May 2012


Outside the air-conditioned car, it’s 100 degrees. The Mojave Desert stretches away on either side of the highway. We have been maintaining a steady 60 on the clock for quite a while. But we are, nevertheless, in a queue. The same vehicles have been in front and behind since our last stop at Baker and will still be with us when we get to Las Vegas. It’s Sunday afternoon, and the traffic is solid in both lanes on our side of the highway. And it’s the same on the other side for traffic heading back to Los Angeles.

This is the first stretch of the most ambitious of our motoring trips. The idea is to drive inland from Los Angeles through Nevada, a corner of Utah and a corner of Colorado to Santa Fe in New Mexico, and then return by a southerly route through Albuquerque, Flagstaff and Phoenix. We arrived in Los Angeles late on Friday night, and did very little on our first full day, except relax by the hotel pool and book the hire car, a compact Ford SUV.

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What is the economy? The textbook answer is something along these lines: the economy is the system of production and distribution of commodities, with or without the use of money. I have come to think that this is somewhat misleading, because it seems to make two assumptions: firstly that the commodity economy is primary and the financial economy is secondary; and secondly that the commodity economy and the financial economy are integrated and that there is in fact a single economy.

The model pictured in the diagram (*)  doesn’t make these assumptions. There are three principal ideas being illustrated. The first is that there is only a loose interaction between the financial economy and the commodity economy. We think they are closely entangled, because many transactions are the exchange of money against commodity. But many transactions are not mirrored. Taxes, subsidies and welfare payments, and lending and borrowing are purely financial transfers which have no correlate in the commodity economy. The central banks’ ability to create and withdraw money from the financial economy is also a purely paper transaction and has no necessary connection to the commodity economy. Asset revaluation, depreciation, goodwill and provisions against future losses are arrived at by applying formulae and accounting conventions; they are more or less successful attempts to capture something that is happening in the commodity economy. The financial or paper economy is entirely an artefact.

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