The Fable of "Moral Arithmetic"

May 20th, 2012
in Op Ed

Written by Anonymous

Warren Mosler (visit Warren’s blog) applies simple arithmetic to numerical relations that have a $ sign (or € sign), and explains clearly how a money economy works.

Everybody else stares mystified, as if placing a $ or € in the equation propels us into some alternate universe where ordinary arithmetic does not apply; where suddenly everybody is offering "moral" solutions (Live within our means!) to grade school arithmetic questions, as if "being good" exempts us from the rules of adding and subtracting money numbers.

"If Timmy brings 100 marbles to school and lends them to his classmates at 5% interest for the day, and the classmates diligently work to trade and earn and win enough marbles to pay their debts, how many marbles will Timmy collect at the end of the day?"

Follow up:

Most of the pupils are of the linear thinking neoclassical persuasion steeped from the cradle in "banker arithmetic", so they sharpen their pencils and calculate that Timmy will receive 105 marbles in total principal + interest. "Profit drives the marble economy", Teacher correctly explains, "which is why the classmates were all so busily engaged working for marbles." And the pupils agreed it would be great fun participating in a marble economy where you could exercise your talents to get out more than you put in.

But little Warren had failed to cram his head into the neoclassical pencil sharpening box where you learn banker arithmetic and he exclaims, "But there ARE only 100 marbles, so unless Teacher adds marbles into the room, Timmy can only get back as many marbles as he put in. So the correct answer is Timmy will get back 100 marbles and some of his classmates will default on their debts and suffer a life of stupid unemployed poverty because Teacher says "We must live within our means." and she refuses to add the needed marbles even though she owns the marble factory that produces unlimited marbles at virtually no cost."

Teacher, by virtue of her "solid moral character", is hired to run the Bundesbank, from whence she engineers a German export juggernaut that trades Mercedes for marbles so that Germans always earn enough marbles as profits to pay their debts. So now the "classmates" in Europe are rich in Mercedes but are destitute for marbles, because Germany got all the marbles in exchange for the Mercedes, and after the classmates ran out of domestic marbles Teacher "loaned" them more Bundesbank marbles so they could keep buying more Mercedes to keep the export juggernaut going. But finally it turns out the classmates cannot keep borrowing and spending German marbles to buy German exports and they start defaulting on their debts.

Teacher thinks, "Default? Which of my pupils used that word before?" And she remembers the little immoral heretic Warren who couldn't understand moral arithmetic and insisted on applying "regular" arithmetic to problems about marbles. So she calls him up from his tropical tax haven and asks him to repeat what he once explained about "not enough marbles".

Warren explains monetary arithmetic, which turns out to be the same as "regular" arithmetic except you confuse people with the mesmerizing $ € signs that wizards like to use to show how arcane and inscrutable they are. Then Teacher's eyes are opened to the reality that morality and arithmetic inhabit non-intersecting Venn sets, where morality does not alter arithmetic. And with her newfound numerical clarity Teacher is appointed dictator of the ECB to save Greece and Germany and euroland from their mystifying problems with money numbers.

From her commanding heights at the ECB Teacher promptly begins distributing per capita grants of euros to all the classmates in the eurozone, and soon everybody has enough marbles to pay their debts and keep their game of "money economy" happening, to the delight of all parties. Greeks are smiling in their new Mercedes and Germans are revelling in their fat bank accounts as they soak up the Greek sun on vacation. And all's right with the world.

Except for some Austrians, who confront Teacher, "So where are you getting all the marbles you're distributing willy nilly throughout euroland? That seems pretty immoral to us! Unsustainable, too. Vigilantes will come an' git you. And you won't like that, nosiree!"

And Teacher patiently explains that numbers and morals do not mix, and that she simply made up the marbles because that's all "money" really is, equations of numbers. And you don't "get" numbers from some secret hidden pile of numbers somewhere. You simply add numbers when your economies are short of 'money': when people and resources are languishing unemployed and people can't pay their debts; and you withdraw numbers (tax) once the economy is working near full capacity and price inflation gets too hot. She explains that euroland appointed her grand wizard dictator of the ECB because she alone was not mesmerized by the € sign, and she was not afraid of invoking wrathful plagues of 'hyperinflation' for daring to add and take away numbers that have a € on them.

The Austrians slouched away muttering about heresies against sound money, and they tried to stir up moral outrage in euroland against this blasphemous Teacher woman. But euroland was so happy with their restored economic prosperity that few even heard the Austrians let alone heeded them.

Until the truly fearsome monstrosity from the depths of the Earth began to raise his dread voice, the inexpiable "peak resources", the beast who will not be appeased by numbers. But that's a fable for another day. Today's story was about "money numbers", and how to use this knowledge to solve the present crisis, which is a confusion of arithmetic problem, not a real resources problem.

A related fable by J.D. Alt involving a variation of the game Monopoly can be read at
New Economic Perspectives.

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1 comment

  1. *****

    But when the Austrians finally had to admit that $ are nothing more than accounting notations, having no physical substance whatsoever, and as accounting notations can be produced by merely changing numbers, they began to scream, "Inflation."

    See, Austrians change the discussion from money supply to inflation, as soon as the money supply argument is shown to be empty.

    And they chant, "Too many dollars chasing too few goods," an old, old song, no longer appropriate, since it cannot happen in today's world economy.

    But there is a reason they don't understand, and the reason is at nofica dot com:

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