DEDICATED TO THE MEMORY OF FERDINAND LIPS WHO ARDENTLY ADVOCATED THE PRESERVATION OF KNOWLEDGE HOW TO RUN A GOLD STANDARD SO THAT IT CAN BE PASSED ON TO FUTURE GENERATIONS
Courtesy of Professor Antal E Fekete @ NASOE.org:
Social Circulating Capital
When does a river cease to be a river? At the moment it gets within sight of the sea. As the river is descending to sea level significant and conspicuous changes occur. The salinity of the water increases sharply and, with it, the ecology changes. Water molecules lose their potential energy and their kinetic energy is converted to entropy.
Similarly, the flow of myriad goods from producer to market also undergoes a remarkable metamorphosis when it gets within sight of the consumer. Adam Smith was the first to notice this interesting phenomenon. He formulated the concept of social circulating capital. By this he meant the mass of finished or semi-finished consumer goods which has reached sufficient proximity and is moving sufficiently fast to the ultimate cash-paying consumer so that its destiny of being consumed presently can no longer be in doubt.
The analogy between the flow of goods to the final consumer and the river emptying into the ocean can be profitably extended to include economic entropy. The risks and uncertainties, so characteristic of processing in the earlier stages of production, all but disappear by the time the maturing goods become part and parcel of social circulating capital and sale at the going price can be taken for granted. Speculation and other forms of risk-taking give way to the highly predictable automatic processes of distribution. In particular, established retail prices do not normally change in response to changes in demand because of the increase in economic entropy, measuring the reduction of uncertainty and risk.
The vanishing of uncertainty and risk, the emergence of social circulating capital, and increase in economic entropy are manifested in a most dramatic fashion through the appearance of liquidity. To Adam Smith liquidity was tantamount to the spontaneous circulation of real bills that he observed in Manchester and Lancashire\. It refers to the qualitative difference between goods carried by the trade at virtually no risk in anticipation of sale to the final consumer at established prices, and other goods carried at considerable risk in anticipation of an eventual appreciation in value. Continue reading