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Economics Simplified




Ram wants to start a business.  He needs ₹1 million.  Desh Bank is a new bank where Shyam has deposited ₹1 million on completion of a recent contract of his. The bank is ready to give Ram a loan and transfers ₹1 million to his account.  Ram gives the contract for his new building for his proposed business to Shyam who demands ₹1 million for the job.  Ram gives Shyam a cheque for ₹1 million.  Shyam deposits the cheque in the bank.  How much money does Shyam have in his account now?  Answer: ₹2 million.  How much money is there actually in the bank?  Answer: ₹1 million.

Som similarly gets a loan of ₹1 million from Desh Bank.  He too employs Shyam as his contractor and gives a cheque for ₹1 million to Shyam who deposits it in the bank.  There’s now ₹3 million in Shyam’s account although the actual amount in the bank remains the same original ₹1 million.

Now Shyam wants to take out his ₹3 million to start a business of his own.  What happens?

Desh Bank seeks government assistance.  The government agrees to help so that the bank won’t collapse.  Where does the government get the money from?  It can raise the price of petrol and diesel by a few paise and a few millions will be materialised within minutes. 

This is just a parable adapted from Yuval Noah Harari’s book, A Brief History of Humankind.  Replace the names of the bank and the persons with some real names, make it a little more complex with more people and bigger amounts, and you will understand the way our economy works.



Comments

  1. Durga Prasad DashSeptember 20, 2017 at 4:38 PM

    Your blog has a new look. Great.
    That is unfortunately, the story of human kind. You pay for someone else's sin, someone who is much much richer than you.

    ReplyDelete
    Replies
    1. Tomichan MatheikalSeptember 20, 2017 at 7:32 PM

      Ah, you put it so precisely. Great comment. Great understanding. I'm obliged for such understanding. At least you won't shoot me. :)

      Delete
  2. Pranju chakrapaniSeptember 25, 2017 at 7:16 AM

    I have been reading this book, sapiens. It has broken my several beliefs and at the same time has evoked a certain helplessness in the entire system of imagined realities that we hold dear to us. The concept of money is itself the biggest imagined reality that people believe in. Stock exchange, banks, limited liability companies , religion, feminism, nationalism, capitalism , gods and gossips come along and hold our collective imagination.

    But for what? Where is it leading us to? If you go back and find the barter system stupid , then is the currency exchange system also a stupidity or an evolution of the imagined realitities? Are we moving towards a converging point, towards a unity with such progressive imaginations? What would be the conclusion? I am yet to finish the book but nonetheless the book raises more of such questions and inevitably makes me embrace the cognitive dissonance.

    ReplyDelete
    Replies
    1. Tomichan MatheikalSeptember 25, 2017 at 7:35 AM

      The book raises many radical questions. As long as most human beings choose to wallow in mediocrity, the civilisation will continue with limited liability systems.

      Delete

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