Free market vs State-led Economy

[Knk]

Hi Guys,

I'm doing an essay where I have to compare the free market economy vs a state-led economy, and say which one is most ideal. I have two questions:

1. Do you have any useful, interesting, or relevant information you could share with me? This can be factual information, theoretical, or opinion based - I'm open to any ideas.

2. Do you know of any sources (books, articles, websites etc) that could be of help to me?

Anyways, thanks a lot!

KNK

[SomeRandomGuy]

I have always considered myself very pro free market. I feel like I am transitioning away from that now, as free market seems less and less compatible with the person I am becoming.

No matter how I try to think of a free market, I keep coming back to what I see as the primary force that keeps the market going; greed. Greed seems to flourish in a greet market, it actually seems to be rewarded. People in free markets seem to be constantly pursuing money, rather than those things that are truly important in life.

On the other hand, being from the US, I can't say that I've ever known of the government doing anything well. For that reason, I definitely do not think that a state-led government is ideal, at least not in terms of a large government.

I think that when it comes down to it, I favor a "village" based economy, where everyone works together for the benefit of all. Technically, this is probably a type of government-led economy, but the people are the government.

Obviously these are just my opinions, and to be honest not opinions that I fully developed. I am still trying to reconcile my pro free market ideas with the ideas of caring and compassion. So far they do not see at all compatible.

[Double]

Maybe defining the terms is a good idea.

One could say Individuals trading among each other VS Individuals trading among each other, where some are allowed to steal, and some by threat of violence are allowed to tell others what to do

One is morally superior to the other, but certainly also inherits larger economic growth potential.

[hawkal]

I am pro free market but when I say free market I mean completly open international market. The problem is that the so called "free markets" are not free at all. There are a lot of these "partnerships" that ruin the free market idealogy like the EU free market and other markets that encourage buying within that market.

There should be no one controlling a free market at all. It should be an open competition where everyone is able to compete within the market. The only thing I think should be allowed although I'm not keen on it either because they don't seem very effective is trade sanctions but on a country by country basis.

[Double]

As long as you think in countries you cant have free-markets, because a country is merely the definition, or the range of reign of the worlds state-powers.

I think its logical to conclude Statism and free-market are two opposites

[SmartAlx]

I would recommend any of Ron Paul's books on economics.

[Gabo]

I think one of the most important things you must do is define a free market economy and a state-run economy. Many people have different views of what each of those things are, so you should be sure to state which definition you will use. I would personally recommend the following definitions (or similar):

A free market economy is a social structure where each individual owns property and labor, and voluntarily trades their property and labor with others to make themselves better off.

A state-run economy is a social structure where one individual or group (the "state") forces individuals to trade their property and labor with each other as the state sees fit.

[funchy]

I agree that you need define what both words mean and be very clear and concise about it.

Most people think the US is "capitalist" and "Free market" -- it is NOT. In reality, every business is regulated in some way or another. Everyone's home is controlled by regulations such as zoning, which affect its value. A town can decide they want an 'enterprise zone' downtown and can evict homeowners using the Eminent domain laws, basically creating its own little local version of a state-led economy. Some cities give away land and don't charge taxes to some of their favorite business friends, in the name of "redevelopment", at the cost of the citizens who now pay higher property taxes.

You'd need to find a completely free market somewhere in the world to use an example. Good luck doing that. As soon as there is an organized government in control of a local economy, they generally go mucking around with economic issues, trying to gain control.

[hawkal]

I found this website that ranks countries by economic freedom. Interesting stuff.

Index of Economic Freedom: Link Between Economic Opportunity and Prosperity | The Heritage Foundation

[Brutha]

Reality is more difficult than having two distinct categories of "free market" and "state driven".
If you are two out there with ideas it's easy to lose touch with reality.

I found this website that ranks countries by economic freedom. Interesting stuff.

Index of Economic Freedom: Link Between Economic Opportunity and Prosperity | The Heritage Foundation

Of course you should keep in mind that the Heritage Foundation is a think tank that produces a lot of pro-free market (not necessarily in the Ron Paul sense) propaganda.

[ar81]

Originally Posted by Gabo

I think one of the most important things you must do is define a free market economy and a state-run economy. Many people have different views of what each of those things are, so you should be sure to state which definition you will use. I would personally recommend the following definitions (or similar):

A free market economy is a social structure where each individual owns property and labor, and voluntarily trades their property and labor with others to make themselves better off.

A state-run economy is a social structure where one individual or group (the "state") forces individuals to trade their property and labor with each other as the state sees fit.

How about banks? Banks no not own their assets as property, and they voluntarily trade other people property, take money from people unilaterally, and also they create money in their accounting books and they produce nothing but inflationary pressure.

[Jaiysun4]

In my opinion, it is absolutely crucial that certain countries follow Venezuela's lead and nationalise assets (Oil etc), rather than allow the continued exploitation by foreign corporations. It may risk war with the US, as history shows (and I wouln't be suprised if Venezuela is forced into war with Colombia-US), but eventually countries will realise (particularly in Latin America where CIA genocides have been rife) that the US is now weak and is falling apart on a spiralling deficit and weak dollar.

I am thoroughly against free markets to the extent that they do not protect the consumer from health risks, do not offer fair value and competition, and do not offer sufficient jobs for the unemployed.

[ar81]

In an economy you have:

1.Banks and financial entities (they make money without producing anything)
2.Companies (make money by producing value added)
3.Government
4.Citizens
5.Other countries

Banks are sucking money from people to back their toxic/fake money with real assets from people. In an debt based economy, not lending means recession. Geithner said that banks were going AGAINST recovery.
Companies are firing people to make some extra profit, shrinking the market and making more difficult a free market.
Citizens are affected by unemployment and leech banks.

So it leaves 3 options of actors that could do something:
1.Government
2.Other countries
3.Nobody does anything

If other country takes posession, then the nation is gone.
If government does not "interfere" (react) then nobody would do anything and things would go in free fall, just like during Bush administration.

So your question about "Free market vs State-led Economy" is kind of senseless, because it puts as opposites things that are not opposites.

[Gabo]

Originally Posted by ar81

So it leaves 3 options of actors that could do something:
1.Government
2.Other countries
3.Nobody does anything

If other country takes posession, then the nation is gone.
If government does not "interfere" (react) then nobody would do anything and things would go in free fall, just like during Bush administration.

The Bush administration did far from "nothing".
Under Bush, we passed a $700 billion bailout package for banks.

The simple fact is that the market had to crash because it was artificially inflated by unnaturally low interest rates and a massive overextension of credit by financial institutions.

In a free market, the market would crash (like it has), creating a small but severe dip in productivity while loans default, bankruptcies are declared, bad debt is rectified, and the market realigns. Within a year, things would turn around and the market would resume under normal conditions. This is what happened during the recession of 1920.

Instead, the government has pumped vast amounts of credit into the economy to lessen the initial impact of the crash by propping up bad loans and institutions that made those loans. This means bankruptcies will never be declared, bad debt will remain on the books, and the market will not correct itself. Instead, the short dip in productivity will become a prolonged slump as inflation and unemployment stifle the economy. We will see a repeat of what happened in the 1930's, created by a repeat of government actions during that era.

[Scipio]

Originally Posted by Knk

Hi Guys,

I'm doing an essay where I have to compare the free market economy vs a state-led economy, and say which one is most ideal. I have two questions:

1. Do you have any useful, interesting, or relevant information you could share with me? This can be factual information, theoretical, or opinion based - I'm open to any ideas.

2. Do you know of any sources (books, articles, websites etc) that could be of help to me?

Anyways, thanks a lot!

KNK

www.aynrand.org

Ludwig von Mises Institute - Homepage

The Capitalism Site : Laissez-faire Capitalism is the social system based on the principle of inalienable individual rights. (Take the capitalism TOUR)

Capitalism Magazine - Individual Rights are the Moral Basis of Society

[Scipio]

Originally Posted by ar81

1.Banks and financial entities (they make money without producing anything)

Banks and financial entities serve probably the most enormous productive function in an economy. Banks, for instance, provide capital to worthwhile businesses that will engage in productivity. Without the concept of a loan, so many inventions would never have been created, so much wealth would never have been created. Stock markets (and their associated traders) in conjunction with the concept of a limited liability company, and venture capitalists also provide this assistance.

[Scipio]

Originally Posted by Gabo

In a free market, the market would crash (like it has), creating a small but severe dip in productivity while loans default, bankruptcies are declared, bad debt is rectified, and the market realigns. Within a year, things would turn around and the market would resume under normal conditions. This is what happened during the recession of 1920.

I like your interpretation. I'll offer a minor disagreement but we agree in principle here. I'd say that in a free market, there would have been no subprime loans, there would have been no bubble in the housing market, and there would have been no overexpansion of credit. That's because a free market would be lacking government controlled companies like Fannie Mae and Freddie Mac which can extend loans to people without valid credit (what the free market would evaluate is valid) and cause other private companies to compete with them. There would have been a free banking system in a free market, rather than a fiat dollar and a federal reserve which controls interest rates.

[Knk]

The free market is the obvious answer, simply because it has proven time and time again that it is effective, atleast practically speaking. It has provided hapiness and security for millions of people, but despite this, it is in no way the most effective approach. Only when we come up with a system that encompasses both selfishness and selflessness can we determine a system that is both pracitcally effective and spiritually effective. Until then, we must accept the system presently used, although this doesnt prevent us from imagining a better, more truth-based system.

[ar81]

Originally Posted by Gabo

The Bush administration did far from "nothing".
Under Bush, we passed a $700 billion bailout package for banks.

The simple fact is that the market had to crash because it was artificially inflated by unnaturally low interest rates and a massive overextension of credit by financial institutions.

In a free market, the market would crash (like it has), creating a small but severe dip in productivity while loans default, bankruptcies are declared, bad debt is rectified, and the market realigns. Within a year, things would turn around and the market would resume under normal conditions. This is what happened during the recession of 1920.

Instead, the government has pumped vast amounts of credit into the economy to lessen the initial impact of the crash by propping up bad loans and institutions that made those loans. This means bankruptcies will never be declared, bad debt will remain on the books, and the market will not correct itself. Instead, the short dip in productivity will become a prolonged slump as inflation and unemployment stifle the economy. We will see a repeat of what happened in the 1930's, created by a repeat of government actions during that era.

There are two types of intervention. One to use a flamethrower to fight a fire, and another one which uses water.

Bush used a flamethrower, thinking that fire works against fire.

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[ar81]

Originally Posted by Scipio

Banks and financial entities serve probably the most enormous productive function in an economy. Banks, for instance, provide capital to worthwhile businesses that will engage in productivity. Without the concept of a loan, so many inventions would never have been created, so much wealth would never have been created. Stock markets (and their associated traders) in conjunction with the concept of a limited liability company, and venture capitalists also provide this assistance.

You are talking about sharia banking. The problem with european banking model is not the loan, it is the creation of money through interests, and also the way non sharia banks transfer risk to others. It looks like arab world is winning over the failure of european banking model in US.

The steady rise of Islamic finance
BBC NEWS | Business | The steady rise of Islamic finance

Islamic banks 'better in crisis'
BBC NEWS | Asia-Pacific | Islamic banks 'better in crisis'

Indonesia's BCA plans to launch sharia bank in Sept
Indonesia's BCA plans to launch sharia bank in Sept | Reuters

For muslims, interests are immoral, just like it was for christians before 1300AD. Interests were regarded by christians as a sin.
Interests also creates an inflationary pressure.

Why is inflation a problem?
Let's imagine that many loans are given to people in US to buy , it means more money for the same amount of goods, so prices go up and money lose value due to inflation. But what US does is to export inflation. Americans buy products overseas, and it causes inflation overseas, so foreigners lose buying power with inflation and become cheaper. For years Costa Rica has been absorbing inflation and poverty caused by inflation. And this is why Costa Ricans are cheaper, and that's why some US jobs go to Costa Rica.

So in an inflationary system you either absorb inflation and lose buying power, or export inflation and lose jobs.
Do not blame Costa Rica. Inflation was exported from US and also jobs are.

[Scipio]

Originally Posted by ar81

You are talking about sharia banking.

No, I'm talking about the Western model of banking.

The problem with european banking model is not the loan, it is the creation of money through interests,

Interest is not a "creation of money"--and there is no "problem" with interest.

It looks like arab world is winning over the failure of european banking model in US.

You mean the Arab world that has produced literally nothing without the finance and support of Western investors and countries?

[Deep Eco]

There is also the option that neither a free market nor a state run economy are the optimal ways of running things. The problem with both of those is that they exist in a mass hierarchical society.

In a hierarchy wealth will always flow upwards, whether that is due to the invisible hand or the visible hand. All that changes is who is running the show - a bunch of wealthy capitalist merchant bankers or a bunch of politicians.

Humans have lived for many thousands of years and still do live in tribes where there is no hierarchy and no central control. They retain all of what they produce and it's both efficient whilst at the same time ensuring everybody is provided for.

Tribalism isn't about the degree of technology but rather how things are structured. Many businesses in recent times have moved over to a tribal structure. There is no hierarchy, the business exists for the purpose of providing a living for its members, rather than employees providing a living for shareholders.

Dunno if that'll help with the essay though but food for thought...

[SmartAlx]

Originally Posted by Scipio

No, I'm talking about the Western model of banking.


Interest is not a "creation of money"

You are absolutely correct. Interest is essentially the creation of anti-money. When it meets money both are destroyed. But you still owe a significant amount of the principle to the bank with no means to pay it all back.

--and there is no "problem" with interest.

You are absolutely incorrect. There IS a problem with interest when there isn't enough money in the economy to pay the interest. All money in the Western banking system is a loan, like an IOU. It really really is. Banks create these IOUs then you trade them for goods and services. Then you give back the IOUs, but you have to give back MORE IOUs than the banks created for you. You have to get more IOUs from someone else. But remember, they are IOUs. SOMEONE owes them to a bank! How are they going to even pay back the principle much less the interest if you need them to pay off the interest on your loan? They'll have to get them from someone else. Thus begins the cycle of inflation. Inflation is caused by the ever increasing need to pay more and more interest.

Let me phrase it again, like this:
Since every dollar is an IOU, if everyone was able to pay off their debts, all of those IOUs would not exist, BUT we would still be required to pay interest on the IOUs we borrowed. Since there are no more IOUs in the economy, no one can pay their interest.

If there is 1 trillion dollars in the economy, the economy owes the banks something like 1.1 trillion dollars. That extra 100 billion dollars is the interest the economy owes to the banks. Well, where do we get that 100 billion? We have to borrow it. Oh but then that means the economy would have 1.1 trillion dollars and it would now owe 1.11 trillion dollars. See? It's a never ending cycle that can only end in collapse. Eventually some people will default on their loans because there isn't enough money to go around. Then the banks then take their homes. Taking people's property is a short term solution but in the long run inflation decreases the value of money so much that it will cost 10 dollars to buy a loaf of bread. People become doubtful of the economy an the whole system comes crashing down. Then they give is Ameros. But in another 100 years it will cost 10 Ameros to buy a loaf of bread and people will begin to lose faith in the almighty Amero. Then the Amero will collapse and the bankers will be all to happy to provide for us plenty of Earthos, at interest of course. Then the cycle will repeat, until the bankers own everything. But even then they'll maintain their fractional reserve banking because it is the way they will control the few who break away from their dominion.

Interest is a scheme designed by bankers to steal the world's property. Bankers are trying to take over the world. Yes, they are.

This is why the Bible is against interest by the way. Jesus got angry one time in his life, when he saw money changers making a profit.

[SmartAlx]

Originally Posted by ar81

You are talking about sharia banking. The problem with european banking model is not the loan, it is the creation of money through interests, and also the way non sharia banks transfer risk to others. It looks like arab world is winning over the failure of european banking model in US.

The way I understand Sharia banking is that it essentially attempts to get around the whole interest issue, but it still effectively acts as interest.

Here's how I understand it:

A wants to buy Z from B.
B wants 100 for Z.
A goes to Bank.
Bank buys Z from B for 100 and sells Z to A for 110,
but Bank allows A to pay the 110 over time.

How is that any different from:
A wants to buy Z from B
B wants 100 for Z.
A goes to Bank.
Bank gives 100 to A and allows A to pay 110 over time.

The end result is the same!

A has to pay 110 to the bank over time!

[ar81]

Originally Posted by Scipio

Interest is not a "creation of money"--and there is no "problem" with interest.

Let's imagine economy has $1.
I lend you $1 and I as you $1 million in return.
How much money does economy have before you pay me? $1 or $1 million?
The answer is $1 million.
Interests create money in the accounting books.

However, if you do not pay me, the money in my books becomes ghost wealth or "toxic asset". When you pay me, you had to work in a job that produces value added, so the money you pay me is backed by value added.

Before you pay me, the ghost money is not backed by anything.

Banks use money as inventory, and money can't add value to itself. So the only way banks can make profit is by printing money in accounting books and by extracting money from people's pockets to back their ghost wealth with real assets.

It is hard to understand by people, because people are used to microeconomics, not macroeconomics. The unbalance created by the financial system is macroeconomical.

Originally Posted by Scipio

You mean the Arab world that has produced literally nothing without the finance and support of Western investors and countries?

For muslims, charging insterests goes against their religion, just like it happened with christians before 14th century.

Originally Posted by SmartAlx

The way I understand Sharia banking is that it essentially attempts to get around the whole interest issue, but it still effectively acts as interest.

Sharia banking does not create money in the form of interests, like our western banking model.

Banks act like an investor, so there is no interest, or at least not above market profit levels (which is called Riba, money charged without counterpart). All the money that is paid comes from activities that produce value added.

See Islamic banking - Wikipedia, the free encyclopedia

The problem of creation of money via interests is that it pushes inflation.

M x V = P x Q
where

M: Money ($)
V: Velocity of flow (how many times it flows)
P: Price ($/unit)
Q: Quantity (units)

So it means that if you have V = 1 and you have $100 (M) and 100 units (Q), the price of goods will be $1 (P).
But banks produce nothing and they create money in their books.
Let's imagine that the bank created $100 in the form of interests.
It means M = $200 and Q = 100 units.

So the price will become $2.

Currently there is enough money already created to cause a global hyperinflation. But banks are holding the money (V is reduced) because they do not want to appear as insolvent. This is why you have deflation, because US economy is based on debt. So you have tons of money, but velocity of flow is low, and it creates the illusion of being in need to create money.

But as soon as they get to back the money they created with real assets, by taking people's homes and having abusive credit card conditions, the ghost money of interests becomes money backed by real assets.

It would be better to let banks to fail and all that ghost money that was created by the banks would disappear, destroying money and reducing the hyperinflationary pressure and making dollar to be not so weak.

Right now Geithner is telling Asia that US is doing everything to keep a strong dollar. But as money is not being destroyed, it is inflating a dangerous bubble of hyperinflation.

Hyperinflation triggered communist revolution in Russia, French revolution, chinese communist revolution, riots by starved people in Argentina in 1989, it fueled the raise of right winger nazis after the hyperinflation of 1923 and the 1930's crisis...

[SmartAlx]

Originally Posted by ar81

Let's imagine economy has $1.
I lend you $1 and I as you $1 million in return.
How much money does economy have before you pay me? $1 or $1 million?
The answer is $1 million.

You made a grammatical error there so I can't follow what you are saying. But I do know that when you say that the economy has $1 in it, it does not have $1 million in it.

If the economy has $1 in it, you loan me $1 and you say I owe you $1 in interest on top of the $1 you loaned me, the economy doesn't now have $3 in it. Before I pay the debt off it has $2 in it. After I pay the principle back it has $1 in it again, but I still owe the interest. After I pay the interest the economy has 0, yes! ZERO dollars in it. This is why interest is so harmful. Interest anihalates money.

Interests create money in the accounting books.

Interest doesn't create money. It is anti-money. It anihalates money like antimatter anihalates matter. Interest can not be used like real money. You can not buy a house with interest. You can not buy goods with interest. You can not be used to pay for services. It is a ledger entry that says someone owes this amount of debt on top of the debt "we" created for him.

[ar81]

Originally Posted by SmartAlx

You made a grammatical error there so I can't follow what you are saying. But I do know that when you say that the economy has $1 in it, it does not have $1 million in it.

Ooops, I was asleep and I started to type.
I meant I lend you $1, then you pay me $1 million. It makes $999,999 of interests.
This exaggeration makes the effect of interests to be very visible.

Yes $1 million does exist.
That $1 million is reflected in the company balance as "account receivable" asset.
And if the loan is refinanced, the principal of the refinanced loan will be $1 million. So lots of money will be created in the accounting books.

The problem of that money is that it is not backed by goods, so if debtor defaults, that money will exist only in the accounting books and you would have a "toxic asset" also called "troubled asset". Some other call it "ghost wealth" or just plain "fake money".

This toxic asset will be backed by goods when you work hard in a job that produces value added, so you worked to earn $999,999 and then as the loan is completely repaid, then the $1 million will be backed by the value added you produced. In the meantime, the money that was not repaid remains a toxic asset.

How do banks get to repay toxic assets? Since subprime customers can't pay, the rest of people will pay. It can be achieved with government bailouts and abusive conditions for credit card holders.

Another way to explain how money is created is this: Imagine I lend you mass of planet Earth. I lend you 100% of the mass of the planet, and you must pay a 5% of interest, but you have no spacecrafts. To pay me, you'd need to create new mass, or bring it from somewhere, so the amount of mass increases.

Originally Posted by SmartAlx

If the economy has $1 in it, you loan me $1 and you say I owe you $1 in interest on top of the $1 you loaned me, the economy doesn't now have $3 in it. Before I pay the debt off it has $2 in it. After I pay the principle back it has $1 in it again, but I still owe the interest. After I pay the interest the economy has 0, yes! ZERO dollars in it. This is why interest is so harmful. Interest anihalates money.Interest doesn't create money. It is anti-money. It anihalates money like antimatter anihalates matter. Interest can not be used like real money. You can not buy a house with interest. You can not buy goods with interest. You can not be used to pay for services. It is a ledger entry that says someone owes this amount of debt on top of the debt "we" created for him.

No. In this case I lend you $1 and I ask $1 million in return ($999,999 of interests so you can see the effect of interests). Economy has $1 million when I enter $1 million as assets in the accounting books.

There are several ways in wich money is created, that does not involve printing bills by a central bank. Those ways create inflationary pressure. But business schools do not teach that, because they are focused on microeconomics, and this microeconomical view that disregards the big picture or macroeconomics, is exactly what caused this crisis. They designed creatures without looking at the efect on the overall system.

The problem of people driven by microeconomics is that they do not realize about their effect on macroeconomics, so they mistake money as equivalent of wealth, so they create money that is not backed by goods, which creates inflationary pressures.

When banks get to have their toxic assets repaid, the amount ofmoney that would flow should be enough to have a planetary hyperinflation.

Right now we have M that has been growing faster than Q, so it creates inflationary pressure on P. But how is that you have deflation instead of hyper inflation?

Banks have restricted the flow of money by not lending, so they do not appear as insolvent, so the inexistence of their toxic assets become apparent, and in a debt based economy it means a reduction of V.

But when toxic assets are repaid by people with real assets, V will return to normal levels and the amount of money that was created will be apparent, causing a hyperinflation.

US has done nothing to balance its economy. Indeed it has done the opposite of what is recommended. Why? Because it wants to play the same game it played in past decades, while being confident of finding a way to export crisis.

[SmartAlx]

Originally Posted by ar81

Ooops, I was asleep and I started to type.
I meant I lend you $1, then you pay me $1 million. It makes $999,999 of interests.
This exaggeration makes the effect of interests to be very visible.

Quite the contrary. It does the opposite. I think my example makes it even more clear. Reread it again if you please.

In your example though how can I possibly pay a million dollars in interest if the economy only has $2 in it to pay that amount? Where do I get that million dollars? Where? Where?

I have to borrow the million dollars from an institution that has the ability to create money... a bank. But even then the money is not created. I have to give it to you and then I owe the million dollars as principle and the bank is going to tack on additional interest. If the bank charges the same interest you do, I now owe them $1 TRILLION! Where do I get the money to pay the trillion dollars now? That amount doesn't exist in the economy. So how do I get the trillion dollars? I can't get it. In fact it would be obviously stupid for me to borrow money just to pay interest. (Of course this is exactly what the government does - and it's another reason why our national "dept" is skyrocketing.) I need to be able to pay you the million dollars without borrowing it. How do I do that?

Work? Well, where does my employer get the money to pay me? He gets it from his clients. Where do they get the money? They borrow it... from a bank. And they have to pay interest on THAT money. Again, the interest is not created money. It is a vaccum that sucks up money. It does NOTHING but destroy money.

There is no reason to get overly analytical here. Mathematical formulas and words like macroeconomics are concepts that the creators of the system use to keep dumb laypeople from trying to figure it all out. If the public learned how simple economics is, they would riot and hang the Federal Reserve board up by their necks.

If you haven't yet, I suggest you watch the free video, Money as Debt on Youtube. It explains our banking system in easy to understand language.

[Acting Like Godot]

you lend me a dollar. With that dollar, i buy tools, equipment, raw materials etc. I make ten dollars worth of goods, and sell them. I repay you with one fifty, and keep eight fifty for myself.

[SmartAlx]

Originally Posted by Acting Like Godot

you lend me a dollar. With that dollar, i buy tools, equipment, raw materials etc. I make ten dollars worth of goods, and sell them. I repay you with one fifty, and keep eight fifty for myself.

But the economy only has $2 in it. Where did the $10 come from? It couldn't have come from the economy. The best you could have done was give me $2. But then you wouldn't have made any profit.