guy com Atanu Who paid for

From nol.net!news.sprintlink.net!howland.reston.ans.net!agate!news.ucdavis.edu!csus.edu!netcom.com!atanu Tue May 16 01:33:55 1995

Newsgroups: alt.buddha.short.fat.guy

From: atanu@netcom.com (Atanu Dey)

Subject: A puzzle. Who paid for the Englishman's Vacation?

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Organization: the Center of the Known Universe

Date: Sat, 13 May 1995 18:25:30 GMT

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author.  I asked for his permission to cross-post it to my

favorite group.  I hope you like it too.

Cheers,

Atanu

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[ Article crossposted from sci.econ ]

[ Author was Gustave Rabson ]

[ Posted on Thu, 11 May 1995 15:04:02 GMT ]

	I have a puzzle for you. According to Maurice Levi in his book 

"Economics Deciphered" it was a Ph.D. exam question in economics at 

the University of Chicago. I guess I would never have gotten my 

their answer is wrong. But more of that later. First let me present the 

question.

	I will use Maurice Levi's wording verbatim:

	"There once was an upright and very proper Englishman who 

sland. The Englishman had returned to the island so many times that

been honored promptly.

	"Since the Englishman's credit was so sound, the islanders were 

totally happy to allow him to pay by check, with the certain 

knowledge that they were good checks. Indeed, so well known and 

trusted was the Englishman on this tiny island that the islanders 

example, if the restaurateur wished to pay the grocer partly with a 

check he had received in payment for a meal, the grocer was happy 

to accept the check. The grocer was then able to buy gas with the 

check, and the Englishman's checks circulated in this way around the 

sland. Indeed, the checks were never returned to the Englishman's

London bank for collection.

	"Who paid for the Englishman's holiday?"

	Well, who did? Here is Maurice Levi's answer:

	"Clearly, the Englishman did not pay, since the checks were 

never returned to London. Then it was obviously the islanders, but 

checks - since everyone can spend the checks and everyone will 

accept them - it is not the last people holding the checks. O.K., then, 

	"The answer is that all the islanders paid, and not just the ones 

n the position of being able to "print" money. He had become like the

central bank in every country, which can print money that people 

are willing to hold. (Indeed, they must hold central bank money 

"printing" money, the Englishman had raised the tiny island's money 

for the holiday? They paid by being left with reduced buying power 

because of the higher prices. They paid through the inflation brought 

about by the circulation of the checks.

	"The goods and services consumed by the Englishman with his 

newly created 'money' - **given an unchanged output of goods and 

	My Comment:

	Well - it sounds reasonable. The Englishman increased inflation 

on the island and that was essentially a tax that everybody paid.

But wait. What if the "output of goods and services on the island" 

ncreased because of the influx of capital. What if the waiter who

ceramics factory he had dreamed about opening. Suppose the general 

Englishman's "money" made investments possible that were not 

that case?

	In fact, is that so different from what happens when an 

American entrepreneur borrows $60,000 to modernize his factory. 

The bank loans him the money, that is they add $60,000 to his 

account. But who paid for that $60,000? Well, the Federal Reserve 

System requires that the bank have $10,000 in reserve, but where 

William Greider, pp.59 - 61.] And who pays the banker's salary? The 

bank can create money because people trust it. Just like the 

Englishman on his beloved Aegean island.

	On the other hand, suppose the Englishman (by the way, no 

never left the island the situation with respect to them would have 

been exactly the same as it was with the checks. Would you say that, 

n this case, the Englishman's holiday was paid for twice? Once by the

Englishman himself and once by the islanders?

	So what's the answer? The answer is that the question is 

be paid for. That, in any interaction somebody wins and somebody 

loses. If something good happens then something bad has to happen 

n order to balance the books. Somebody must pay. They seem to

believe this although it is plain to everybody who cares to look that 

the air is free, the sunrise is free, the rain is free. Good friends are 

free. Love is free. Water used to be free. Wild berries are free. Who 

	Who pays for the wonderful gifts of our forbears? Language, 

literature, art, music, mathematics, the wheel, the idea of money, 

We accept it all and exploit it, yet nobody pays.

 	It is the task of economists to trace and explain the flow of 

trust, sometimes not even that - and sometimes they are destroyed.

But the question "who pays"  is a religious question not an economic 

one. I believe this is always the case. I believe that asking who is 

evening with our friends?" Or  "who paid for the Englishman's 

vacation?" 

	I believe that there is such a thing as a free lunch. Indeed we 

are all guests, every moment of our lives,  at a sumptuous free feast. 

We can contribute to it, if we wish, and make it even more 

for our fellow guests at the banquet table.

-- 

Show me a business that is not in debt

and I will show you a business headed for bankruptcy.

                   Gus