The US, European and Chinese economies demystified

In this post, we try to describe how some major economies of the world currently function by revisiting our village and understanding how it would look if it followed the model of each of those economies. We do this again without using the concept of money (only partly true because we use the concept of Government-Owes-U and money is nothing but a special form of GOU).

Note that what we are trying to describe certainly does not capture each and every nuanced detail of the economies. Note also that another layconomist might differ from us on the salient aspects of each economy that should be highlighted.

The US economy

If the village followed the current US economic model it might look like the following:

1. Wesley would be employed in the government and use his services to barter for produce, meat, shelter, clothes and GOUs. He might use IOUs to barter for toys. He would also be responsible for using GOUs to barter for produce, meat, shelter and clothes within the village on Debbie's behalf. Finally, He would be responsible for using GOUs to barter for toys with China on the village's behalf.
2. Fannie would be employed as a farmer and use her produce to barter for meat, shelter, clothes and GOUs. She might use IOUs to barter for toys. She would be paying "taxes" in the form of bartering her produce for Wesley's services.
3. Henry would be employed as a hunter and use his meat to barter for produce, shelter, clothes and GOUs. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his meat for Wesley's services.
4. Billy would be employed as a builder and use his shelter to barter for produce, meat, clothes and GOUs. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his shelter for Wesley's services.
5. Taylor would be employed as a tailor and use his clothes to barter for produce, meat, shelter and GOUs. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his shelter for Wesley's services.
6. Debbie is currently unemployed and using IOUs to barter for shelter, clothes and toys while getting produce and meat for free from the government (welfare). She might be training herself to produce something of value in the future that she can use to not only fulfil her IOUs but also to use for bartering in the future.
7. Main points:
1. The internal debt is in the form of GOUs to Fannie, Henry, Billy and Taylor that can be repaid whenever Debbie fulfils her IOUs. The external debt is in the form of GOUs to China that is balanced out by the IOUs that the villagers have to repay. The GOUs to China can be repaid in the future by having everybody work a little harder (if China is interested in what the village produces) which incidentally also allows the villagers to fulfil their IOU obligations.
2. The IOUs that people are using to barter for toys is what we would call consumer/credit card debt.
3. The GOUs that were used to barter for toys is essentially the $1.1 trillion that the US currently owes to China.
4. The $11.1 trillion public debt owed to Americans is essentially the internal debt in the form of GOUs to Fannie, Henry, Billy and Taylor.

European economy

If the village followed the current European economic model it might look like the following:

1. Wesley would be employed in the government and use his services to barter for produce, meat, shelter, and clothes. He might be using IOUs to barter for toys. He would also be responsible for collecting produce, meat, shelter and clothes from within the village in the form of extra "taxes" on Debbie's behalf. He would also be responsible for using GOUs to barter for toys with China on the village's behalf.
2. Fannie would be employed as a farmer and use her produce to barter for meat, shelter and clothes. She might use IOUs to barter for toys. She would be paying "taxes" in the form of bartering her produce for Wesley's services and simply covering Debbie's welfare.
3. Henry would be employed as a hunter and use his meat to barter for produce, shelter and clothes. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his meat for Wesley's services and simply covering Debbie's welfare.
4. Billy would be employed as a builder and use his shelter to barter for produce, meat and clothes. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his shelter for Wesley's services and simply covering Debbie's welfare.
5. Taylor would be employed as a tailor and use his clothes to barter for produce, meat and shelter. He might use IOUs to barter for toys. He would be paying "taxes" in the form of bartering his shelter for Wesley's services and simply covering Debbie's welfare.
6. Debbie is currently unemployed and using IOUs to barter for toys while getting shelter, clothes, produce and meat for free from the government (welfare). She might be training herself to produce something of value in the future that she can use to not only fulfil her IOUs but also to use for bartering in the future.
7. Main points:
1. In this particular scenario, there is no internal debt in the form of GOUs to Fannie, Henry, Billy and Taylor because Wesley instead of using GOUs to obtain the extra products simply got them by levying extra "taxes". The external debt is in the form of GOUs to China that is balanced out by the IOUs that the villagers have to repay. The GOUs to China can be repaid in the future by having everybody work a little harder (if China is interested in what the village produces) which incidentally also allows the villagers to fulfil their IOU obligations.
2. Alternatively, under the European model Wesley could have used GOUs instead of higher taxes to pay for Debbie's welfare just like in the US model described earlier. This would result in higher internal debt than in the US model because there are fewer Debbie's IOUs to balance out the higher number of GOUs issued.
3. The point to be highlighted is that welfare support in the European model is broader than in the US model. Broader welfare is supported either through higher taxes or by increasing debt or a combination of both.

Chinese Economy

If the village followed the Chinese economic model it would look like the following:

1. Wesley would be employed in the government and use his services to barter for produce and shelter. He would be responsible for using toys produced by Taylor to barter for the US and European GOUs. He would also be responsible for collecting produce from Fannie and Henry for Debbie. Finally, he would be responsible for using GOUs to barter for shelter and produce on Taylor's behalf.
2. Fannie and Henry would both be employed as farmers and use their produce to barter for GOUs and shelter that they will share together. They would be paying "taxes" in the form of bartering their produce for Wesley's services and Debbie's welfare.
3. Billy would be employed as a builder and use his shelter to barter for produce and Wesley's services. Wesley as part of the government also employs Billy to build more than required by other villagers in the hope that the shelter he is building will be in demand in the future. Billy uses the extra shelter he builds to barter for GOUs. He would be paying "taxes" in the form of bartering his shelter for Wesley's services and Debbie's welfare.
4. Taylor would NOT be employed as a tailor but as a toy maker using the know-how from the US and Europe. He would use his toys to barter with Wesley (who is acting as Taylor's proxy to barter with Fannie, Henry and Billy) for produce and shelter which he shares with Debbie. He would be paying "taxes" in the form of bartering his toys for Wesley's services and Debbie's welfare.
5. Debbie is currently unemployed while getting produce for free from the government (welfare) while sharing the shelter with Taylor. She might be training herself to produce something of value in the future to use for bartering in the future.
6. Main points:
1. There is some government debt in the form of GOUs to Fannie, Henry and Billy. There is no external debt and to put some icing on the cake there is external credit in the form of European and the US GOUs to China. China can use the GOUs to get something from Europe and the US if it is interested at some point in what those villages produce.
2. The productivity of Chinese farmers is lower than that of those in Europe and US because a greater fraction of the villagers are required to produce enough food for the entire village. This cuts down the amount of food avaiiable to each villager in China.
3. The villagers do not see any need to use their hard work to barter for clothes which they feel is a luxury.
4. The villagers do not see any need to own individual shelters when they can share it with somebody else. They would rather save (in the form of GOUs) than use their hardwork to barter for things they don't feel is a necessity.
5. Basically, the point to be highlighted is that the villagers are not making/producing something that other villagers would want. That is, China has not transitioned to a consumption based economy where people feel the need to satisfy their many desires. However, they are producing something that will satisfy the desires of inhabitants of other villages. For this they are getting Chinese GOUs in exchange. The Chinese villagers are holding on to their GOUs hoping to exchange it for something they might want in the future.
6. It's quite possible to exchange US GOUs for European GOUs and Chinese GOUs and vice-versa at some exchange rate that we will explore at a later stage.