From our earlier description of him, the entrepreneur is a worker of exceptional skill and ability. Usually, he takes many years to educate and prepare himself for the specialised vocation or career of his choice. More often than not, he is gifted with an inborn flair and talent for such a vocation or career. For these reasons, he is always in short supply, and hence he invariably attracts large rewards which are sometimes wholly disproportionate to his contribution to the common pool. Comparatively speaking, his mobility is less inhibited than that of the ordinary skilled or unskilled worker.
Five pertinent and important observations remain to be made before we come to the end of this chapter.
ONE: We have spoken of Land, Labour, Capital, and Entrepreneurship, as factors of production, and as goods or commodities subject to the law of supply and demand. We have also spoken of the rewards which go to these factors. For the avoidance of confusion, we would like to expatiate a little further on this point, and clearly identify the sources of the rewards of these factors. Just as the landowner, labourer, owner of savings, and entrepreneur, are respectively on the supply side of land, labour, capital, and entrepreneurship, so the non-owner user of land, the employer of labour and entrepreneurship, and the borrower of capital are on the demand side of these factors. To these two opposing sides, these factors are goods or commodities, but being at the same time factors or agents of production, the prices paid for them are, for purposes of analysis, given the names of rent, wage, interest, and profit. There are instances when a person combines the four agencies in himself: when he is the proprietor and employs no outside labour at all. In this case, it is assumed, again for purposes of analysis, that the elements of the four classes of reward are there just the same.
The mainspring of these four classes of reward, and, specifically, of all rewards that go to all those who are employed in the six main occupations – that is, extractive, manufacturing, transport, distributive, banking and insurance, and infrastructural – is the production and sale of physical goods and commodities which in turn have their origin in the active and fecund union of land and labour. In other words, all the intricate, mighty, and far-flung superstructure of modern economy, camouflaged as it is by the dazzling and deceptive paint of monetary institutions and transactions, is erected wholly on, and sustained absolutely by, the foundation solidly laid by the fruitful and harmonious union of land and labour. Without this union, no economy can be maintained. The manufacturer, the transporter, the banker, and the insurer, the distributor, lawyer, doctor, professor, etc., who earn fat and sometimes fabulous profits, fees, or salaries, and who tend to look down on the struggling farmers, lumbermen, miners, and the skilled and unskilled workers who labour on the farmlands and in the factories, do not always realize that without these primary and secondary producers, society would perish.
TWO: We have previously noted the functions of money. We have, indeed, described money as a certificate approved and endorsed by society at large, to the effect that its holder or possessor has rendered to society services to the value of the money, currency, or amount in his possession, and that anyone from whom he has received goods or services should accept in exchange the amount of money or currency which is generally regarded in the market as the equivalent of such goods or services. It is crystal clear from this description that the possession of money confers purchasing power on its holder or possessor. Whether the holder or possessor of money or currency comes by it by the sweat of his brow, by stealth, by cunning, by the use of his wits, or by the employment of any of the innumerable methods – honourable and dishonourable – known to the world of industry, commerce, and monetary dealings generally is beside the point. As long as he has money, he has purchasing power. And this purchasing power is transferable and saleable for cash or kind, in the same way as any tangible or intangible commodity.
These inherent qualities of money – its purchasing power and its transferability-and saleability – have almost completely blurred its primary and pristine functions as a medium of exchange, a measure and a store of value, and a standard of deferred payment.
Institutions such as Commercial Banks, Merchant Banks, the Stock Exchange, and Foreign Exchange Market are important and inseparable features of modem economy. They have been established for the purpose of dealing in money or its equivalents. Specifically, they assemble or buy purchasing powers, that is moneys or their equivalents, from all available sources, in return for a price called interest. They then sell these purchasing powers to others who need them for any purpose whatsoever – ranging from gambling to the building of a factory; from waging war to paying family allowances or building hospitals. What is essential to these dealers in purchasing power is not the social or anti-social end to which it may be put- these are immaterial. What is essential to them is the credit- worthiness of the purchaser of this power or of his guarantor. It is superfluous to point out that these financial institutions always see to it that they sell the purchasing powers at their disposal at higher rates of interest than they buy them. In this way they are able to make profits which are large and sometimes excessive.
It must be conceded, however, that by dealing in purchasing power in this way, the institutions concerned do help very much in making the wheels of industry, commerce, and business turn more smoothly and faster than would otherwise have been the case. At the same time, it must be pointed out that they do often help these wheels to turn much faster than prudence and safety demand, with well-known and disastrous consequences to which we will make more specific reference later.
In its role as purchasing power, money becomes a commodity whose value is subject to the law of supply and demand. If there is too much purchasing power in the society – that is, too much money or currency in circulation – relative to the quantity of goods and services available, the value of money will fall.
Conversely, if the goods and services available are too plentiful relative to the prevailing amount of purchasing power, the value of money will rise. It follows, therefore, that in order to prevent incessant price fluctuations and maintain the value of money, so that people’s confidence in its primary roles may remain unshaken, the volume of purchasing power, or money in circulation, at any given time and at a given price level, must be just sufficient – no more and no less – for the quantity of goods and services available.
Now, the bodies responsible for putting currency or money into circulation are usually the Central Government of a country and the Bank owned by it but not run by it as a department of Government.
These two bodies constitute the Monetary Authorities for a country. It is they, acting jointly, whose duty it is to make sure that there is not too much and not too little money in circulation, at any given time and at a given price-level. They must, at the international level, maintain the stability and strength of their currency, and its equilibrium or purchasing power parity with other currencies.
Their job is complicated, however, by the fact that it is not only the currency issued by them that is recognized as money. Cheques, Bills of Exchange, and Promissory Notes also perform the functions
of money, and are so recognized by the business community. In some highly developed economies, these monetary instruments are used in transacting a much greater volume of business than the currency
issued by the Monetary Authorities. Speaking generally then, the only thing that differentiates money from the other monetary instruments is that it is legal tender, which the latter are not.
The problem is still further complicated by the fact that the volume of money – that is, of all the currency and monetary instruments in circulation – can be increased by the speed or velocity with which money and all these other instruments change hands. If business is brisk and buoyant, and currency and other
monetary instruments, which are worth £1, change hands ten times in one day, then that £1 is equal to £ 1 0 worth of currency and other monetary instruments in circulation. On the other hand, ifbusiness
is dull and the £1 only changes hands twice in one day, then it has only done the job which £2 worth of currency and other monetary instruments in circulation would have done.
For these reasons, the Monetary Authorities have always had to keep their eyes intently on the monetary weather-vane. If there is too much purchasing power in people’s hands, the Monetary
Authorities will push up its price by raising interest rates, so as to make it .less easy for people to borrow money from the Banks. They may also go into the money market themselves and buy purchasing power from people’s hands in exchange. for Stocks and Securities. The Government, in particular, may take the excess purchasing power out of people’s hands by means of direct and/or indirect taxation. In this case, its policy would be to budget for a surplus. If there is too little purchasing power, the Monetary Authorities do the reverse by lowering interest rates so as to encourage borrowing, and by selling purchasing power in exchange for Stocks and Securities. The Government, in particular, “may reduce tax or embark on large public works in order to put more money into circulation. To this end, it would adopt the policy of deficit budgeting. In addition to all this, administrative guidelines or directives may be issued to the banking and other financial . institutions, in order to ensure the liberalization or restraint of credit or purchasing power, as and when necessary.
In spite of all this, however, experience has shown that, as time goes on, prices do tend continuously to rise. As we have noted, the Monetary Authorities constantly keep their eyes on the monetary weather-vane. When the volume of money and other monetary instruments shows an ominous rise, the Monetary Authorities go quickly into action, but not before. At this point in time, the harm is already done; and the best that is invariably achieved is the prevention of such a rise getting completely out of hand. The clear
verdict of economic history, however, is this. When once the ascent is made, it may be reduced to a lesser degree, but it has never been possible to return to the base from which that ascent has been made. Hence, the purchasing power of £ I today is worth less than its counterpart ten years ago, and will be worth less than now, ten years hence.
Just as money is a commodity sold and purchased like other goods at the domestic level, so it is at the international level. If the price of money is higher in A than in B, people in B will tend to offer their country’s currency in exchange for the currency of A, in order to benefit from the higher price of money in A; provided of course, there was parity of exchange between the two currencies before the price of A’s
currency goes up, and provided also that people in B have confidence in the stability of A’s Government, and in the credit-worthiness of its Monetary Authorities and other financial institutions.
THREE: If a country can produce all the things that its people require to satisfy their wants; if it can produce these things better than any other country in the world; and if its efficiency in the production of these things is equal, it will not need to trade with other countries. But this is manifestly impossible. There are, therefore, three causes of International Trade. It arises:
(i) because a country does not produce or is unable, because of lack of the requisite natural resources, to produce all that it requires;
(ii) because certain things which it can produce can be produced more cheaply or better in other countries; and
(iii) because though it can produce certain items of goods more cheaply than other countries, yet its efficiency in the production of some of these items is less than its efficiency in the production of the other items.
In economic parlance, International Trade exists because every country tends to concentrate on those goods in the production of which it has greater comparative advantage or less comparative disadvantage. In other words, the real basis and raison d’ etre of International Trade is international division of labour
Trade between two countries may be straightforward barter under a bilateral arrangement. This form of trading will be successful only if, as is the case of barter between two individuals, there is a double coincidence of wants between the two countries concerned. In addition, the terms of trade between them must be equitable, and either side must not supply more or less than each requires. Again, as in the case of barter between two individuals, bilateral trade arrangement of this kind is not always a success.
Apart from the obvious difficulties in the way of trading by barter, a bilateral trade arrangement prevents the countries concerned from enjoying, to the full, the fruits of international division of labour, and constricts them in their search for; or the pursuit of the optimum in the fields of production in which they separately have greater comparative advantage or less comparative disadvantage. It is, therefore, generally recognized that multi-lateral international trading is much better than strict bilateral trading.
Whether bilateral or multi-lateral, international trading transactions are subject to the law of supply and demand in the same way as buying and selling between individuals in a country are ‘ governed by the law. And the favourableness or unfavourableness of the terms of trade, as between one country and another, will depend, other things being equal, strictly on the state of supply relative to demand as between the two countries. This statement, however, deserves serious qualification. The movement or flow of goods between one country and another is by no means free. In order to raise revenue; to protect infant industries at horne; to execute national policies in relation to development, defence, and security; to achieve balance of payments equilibrium; and to act in retaliation against another country; for any of these reasons a country may impose tariffs on goods imported into or exported from its territory. It may even do more: it may totally prohibit or subject to quota-allocation the exportation or importation of certain items of goods; it may subsidize the exports of some classes of goods, and may devalue its currency in order to encourage export trade generally. When all this is done, the normal operation of the forces of supply and demand as between nations is temporarily suspended and permanently distorted. The terms and directions of trade are also
seriously affected and disturbed. In these circumstances, it becomes very difficult, if not impossible, to make any intelligent and accurate forecast of the results of international trading.
If imports and exports between two countries are exactly equal in value, no problem arises. But except in isolated cases of bilateral trading agreement, this cancelling out of import-export transactions is rare. When a country, therefore, imports more from than it exports to another country, or when, in a state of multi-lateral international trading, a country which we will call A imports goods from another country which we will call B and exports goods to a third country.
CONTINUED FROM LAST WEEK
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