is for everyone!
Economics is for everyone! 

Money is why

Green GDP: The Way Forward

The Environment and Economics

Most people would assume that good economic theories never take the environment into consideration. After all, aren't economic models all about output, capital or growth? 

Wasn't Economics just about the economic man, and not about trees or birds? 

Not one bit. Good economic policies have always been ecologically conscious. Every forward looking idea must be sustainable. By sustainable we mean that it must put forward a manner of using resources that leaves enough for future generations. Good policies must last longer than men & women themselves. We cannot continue cutting down trees for more area for cultivation. We also cannot continue to pollute rivers and oceans just because we cannot manage the industrial waste. These trends have to go someday, because they are unsustainable. Good economic policies must think about the environment and not just about the people they are affecting. Environmental Economics is the branch of economics that deals with all these issues. It tries to understand the costs and benefits of environmental laws.

Natural Capital

What Nature provides us is called Natural Capital. Natural Capital includes all the parts of our surroundings that can give us returns in the future. For example, lakes can provide fishing grounds for hundreds of years. Trees can provide food and habitat. Plants can cool homes and prevent the soil from eroding away. A large population of snakes keeps rats from multiplying. All these are Natural Capital.

Natural Capital can also cleanse the environment to make it cleaner. Trees remove carbon-dioxide from the air and supply oxygen. The branches and leaves on the trees catch dust and flying particles, they leave the air cleaner. Vultures eat dead decaying animals and worms consume rotton fruits. Bacteria can break down almost all types of organic matter. These creatures help clean up the environment.

 Natural Capital unlike Physical Capital is not always renewable. It takes thousands of years for trees to become fossil fuel. Most components of our eco-system work together, hence the value of Natural Capital is only evident in the larger picture. Ecological Economics is the branch of economics that considers the economy as a small part of the environment and emphasises the role of natural capital.

The GDP is all wrong!!!

Physical Capital like machinery, houses and transportation vehicles lose value year by year due to wear and tear. Economist's call this Depreciation. The Traditional GDP does consider this wear-and-tear loss. But what about the wear and tear of aquifers, watersheds and forests?  What about the degradation of ponds and lakes? The Traditional GDP cannot account for this depriciation because it does not consider Natural Capital at all!!!



Recently Beijing was in the news for emitting a lot of excess pollution. Now rising pollution would lead to failing health. Failing health would lead to a rise in the incomes of hospitals and the Chinese pharmaceutical industry. Hence the Traditional GDP would assume that hospitals are contributing more to the Chinese national income. However, as we can notice- the rise in expenditure on medicine was caused due to a rise in pollution. Thus this 'increase in medical expenditure' should be considered under 'damage to environment'. This rearrangement would not be necessary in the Green GDP.  


Sustainable Development Indicators are those macro-variables that tell us whether a particular venture is equally helpful for both current and future generations. The Green GDP can be considered one of the most important indicator of sustainable development. The Traditional GDP is hardly even relavent for sustainability. It overlooks the unsustainable methods of production and does not account for the loss of productivity in the future. Cutting the entire forest down to make furniture would result in a high rise in the Traditional GDP but it also prevents future generations from enjoying the benefits of the forest.

The GDP is very much used in political debates and discussions. Focusing on the Traditional GDP diverts the energies of policy makers and general public in a direction that does not necessarily go in line with the environment. Politicians aim for high Traditional GDP growth which is not necessarily a beneficial thing.

What is the Green GDP? 

The Green GDP is a part the SEEA (System of Environmental & Economic Accounts). The SEEA provides us with a lot of information and although it is a very recent development (1993) it tells us a lot about our interaction with the environment. It tells us the quantity of pollution that was emitted last year. The amount of energy, water and fuel that the country uses is also measured in the SEEA. The SEEA also includes the cost of environment deterioration in money terms. Out of many indicators, the Green GDP is the value of all production activity deducting the cost of environment damage. It presents a truer picture of our production, income and expenditure. It tells us if our total wealth is increasing or decreasing.

The Green GDP is instrumental in directing the focus of our policymakers and economists towards a greener ideology. The Green GDP is the actual amount of output that our private and public sector create. If we are trying to raise the production of goods and services at the cost of polluting rivers and cutting down trees, then the Green GDP will be low. On the other hand, if we use newer & cleaner technologies to raise the production of goods and services and at the same time manage our waste; the Green GDP will be high. The Green GDP is the future of the GDP, and it is surprising that it has taken so long to be recognised. Only in 2012 was the SEEA made an international standard by the UN, which means it has a similar status as the traditional GDP. 

A future made sustainable 

Although the future rests on many developments yet to come, the Green GDP is the logical next step. The countries of Germany, Norway and Sweden all try to account for environmental degradation. Soon they will be able to provide us with their Green GDP measures. Once public policy follows public sustainability the future becomes largely secure. At present, it is far from secure. We have many issues to tackle- war, famine, hunger- and the Green GDP is definitely a way forward. It could change the way we perceive our everyday lives! Individuals like you and me, might be able to understand the true cost of our actions and their repercussions on nature. We might be able to follow a lifestyle that goes hand in hand with nature's resources. 

Paul Erlich -

"We must acquire a lifestyle which has as its goal maximum freedom and happiness for the individual, not a maximum Gross Domestic Product"

Confucius -

"The future generation is the most important thing"

Terri Swearingen -

"We are living on this planet as if we had another one to go to"

Consumption : Food for Thought

What is Consumption? 

What did you eat today?

Which movie did you watch last week?

How many bus tickets did you purchase last month?

How much electricity did you use last year?

All these questions are common to us. We live in a world where we continuously ‘use’ things. We eat food, watch movies, travel buying bus tickets and consume electricity. Economists call this Consumption. Consumption is the act of utilization of things. Before we can understand consumption we must understand what are these ‘things’. The formal term for these ‘things’ in economics is goods and services.

Goods are objects or items such as cars, chocolates, footballs, pens, books, clothes and everything that you see in your room right now. Services are provided to us by other people. Doctors tell us how to be healthy, lawyers defend us in court, night guards protect our homes and so on and so forth. Other people perform acts for us; people ‘serve’ us in that sense. Goods and services never come free as we have to pay for them. They are scarce or limited and hence, we must lose money to gain them. Consumption is also the outflow of money for these goods and services.

This is Consumption.

Consumption is thus the way individuals like you and me use these goods and services. We ‘consume’ the scarce goods and services in order to live a happy life. If we do not consume we will neither survive nor thrive. Consumption is extremely important for all of us; we do it every moment of the day. We must also remember to note the element of time. If we increase the time frame to a year from a month, we will find that we have consumed more. The importance of Consumption becomes visible when we understand the concept of Income.

Income is the inflow of money that every person gets for the work he or she does. Laborers and factory workers are paid daily, and that payment is called wages. Cooks and Economists, being better off, are paid monthly and that payment is called salary. Both salaries and wages are types of Income. What is important here is the element of time that is involved. A laborer is paid by the day while an economist is paid by the month. However, both of them get money over a period of time. Income is the inflow of money over time.

Incomes are used in two ways. One part  is used for consumption or the usage of goods and services from the economy. The other part is saved. That is how economists’ have explained Saving. Saving is the leftover part of the income that people keep for later use. This division of income into consumption and saving  is  a fundamental fact of our lives. If Consumption is the part of the pie that you have eaten then Saving is the part of the pie that is left.

Income = Consumption Expenditure + Savings

The Consumption Function

Apart from separating income into consumption and saving, economists have tried to find deeper relationships between the three. As you can see from your own life also, different people with different levels of income have different expenditure for consumption. Across generations, as incomes’ change for a family, the pattern of consumption also changes. Apart from the simple separation of consumption expenditure and saving that we read earlier, there exists another direct relationship between consumption and income. Consumption function is a mathematical formula to obtain the level of consumption given a level of income. Economists tinker with numbers to fit the consumption function for different countries and groups that are being studied. J.M. Keynes, the famous American economist, emphasized this relationship.

For instance imagine a small country where all the consumption expenditure is only for carrots. Bugs Bunny is a resident of this country and earns 10 units of currency every month. He also spends a certain amount on carrots while the rest is saved for later. If the consumption function for Bugs Bunny looks thus:

Consumption Expenditure =  2  +  ½  x  Income

Then we can simply input Bugs Bunny’s income in the formula and find out that he spends 7 units of currency on Consumption (carrots). We also can see that he will save the rest i.e. 3 units of currency. The most important feature of this formula is that it will tell us how much Bugs Bunny will consume if he gets richer (higher income) or if he gets poorer (lower income). We can easily input the value of income in the formula and obtain the value for consumption.

Similarly, the way we use this formula for one particular person (Bugs Bunny), we can also  use it  for all the people. If we know the National Income we can  calculate the total consumption expenditure of the entire nation. Although sometimes it is difficult to figure out what exactly is consumption function, economists have used it on many occasions.

Other Ideas on Consumption 

After the basic foundation of  consumption function there were many more ideas on consumption and saving. The most important concepts are two- the ‘permanent income’ and the ‘life cycle’ idea.

Permanent Income Idea

This theory suggests that people like to consume smoothly. This means that, people don’t want to consume more in some years and less in some years. On a long time scale, they want to  maintain a similar standard of living. While  they are keen to live better lives they certainly do not want to be worse off. It is because of this feature that people do not trust ‘temporary income’ and rely more on ‘permanent income’. Permanent income is that part of income that can be expected to be regular. It is stable and does not increase or decrease suddenly. Temporary income is that part of your income that you never expected. For example, winning a lottery would be temporary income and earnings from a decade old farm gives you permanent income.

Because people trust the permanent parts of income much more than the temporary parts of their income, they base their consumption on it. So in other words, consumption depends on the permanent part of people’s incomes, not on the temporary part.

The Life Cycle Idea 

The life cycle idea brings finance into our understanding of consumption and income. What it basically says is that even though we as individuals maintain a similar standard of living throughout life, our incomes vary a lot. We do not earn as children and as students. Neither do we earn when we are old and retired. We earn the bulk of our life’s worth between the ages of 20 to 60. In this middle age, we earn enough to provide for ourselves and manage to keep some income for later use. What the Life Cycle Hypothesis says is that when we are young and old our consumption expenditure exceeds our income and thus we must borrow. In our middle ages as we earn more than we need for consumption, we must save. Banks help us connect the phases of our life where we are in need of money and when we have too much money.

The life cycle hypothesis divides our lives into 3 parts.

1)   The Early Ages:  Between the ages of 0 to 20, we are mostly children and students who need to borrow to maintain a standard of living. We are taken care of by family and government. Our Consumption is more than our Income; hence we borrow to maintain it.

2)   The Middle Ages: Between the ages of 20 to 60 we are usually earning. We do not depend on anyone and earn much more than we can consume. Hence our Income is more than our Consumption and we are able to pay our past loans and save for the next age.

3)   The Old Ages: After 60, we are too old to work and once again need looking after. We use the money that we have saved in the Middle Ages, or in other words we dis-save in order to survive.

It’s all about us… really!

Consumption and Saving, are concepts defined to explain what you and I do. These concepts try to tell us how we spend and how we save. Economists spend years trying to figure out how we as individuals spend our money. It’s all about us… really! Economics in this case is once more trying to explain the very basic elements of what we do. Economics is not rocket science or even ‘dismal science’. It is only trying to help you understand yourself. Consumption is important both at national and individual level. Good Governments are concerned to enable people to raise their incomes and this ultimately leads to consumption spending. If we are able to consume more, our standard of living rises. In my opinion, study of Consumption can contribute to the welfare of  people. Also higher levels of Consumption gives more opportunity for business to bloom. 

Helping the economy, bit by bit.

Consumption is about everyone!

Economics is for everyone!

Studying Unemployment : Employment for Economists!

In our world there exist a massive number of occupations. We live in a world where a wide variety of work is carried out simultaneously. Lawyers, doctors, factory-worker and government officials are only the tip of the iceberg. It possibly is impossible to list out all the types of occupations. Some of them are so unusual that you probably have never heard of them. For instance, have you heard of a computer-player factory in China that hires people to play through the difficult levels in online games for the computer nerds in the West? Probably not. It is interesting to note, the wild variety of jobs that arise from wild purposes. Everyday there are newer areas where people are needed. Who would've ever thought that there could be a market created by rich lazy gamers? 

It is very easy to understand that when all the people in a country are working, the country will perform better. Also if many people are unemployed then that country will not perform as well as it can. Economics, provides a deep insight into the nature of this employment. The branch Macroeconomics, tries to study the total unemployment in the country. It observes how far from potential performance is the country. It tells us the structure of the people who are unemployed, and finally it advises the governments on how they can aid the people and help provide jobs. A stable job, as it turns out is the central feature for all adults. It provides a means of sustenance and survival for some, and the ability to thrive for others. The first thing that Macroeconomists do while studying employment, is to define it properly. Who in fact is employed or unemployed? And who is neither? 

The Labor Force

All the people who are able bodied, fit of mind, legally allowed and eager to work are considered part of the labor force. Labor in this sense does not mean 'hard work' or carrying bricks. Even industrialists and teachers are in this sense part of the labor force. The whole question of the labor force arises because not everyone in the entire population can work. It seems silly to call children in the primary school as unemployed. Also, if your grandfather is currently relaxing at his holiday home, it wouldn't be nice to poke his conscience by calling him unemployed. Also if we included retired people and children while calculating unemployment we would get misleading data. So we chose to exclude children, old people, people with a mental illness, students pursuing higher studies and even those lazy househusbands. Another interesting feature of the labor force is that it only includes those people who are willing to look for work. So this means that your Uncle _____   (fill in the blank) who isn't even trying is not considered a part of the labor force. Apparently these discouraged people are not even that important to be considered while calculating employment.

Data : 2010

The participation rate finds out the ratio between the total adult population and the labor force. It is a percentage that tells us how much of the adult population is in some sense 'productive' and how many people who 'could have' been significant. A country with a high participation rate seems to perform better than one with a lower participation rate, all other factors being constant (commonly used economic phrase!). Also, the topic about homemakers not being a part of the labor force, is controversial and in my opinion a major flaw in the current method of calculating employment. It is hard to believe that stay-at-home-moms and cooking-dads add no value to the economy. 

Employment Rate

Within the labor force, after the necessary and sometime confusing deductions from total population, we have the employed and the unemployed. The unemployment rate is the percentage of people in the labor force who are unemployed. This data is extremely vital, and is studied intensely throughout the world. It is also one of the most important indicators of progress and welfare. This rate also helps us compare countries and the standard of living. This rate can make or break the careers of Politicians, and is a source for the never ending demand for economists (thankfully!). It is easy to see in the following table, that successful countries make the most of their resource and have a high employment rate.

Data : In and around 2010

It is important to note, the dimension of time in this picture.  Data for unemployment is usually found via a survey and hence the data corresponds to a time frame. So it makes more sense to say - "The employment rate Cuba in 1959 was 24%" than without mentioning the time of the survey.

How does one calculate Joblessness? 

The approach taken to figure Joblessness is simple. There are two tried and tested method to determining the rates. If you want to know whether your cousin Rohan is employed or not, you either ask him or you ask his boss. Hence, elaborating from that, the employment level is found by either a  household survey which goes from door to door people whether they have a job or not, or a payroll survey where the company provides details of its employees.

There are certain flaws of either method. For instance, a person holding two jobs might pop up twice on the payroll survey. A person who runs a small home based shop or business is said to be self-employed and is overlooked by the payroll survey. Also if you notice, the payroll survey only gives details on those employed and does not indicate 'unemployed'. This is like the joke, of a classroom teacher who wants to save herself the trouble of taking attendance by asking 'all those who are absent raise your hands'.

The household survey also yields other difficulties. If the information on the size of the population is incorrect then the information on employment is also. Legal and illegal immigration causes difficulties in collection of data. Some people might give incorrect information on their working status. They may choose to lie about their unemployment out of shame or lie about employment to reap the unemployment benefits that the government provides.

Some economists say one survey is better than other, and some say the opposite. This topic of employment also raises debate and controversy. 

Some Interesting Types of Unemployment 

Frictional Employment exists in the time period when a worker changes jobs. This transition time that he or she needs to search for another, is the cause for Frictional Unemployment. 

Long-term Unemployment is the unemployment that has lasted more than a year or so. Larger amount of long term unemployment can be disastrous for the country. 

Structural Unemployment occurs because of the unavailability of people to match the requirements of available jobs. For example, certain universities have vacant positions as the people who apply to become professors are not qualified enough. Structural Unemployment includes Technological Unemployment which is caused by the replacing of human workers by machines and automations. It is easy to see the emergence of this form of employment in the future. I have watched too many sci-fi movies to ignore the possible competition from cyborg economists. Structural Unemployment also includes Seasonal Unemployment which is caused by the losing of jobs because of seasons. Its easy to why umbrella-makers go out of work when the monsoon ends. Look at it this way : Santa is unemployed in Summer!

Unemployment brings grief and panic,making life harder for coming generations. Nations have been trying to tackle this problem since time immemorial. The great recession of 2007 brought a surge of unemployed into the picture and caused a massive slowdown of our economy. The great depression of the 1930's did much worse. A good government makes sure that its people have means of survival, and looks to lower its unemployment rate. For college students and young professionals these jobs are crucial. Low employment leads to high college dropouts and other problems. Be it getting a job or getting a friend one, the employment of an economy matters to each one of us.

Best of luck!
Economics is for everyone!