When I studied national economy (as second topic) it was very mathematical. That was good for me and bad for the economy students. But besides making the tests easier for mathematicians, did it help to understand economy? I had my doubts.
The theories around money, prices and wages were all based on equilibria. The fully informed participants in the market make rational decisions which ultimately produce the best results for all sides. Prices are determined by supply and demand. Wages are determined by availability of workers and the demand of work to be done. Stock prices represent the true value of a company.
The problem with this is that the market is neither well informed nor rational. For just one example, we all know about the power of advertisement directly addressing the irrationality in us. It is capable of creating demand from nothing. Even if rationality takes over and the true value or harm of a product is discovered, others take its place like mushrooms in the forest, equally poisoned.
Stock markets can display a good example of irrational mass hysteria. One word at the wrong place, and the selling or buying goes crazy. In our current economy so much money is floating around to be invested that the stock exchange looks more like a casino and works in the same way. The irrationality of this bloat is uncovered in the so-called „crashes“ where value is „burned“ which actually never existed.
Unfortunately, all this stupidity has real world consequences because banks and fonds are involved, and real people trusted in those. Consequently, the lost confidence after a crash will reduce demand for products or investments. And lower demand is the most dangerous poison for a consume oriented economy like ours. It immediately leads to a shrinking economy and lost jobs.
Even worse, companies sometimes find it easier to „make money“ on the stock market than by traditional services or with ordinary products. Or they back up their activity with speculation on real estates. The values of these assets are directly coupled to the health of the economy, but they are used to secure other dangerous investments. If this side business collapses, the company is in real danger. „Investments“ in stock markets are especially dangerous.
The classical theory tries to find ways to mathematically model the dynamic developments of the real the financial market. I do no longer believe that this is even possible, not even on the „micro“ scale. There is too much psychology and human instinct involved.
We need to admit that the decisions are not made by rational thinking, but by something more fundamental. And this very human ingredient is trust.
Our economy is based on trust, not on money.
The true value of money, of a product or a company, even of a state or a society is the trust we have in it. Everything is based on mutual understanding that something has value.
This is obvious in the stock market, but it is the same with all other valuables that we own. We should even apply this thinking to simpler actions like buying a car, where we trust in the availability of fuel and in open streets. All our decisions are based on the stability or the foreseeable development of the future. The big economical decisions are speculative and require quite an amount of trust in the stability of our economy, or they will not happen.
A bank will lend us money in the trust that it gets interest rates over a long time, and that the valuables we used to secure the loan keep their value. Saving is another obvious case where we trust in being able to use this money in the future.
Money in itself has no value. This is the big misleading error of current national economy. Money can be generated by banks and printed by the central bank. A lot of existing economies prove that even a big national dept does not matter as long as the creditor has enough trust and does not want the money back or can put pressure on the debtor. Even in a big crisis, a single word by the state head can calm down the public and restore the trust.
So, who is creating this trust and securing it? It is the state and only the state. The state is based in turn on a mutual understanding in our society, a common myth, if you want to call it so. It is the state that protects our property and provides safety from robbery and man slaughter. The common agreement is that the state is providing and protecting the people, and allows us to live and plan in relative safety.
The state creates also some guarantee for the value of money by collecting taxes in that same money. Thus, the money has at least the value to be able to pay those taxes. In return, the state provides safety and thus trust. The state also provides what we now call infrastructure to make our lives and our economy work. It has always been like this throughout the history of civilized nations. In previous times it was the king that provided protection against internal or external enemies and safe roads, but collected taxes along the way. Now, we have constitutions to prevent, in theory, the abuse of state power. But they serve the same purpose.
By the way, the true harm of the „neo-liberalism“, which should rather be called turbo capitalism, is the destruction of the state. „Everybody should care for himself only, then everyone is taken care of“, „Taxes are poison for the economy“, and so on. Nothing could be further from reality. Ultimately, this will lead to lost trust in the solidarity and coherence of the society which is poison to our welfare.
Since the world gets ever more complex and involved, we need the common agreement of a working state more than ever. Otherwise, I see no way to handle the big problems that we are facing, like the climate change in a growing population.