01/13/2012 10:50 am ET Updated Mar 14, 2012

The Middle Class and Money Making Money

In the media recently, the question is being asked: how it is that the wealthy are doing so well while the middle class is suffering in comparison? The usual villains named are outsourcing and the resulting decline of the manufacturing base. Blame also goes to NAFTA and the other trade agreements negotiated by the last three administrations.

But there is another and more fundamental reason why we have this dramatic disparity in income. If you remember Economics 101 in college and the topic about the relationship between commodities and money, you may have seen, as I did, this little formulation written on the blackboard: C-M-C vs. M-C-M. The lecture had to do with a healthy system vs. an unhealthy one. I even recall the professor using the terms ethical and unethical in this context.

In a C-M-C economy, money functions as it was intended as the medium of exchange between commodities, all kinds of raw materials, produce, manufactured goods and services. In this natural system, some of the money made and earned passes into the hands of workers and that money works its way around and through the economy, benefitting many people. In effect wages multiply in value.

In an M-C-M economy, on the other hand, money is perverted into a commodity and real commodities serve only as an artificial and unnatural medium of exchange. In other words, people use money to make more money. In these cases money does not work into the general economy for the general welfare but remains in the hands of the few, sometimes not even involving a commodity except in name only. Combine that arrangement with beneficial tax and loophole policies and the effect is multiplied and protected.

One caveat: some may recognize the M-C-M system as an expression for arbitrage, the business of buying and selling of money, usually with no commodities involved. Sometimes, arbitrage serves a useful purpose in keeping the prices of commodities in balance with different currencies, but in general those in arbitrage have little or no contact with real commodities. But there is still a danger as we have seen in arbitrage manipulation of markets.

The point here is to suggest that using money to make money with little relationship to commodity is an unhealthy practice because it bypasses the makers of products, most of whom are the Middle Class. The result is that workers are left out of the loop and there are no wages to work their magic in the economy as a whole.

Another answer given to the disparity between the rich and the middle class is the failure of so-called trickle down economics. But here again is a misunderstanding. In an M-C-M economy, there is nothing to trickle down because commodity is either not involved or only marginally involved. And if the wealthy choose not to invest in the creation of commodity, the flow of money dries up.

As my professor explained to us in that Econ 101 class, he acquired knowledge and experience to sell to an institution which paid him a salary so that he could offer courses that students were willing to buy in order to acquire knowledge and experience. It was C-M-C working in good order. It worked for me for forty years in education and can work again.