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Theory of Economic Relativity: Solution to Monetary Crises, a Critique of Current Economic Theories

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Theory of Economic Relativity: Solution to Monetary Crises, a Critique of Current Economic Theories 1 Author’s Note: By axiom (ex ante and ex post): S ≠ I In irregular monetary (currency) systems by axiom (ex ante and ex post): i ≡ p www.carlosbondone.com Translator Note: The distinction between money and currency is essential in this work. The author places the term “currency” as a more general categorization than that implied in “money”. Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular. Carlos Bondone, Theory of Economic Relativity: solution to monetary crises, a critique of current economic theories. Copyright © 2006 by Carlos Bondone. All rights Reserved. ISBN 978-987-05-2700-8 2 THEORY OF ECONOMIC RELATIVITY Solution to MONETARY CRISES A critique of current economic theories: Austrian, Keynesian, and Quantitativist Carlos A. Bondone www.carlosbondone.com 3 CONTENTS Introduction 8 Part I SCIENCE 13 Chapter I Introductory Concepts 14 Epistemology 14 Sets 17 Physical Relativity 21 Part II ECONOMIC SCIENCE 24 Chapter II Economic Causality 25 Chapter III Economic Agent 29 Chapter IV Economic goods 34 Types of economic goods 34 How Economic Science Deals With Economic Goods 39 The Value Of Economic Goods 46 Chapter V Intertemporal Exchange 52 Economic Time 52 Intertemporal Exchange Of Economic Goods – “Theory of Economic Relativity” 54 Chapter VI Interpersonal Exchange 58 Types Of Interpersonal Exchange 62 Non-Compliance In Interpersonal Exchange 65 Interpersonal Price Of Economic Goods 66 Economic Calculation 71 Quality And Quantity In Economics 73 Chapter VII Cash 75 Money 78 4 Money Substitutes 89 Other Aspects Of Money 99 The Value Of Money 103 Virtual Money 110 The Money Regression Theorem 111 Variation Of The Value Of Money 114 The Price Of Money 115 Real (Relative) And Monetary (Absolute) Prices 116 Neutrality Of Money 117 Trust In Money – Monetary Devaluation 121 Quality And Quantity Of Money 122 Chapter VIII Credit 124 The Value Of Credit 125 The Price Of Credit –“Interest” 125 Other Aspects Of Credit 126 Credit Types 128 Accounting Consolidation As Corroboration Of The Theory Of Credit 136 Is Manipulating Circulation, Virtual, Or Bank Credit Necessary? 137 Quality And Quantity Of Credit 138 The Dangerous Credit Chain 140 Causality Of Credit 140 Chapter IX Credit And Liquidity 142 The Economy Without Money 147 Economic Relativity Revisited 148 The Theory Of Liquidity And Economic Measure 149 The Dangerous Credit Chain (Continued) 150 Consequences Of The Causality Of Credit 150 Liquidity And Economic Cycles 151 The Needs For Liquidity And Measure 152 Neutrality Of Credit 152 Paradox Of Interest 153 Part III CORROBORATION OF THE ECONOMIC THEORY ACCOUNTING 154 Chapter X Accounting As An Economic Model 155 Chapter XI Cash 161 Direct Interpersonal Exchange –“Barter” 161 Indirect Interpersonal Exchange – “Money” 164 Rigid Materialization (CID, Similar To “Barter”) 165 Monetary Accounting 166 5 Chapter XII Credit 177 Flexible Materialization – Irregular Credit (Pc) 177 Monetary Revaluation Of Economic Goods 185 Analysis Of PC As Credit 186 Flexible Materialization – PC 190 “Regular” Credit 192 Circulating Or Bank Credit – FM 193 The End Of The Corroborations 213 Part IV Synthesis, expansion and comparison of THE THEORY OF ECONOMIC RELATIVITY 215 Chapter XIII Synthesis Of The Theory Of Economic Relativity 216 The Chain Of Economic Causality 216 Interpersonal Exchange – Currency 218 The Most Relevant Aspects Deriving From “TER” 219 (Economic-accounting) Wealth Of An Economic Agent 220 The Total Wealth Equation (Micro And Macro) 222 Chapter XIV Comparative Study And Extension Of The Theory 224 Chapter XV Quantity Theory 236 Chapter XVI Keynes 251 A Synthesis of Keynes’ ideas 251 Keynes’ Ideas 267 The 45 Degree Curve 268 Total Wealth Graph 271 IS And LM Curves 273 Aggregates 277 Phillips Curve 281 Keynes Underconsumption 284 Chapter XVII Hayek 286 Hayek’s Theory 287 Part V Solution to MONETARY CRISES 312 Chapter XVIII 6 Diagnosis Of Monetary Crises 313 Chapter XIX Treatment Of Monetary Crisis 318 __________________________ Appendix – Monetary Institutions Final Words 329 Glossary Of Concepts 330 Criticized Concepts 335 Bibliography 336 Analytical Index 346 7 INTRODUCTION ▓ Object The object of this book is to present a new economic theory related to the role of time in the economy; more concretely, I can say that it is the theory of economic time. Since time transcends all existents, inevitably we shall see that from the economic theory of time derive others, such as exchange, monetary, price, money, credit, interest, and wealth theory (its existence and variations), the theory of equality (distribution of wealth), the theory of accounting as an irreplaceable model for economics, and many more. The object of this work from a social point of view, is to present an economic theory that will allow people to coexist in a society with more wealth and equality, in which each and everyone is in a better situation, with a framework of individual intellectual honesty in which each person lives by his or her own effort and not by appropriating others’ goods. This appropriation may have a monetary origin -which will be analyzed here- and/or a moral origin, which has to do with adopting the posture of an invalid and not taking on the economic responsibility that each one should. Marx proposes: from each according to his capacity, to each according to his need. We will have the opportunity to analyze this from other perspectives, as soon as we correct the scientific mistakes his moral proposal incurs in; that is, we will see how science leads us to that goal but not following the path he proposed. So, from the point of view of the social object of this book, I may also say that it seeks to attain wealth in peace; just as the wealth of nations avoids military conflict, the wealth of individuals works in the same sense, avoiding violence among them. Nevertheless, it must be clear that the main object of this book is the study of economic science and theories derived from it; the social conclusions I have summarized are a corollary or result of the scientific investigations expounded here. Before ending these brief paragraphs on the object of this book, I want to say that one way of expressing my state of mind in relation to economic theory before beginning my investigations –from which I derived the theories I present here- is to refer the reader to a paragraph in the Introduction to the Spanish edition by José Antonio de Aguirre, of the book “Monetary nationalism and international stability” by F. Hayek, edited by Ediciones Aosta. Near the end of the introduction (p. 35), de Aguirre says: “Everything seems to indicate that the most urgent task in the coming years will be to probe how we can reestablish the three pillars of economic policy that were subverted by the scientific optimism of these years, these being: a) monetary discipline, b) fiscal discipline, and c) commercial discipline. This is a congruent totality that survives as a whole when its three elements are engaged or inevitably collapses when any one of them is disengaged”. Though in this work I deal, directly or indirectly, with all three aspects, the point of monetary discipline will be prevalent. ▓ Whom this book is oriented to The fact that the present work is full of scientific theories, many of which I believe are new, does not imply that it is beyond the reach of people involved in the economy, as we all are in every instant of our existence. But it is especially within the reach of those whose work is related to economic activity. A case I especially wish to make is that the theories presented here conclude that the economy runs on accounting and financial tracks more than it does on those presented traditionally in economic models. This derives in a reformulation of econometrics and all the statistical studies used at the present time that do not consider accounting the essence of their investigations. 8 The language used in the text is simple enough so that the essential points of the theory can be understood by anyone interested in grasping the basic postulates, both the hypothesis and their corroborations, along with the immediate applications in different fields. To those not specialized in economics, and who wish to understand the basic postulates in simple form, I suggest that when coming to complicated technical sections, they should continue reading. In the end they will find it possible to grasp the essentials of the theories presented here. It will evidently be very useful for those in fields related to economic science, be they scientists, experts, specialists, advisors or teachers, to understand the whole scientific process included in a theory with greater precision, beginning with the hypotheses, their corroboration, and comparison with other existing theories, to see if it includes or surpasses them, and ending with the phase of applying science to the laboratory of life, seeking solutions for concrete problems. It should be no surprise that a scientific theory can be directed both to scientists and non scientific readers. This is due to the faster forms of knowledge transmission that we have grown used to, thanks to the information revolution. Estimates say that today the amount of knowledge at our disposal doubles every five years, while up to a few decades ago it took humanity a century to do the same. We must also consider that in one way or another all human beings are “experts” in economics, since it is the central problem for most people, in the same sense that every fan is a great coach of his or her favorite sport. I can conclude this point by saying that this book is directed to scientists, accountants, experts, advisors, investors, teachers, students, businessmen and women, statisticians and all those interested in the fate of one or more economic agents.
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