I know there must be a fallacy here somewhere that I am just not catching. I do believe it falls in the factual catagory. Here:
It is August. In a small town on the South Coast of France, the holiday season is in full swing, but it is raining, so there is not much business happening. Everyone is heavily in debt.
A rich Russian tourist arrives in the foyer of the small Ste. Anne hotel. He asks for a room, putting a 100 Euro note on the reception counter. He takes a key, and goes to inspect the room, located up the stairs on the third floor.
The hotel owner takes the banknote and rushes to his meat supplier to whom he owes E100. The butcher takes the money and races to his supplier to pay his debt. The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago. The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit. The prostitute goes quickly to the Ste. Anne hotel, and pays the hotel owner her debt for her hourly room she used to entertain clients.
At that moment, the rich Russian comes down to reception and informs the hotel owner that the proposed room is unsatisfactory. He takes his E100 back and departs.
Does there have to be a fallacy? As described, everyone owed 100 euros, and was owed an equal amount.
Note that all the debts could have been adjusted through barter arrangements, but those would have been very complicated. One of the values of currency is how it avoids that kind of complication.
I suck at these things but I don’t think there’s actually a fallacy there. The hotel owner started off with 0 dollars (+100 from the whore and -100 from the butcher) and after the money got thrown around, she ended with zero dollars as well.
I dont think there is any fallacy.
If the whole towns debt was circular for $100 (A owes B, B owes C, C owes D, D owes A) then the passing of $100 was just a formality. They may have well just call the debt even and not bothered passing the money.
Perhaps the only fallacy is that it assumes an infinitely (or at least very) high velocity of money, but it says a lot that “velocity of money” is a legitimate economics term created to describe this phenomenon.
Each person owes the next E100 and form a closed circle. If they all knew of each other’s debt they could just as reasonably all agree to dissolve the debt and agree they are all zeroed out without ever exchanging a dime.
Generally people do not know about debts down the line though so they need to actually push the money through the system.
Money working as it should. If all those people had gotten together and worked out the various debts then money wouldn’t be necessary, other than as a unit of measure for the debts. Since none of the people involved actually had any Euro notes (apparently) they needed a rich Russian to put those notes into the system. The debts discharged like static electricity then.
The only question is the name of the French prostitute who works on credit?
This was a skit on The Dick van Dyke Show in the early 60s. That’s how long the joke has been around.
There’s no fallacy or paradox. The joke is that everybody just happens to owe everybody else a previous debt that coincidentally happens to be exactly the same amount. It’s the real world simplified into absurdity. Most of the time small individuals owe very large lenders rather than one another and the payments are stretched out over time. Here everything is compressed. It’s comedy, but it’s not technically wrong.
This illustrates the value of money as a medium of exchange. The chain of debts could have been erased if only everyone had come together and worked out exactly who owed what to who, and traded debts between them, until everyone came out even. But that would have taken organizational work. Using money as a medium of exchange allows people to exchange goods and services without worrying about matching those goods and services. They just agree on a value for the goods and services and exchange tokens equivalent to that value.
In places where money is scarce certain key goods can be used as a medium of exchange in a similar manner. Say cowrie shells are used. Then it doesn’t matter that no one actually cares about cowrie shells, they know they can pay their debts with cowrie shells and so they readily accept cowrie shells in barter from other people. And this is how whiskey, or cattle, or cigarettes, or cowrie shells, or cacao beans get used as money. And also how lumps of rare metals get used as money, and then uniform ingots of metal, and then paper receipts that can be exchanged for metal ingots, and then just the paper receipts, and then just an electronic representation of that paper.
I think there’s an implicit fallacy in how it’s supposed to be read: the way the example is set up, it leaves the reader with the impression that all the parties involved started off on -100 euros, and all ended up at 0, so that somehow they’ve all paid off their debts by adding ‘phantom money’ to the system. But as has been pointed out, because everyone was owed 100 euros as well, they didn’t start down and end even, they all started on 0 and ended on 0.
Or to put it in double-entry bookkeeping terms, everyone had a net balance of zero: each had a liability of 100 euros they owed, and an asset of 100 euros someone else owed them on the books.
The fallacy? The hotel owner took a big risk using that E100, and got very very lucky the money came back before the tourist decided he didn’t want the room. It was a deposit that should have been held ready.
Hmm. I think parallels might could be drawn between this and the current banking crisis…
