One way to interpret Adam Smith's Wealth of Nations is as a critique of and rebuttal to what he called the "mercantile system" or today what we would call mercantilism. One critique that Smith made in the book is that mercantilists had an incorrect notion of wealth. In Smith's view, mercantilists confused money and wealth. According to Smith, this misconception led many mercantilists to see trade surpluses as desirable because it was a way to accumulate gold (money) and therefore make the country richer. As it turns out, this is likely a straw man of Smith's own construction.Could this be the case? Also, Adam Smith may not have been aware of a group known as the Hartlib Circle - at any rate he did not acknowledge them in his work. Hendrickson continues:
Members of this group thought that the expansion of scientific knowledge would lead to permanent expansion in economic activity. This therefore required an expanding money supply to prevent deflation and other problems with insufficient liquidity. At least two writers within the Hartlib Circle denied that the value of money came from the commodity itself.Hendrickson explains further, how some members of the Hartlib Circle viewed money primarily as a form of security for transaction, as payment for other commodities. As it turns out, banks ultimately monopolized the capacity of credit claims in relation to (already) existing time value - a fact which meant tradesmen would not get the chance to originate credit claims as some among the Hartlib Circle had hoped. Then as now, credit serves as claims on (preexisting) wealth or time value not just for national transactions, but international transactions as well. Where I disagree with their arguments however, is in the idea of credit as capable of representing wealth beyond the specific endogenous claims which it makes.
Oddly, mercantilists of the time had one point which may have made their trade argument more compelling. Tradable product as opposed to services was the primary (alpha) point of origination, for the monetary representation of the real economy. As far as I can tell, the role of central bankers was to provide monetary representation for what was currently being produced, as opposed to honoring existing claims on production. Nevertheless, credit claims on international wealth holdings, gradually became somewhat of an indeterminate factor, particularly after the rise of fiat monetary representation in the twentieth century. Even a country's nominal income could not be considered as strictly limited to the resource capacity of any single nation.
While I applaud the impulse of the Hartlib Circle to make vital knowledge use an ongoing component of economic wealth, I do not believe that credit should be redefined as central to monetary policy, as means for even more indefinite claims on already existing wealth. Clearly, this urge to demote the integral structure of supply and demand in the misplaced hope of preserving meritocratic pay, is a battle that has been going on for a long time.
Defining credit as representative of wealth, would ultimately distort the very structure of fiat monetary policy. Again, whenever knowledge was asymmetrically compensated for replicated product which existed separately from time value, it was possible to complete the wealth creation cycle (referenced through Adam Smith's remarks in a recent post) instead of leaving it open ended in a dissipation of capital.
Merit compensation of knowledge, while certainly understandable, nonetheless makes an indeterminate demand on other existing resource capacity which can distort normal liquidity during times of economic stagnation. This desire to be able to compensate knowledge use indefinitely by means of a professional salary, is closely connected to the impulse to rely on a credit definition of money as representative of wealth. Unfortunately, credit defined wealth is capable of breaking down supply and demand structure, alongside the forms of resource backing that maintain links between time value and resource use.
Those indefinite claims on monetarily represented tangible product for knowledge use, are unnecessarily dragging down the very product formation which has been utilized to back vital forms of knowledge in recent centuries. Now that central bankers are intent on destroying imaginary inflation, less vitality in tradable sectors ultimately means a smaller horizon for knowledge use if the problem is not addressed, despite wishful thinking to the contrary. Does anyone wonder why the growing risks of a college education are now being stressed to potential students?
There is a simple means to keep monetary policy real: make certain that money continues to be backed by tangible product, so that supply and demand are always discernible in economic activity. Fortunately, this process is also possible through personal time value, much as any other forms of resource capacity. Vital forms of knowledge can still gain meritocratic support through asymmetric compensation, but only up to a point. And it is not just the preservation of knowledge use that is at stake, but the multitude of daily real life interactions which individuals find so comforting in the marketplace as a whole.
This is why I continue to suggest time backed money in local non tradable activity, as means to preserve knowledge and the integrity of monetary structure. Time backed money would allow symmetric compensation to also exist as a real economy component, capable of contributing to wealth as a point of origination, much as any other tradable good. Even though this approach to knowledge use is incremental in nature, it would allow monetary policy to adopt growth policies which no longer exclude a sizable portion of the population, whose positive frugal nature excludes the use of credit.