The Magic Penny effect: why greed causes economic disruption

     Malvina Reynolds, an American folk/blues singer-songwriter, wrote (among other things) a song called "The Magic Penny". You can see a full set of the lyrics at The Magic Penny song but the first verse and chorus go:

Love is something if you give it away,
Give it away, give it away.
Love is something if you give it away,
You end up having more.

It's just like a magic penny,
Hold it tight and you won't have any.
Lend it, spend it, and you'll have so many
They'll roll all over the floor.

     As talked about in my earlier blogs on money and economics, money is a symbol of resources. You cannot directly eat money, or grow money, or save money -- money is only a symbol. The symbol can take many forms -- solid ones such as gold or other "precious" or rare metals, electronic ones such as bitcoin, paper ones such as pound notes or Euro notes, or solid symbols of other wealth such as physical coins.

     Initial use of money arose out of the difficulty of having precisely what the other person wanted as barter -- or the difficulty of transporting it, keeping it alive, and transferring it. Even in a regular barter economy, it is difficult to have that cord of firewood in your pocket if you want somebody's fish. Much easier to have some mechanism of recording that the woodcutter owes you a cord of wood at some point in the future. Even easier if there is some common unit such that one cord of wood is equal to five Tunkels and one fish is equal to one Tunkel. Therefore, one cord of wood is equal to five fish.

     The magic penny effect is most directly related to the practice of hoarding. When you hoard something -- whether it is money, or food substances, or newspapers, or whatever -- you take it out of "circulation". It is unavailable to be used. In the case of food, it will eventually go bad and be unusable by anyone. In the case of newspapers, they can rot and the information will become outdated. in the case of money, those symbols of resources disappear from the economy. While they are not actively used, they are the equivalent of not existing.

     As the song goes, you can spend it or lend it and it will be an active resource. Present, and usable, to convert into food, or housing, or video games, or whatever. Within a capitalist society, it can be loaned to those who do not possess adequate symbols of resources at present and a tax (interest) can be charged against what they can contribute in the future. But, if you "hold it tight" it serves no purpose and might as well not exist -- and has the potential of disappearing (stolen, lost in an earthquake, paper equivalents burned, etc.)

     This is related to, but not the same as, the build-up of "phantom resources" or "accumulated capital". Controlled by a central center -- and able to be spent or lent -- but not freely available to those who can most use it (or, potentially, most deserve it. We'll plunge into that topic in a soon-to-come blog. But, for now, keep in mind the "magic penny" effect and see that money is actively used.