A mountain lake in British Columbia

economics102

The dynamics of private and public ownership

In discussions on the pros and cons of private versus public ownership one should consider competition, decision-making and the dynamics of relationships between firms and governments.

I figure the people who run firms behave in similar ways regardless of who owns the firm. Most of us most of the time think and act in our own short-term interests. This applies to most the people in government and business and makes for interesting dynamics where people do not always behave according to what they say.

Generally people in business dislike competition and try to limit it.  One way to restrict competition is to get governments to pass legislation which interferes with the operation of markets. licensing, tariffs, subsidies, patents and copyright all restrict competition and allow some firms to obtain profits they otherwise would not have.  This creates dynamics between firms (or business associations) and governments as firms want to ensure they have sympathetic governments and governments want business to support them..

The people in charge of governments generally want to remain in power and therefore most of their decision-making is to this end.  Thus the main difference between private and public ownership is in decision-making.  Private owners want to make profits while government owners want  to remain in power.  They want businesses under their control to make management decisions which will help in  a reelection (Or in the case of dictatorships to limit uprisings) and they also want to reward supporters with plum jobs.

All of this is further complicated by the fact that managers and owners (private or public)  may have different goals.  Managers may want to build empires rather than maximise profits.

Where do us consumers fit into this?  There are always people in government and industry who say they are working for our best interests but most of the time I don’t believe them.  Generally our best interest is served when there is competition.  However, as noted above governments and industry work hard to restrict competition.  When  we have competition we get the best prices and a generally efficient economy.  In a competitive economy consumers get to make decisions according to their values.

 

 

The unemployed scapegoats

Apparently a lot of people are blaming themselves for their own unemployment.  This is sad because there is a high probability that our committment to the work ethic will make it difficult or impossible to cope humanely with the economic crisis.

I believe economics is largely about relationships and for relationships to be satisfactory they require a  more or less equal two-way exchange including compassion and understanding.  Too often the victims of the economic crisis are being blamed for their misfortune which is neither understanding nor compassionate.  For them to blame themselves must be psychologically devastating.

Our economic problems are a result of our having consumed the most easily accessible energy and mineral resources and are aggravated by a financial system that has a built-in collapse mechanism.  Those of us who have lived through and enjoyed the recent golden age of prosperity should collectively  take responsibility for the crisis even  though we would not be human if we had not used the resources. To blame any one group for what we have all done is to make them into scapegoats.

Our economic problems could be a lot worse than we would like to think and could lead to a population reduction up to 80 per cent.  That is what the native North Americans experienced when the Europeans arrived.  Of course we are exempt from that kind of disaster but there are so many things threatening our civilization and our way of life that we might be wise to think about how we can cope with a serious disaster so as to minimize human suffering.

One approach may be to look at anthropology and history.  How have other cultures organized themselves and how have they organized the exchange of goods and services.  This has allowed me to see that there are other ways of doing things.  Sometimes those other ways are very appealing.

Our culture places too much emphasis on jobs and employment.  Not only do jobs provide us with food, clothing, shelter and entertainment, they also provide us with self-identity.  If one does not have a job one is a nobody and deserves to be look down upon.  The proper place for such people is that famous burning garbage dump in Jerusalem known as hell.

The reality is that full employment is not a realistic expectation.  The huge agricultural surplus we currently produce makes it unnecessary and our having used up the most easily accessible resources makes it impossible. We need to reorganize our economy so that all people can have the opportunity for a standard of living similar to most other people regardless of what they do with their time.  This means we need to look at some sort of universal income scheme.  Before we can have an income scheme we have to get over our committment to the work ethic.

To some extent we all have to take responsibility for how we live our lives within limitations.  Sometimes we must live in circumstances that are beyond our control.

This blogger feels quite pessimistic about the economic future but has to recognize that people have been pessimistic about the future for millenia.  On the other hand, there have been times during the millenia when pessimism has been justified.  Please don’t blame the economic crisis on those people who are suffering from it.

 

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Will the coming infrastructure crises be one of finances or resources?

Following a weekend of driving a highway in British Columbia one has to believe this article in The Economist which claims it will cost $57 trillion to build and maintain the infrastructure the world needs between now and 2030.  And the road (Part of the Trans Canada highway between Sicamous and Golden) really wasn’t that bad.

The Economist writer is concerned with who will provide the finances for the needed work.  I think financial people are generally very good at creating money when there is a need.   The real problem is: will there be enough energy and mineral resources at a reasonable cost?   There will be lots of resources but we have already used up the most easily accessible and those that are left will take a lot of energy to access. Energy for infrastructure will be competing with all the other things we want to have and do.

One of the issues will be priorities.  Most of us, most of the time act and think in our own short-term interests as opposed to the long-term interests of our communities and even own long-term interests.  We may know that a bridge is past its prime but so long as it remains intact it will be a long-term project and sacrificed for other things that are short-term.  When the bridge was first built it was a short-term need.

Most of the current infrastructure was built during our golden years of prosperity and people were optimistic.  Most of us are now aware there are problems in the economy even if we don’t know why.  There will be people who will risk their savings on long-term investments for a good potential return but I suspect a lot of people will be hesitant to take the risk.

The current infrastructure projects mentioned in the article are along way from the total of $57 trillion which will be needed.  We might be wise to stock up on duct tape.

Speaking of Bridges, the pictures are of one of my favorites: The Kicking Horse Pedestrian Bridge in Golden, B.C. A link.

 

 

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The quantity theory of money and transforming economists into fairy godmothers

It could be that the quantity theory of money is controversial and often dismissed because it deals with two aspects of economics where we most want to deceive ourselves – money and economic growth.

When I  started to research and think about this post I quickly got so ticked off that I went downstairs to my lathe to transform a piece of firewood into a magic wand for one of my grandchildren.  (Abracadabra.  All economists will become fairy godmothers – in their next reincarnations.)

The theory states that MV=PQ  where M is the money supply, V is the velocity at which the money changes hands,  P is the price level and Q is the quantity of goods and services exchanged.  What gets me ticked off is that this is frequently taken to mean there is a direct, proportional relationship between the money supply and the inflation rate or price level.   Can’t people see there are four variables in this formula?

The value in this formula is in that it explains relationships and shows how the real or physical side of the economy connects to the financial.  It is difficult because there are problems with fractional reserve money and because some people believe (or need to believe) that economic growth will always continue.  I think these are two aspects of economics where some people have psychological problems accepting the truth.    It becomes even more difficult if one tries to use this formula in a computer model as the four variables are difficult if not impossible to measure.

To maintain the equality, if one variable goes up then one or more of the other variables must also change,  For example, if the money supply increases then velocity must go down and/or one or both of the price level or the quantity of goods and services produced must go up.  It could be that during  recent decades the money supply was increasing faster than Q was increasing. We saw the difference as inflation.

The way we create money is a  major problem.

The fractional reserve creation of money works only so long as more and more money is being created.  Bankers create money by making loans. The problem is the interest.  If all loans plus interest had to be repaid at one time there would not be enough money in the system.. This is similar to a Ponze scheme and works only so long as more and more money can be created.

This means there is constant upwards pressure on the M in the formula – until the money creation breaks down and the M goes down suddenly and either prices fall or the quantity of goods and services produced goes down or both.  When the United States was trying to stick to a gold standard there were frequent economic crises because there was not always enough gold to support the amount of economic activity for which there were human and material resources.  The gold discoveries of the 19th century contributed to prosperity because they added to the money supply.

The big problem on the other side of the equation is Q.  A lot of people believe or assume economic growth will continue forever.  I figure Q behaves as a fractal, that is with ups and downs and ups and downs within each up and down – something like the seashore.

Some of the things which drive Q are not likely to be steady.  Discoveries of energy and mineral resources are erratic;  agricultural  production can vary with the weather; and new technology comes in spurts.  I think Q is currently being restrained because we have used up the most easily accessible energy and mineral resources.  We have picked the low-hanging fruit and what is left is going to take a lot of energy to get.

As Q is a fractal its changes in direction are likely to throw the equation out of balance and force one or more of the other variables to adjust.

Prices appear to respond mostly to changes in M or Q.  Sometimes governments decide to try to control inflation with price controls. and this usually causes problems with the balance of the equation.  Inflation is to the advantage of borrowers and deflation is to the advantage of lenders.  To be fair to everyone we need price stability.   As governments are large borrowers it is natural for people concerned with government finances to favor inflation.  Probably the best way to price stability would be to find another way of creating money so that the total is flexible.  Then the money supply rather than prices could respond to changes in the quantity of goods and services produced.

To the best of my knowledge not much is known about velocity.  I understand that in the days of the gold standard people would hoard gold if they were worried about other forms of money.

To call the formula MV+PQ the quantity theory of money is probably a little misleading. It would be better to think of it as the connectivity formula.  As such I believe it is very valuable in understanding what is happening to the economy.

Perhaps if we had more fairy godmothers we would have  a better understanding of what is happening to us.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

What will be left for our grandchildren?

Should we feel sorry for our grandchildren who will have to repay the massive debts we have been building up?  Probably not but we should feel sorry for our grandchildren who will have to survive on mineral and energy resources which are difficult to extract.

Debts can suffer fatalities from three causes: bankruptcy, inflation or government haircuts.  Considering current economic conditions  there is some possibility the current debt load will be written off before our grandchildren even understand the word.  If and when this happens there will be considerable  economic turmoil.

I believe economies should be analysed first and mostly in physical terms rather than money terms.  This way we can see some underlying trends and problems which can easily be hidden behind financial terms.

Currently we are probably dealing with problems in both sides of the economy.  We have used up the most easily accessible energy and mineral resources and the marginal cost of accessing what is left is going up.  At the same time the fraction reserve way of creating money in which interest is charged on the money supply is a Ponzi scheme which frequently breaks down.  Financial crises have long been a  feature of our economy.

If one analyses the economy only in phyiscal terms we are not living beyond our means as we produce everything we consume.  In this respect there can be no borrowing from the future.  What we are doing is using resources which won’t be available to our grandchildren at a reasonable cost.

A major financial collapse will have a devastating effect on our exchange of goods and services.  It is quite likely our grandchildren will have to pick up the pieces from a financial collapse.  What is more certain is that they will have to cope with our having used up the most easily accessibe energy and mineral resources.  There will be lots left for them but these resources will require a lot of energy to extract.  That will be enough of a burden to impose upon them.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Corporate profits, taxation and the market economy

Firms avoiding the payment of income taxes are good for headlines, but if we had a truly competitive market economy, the taxation of corporate profits would not be an issue because there would be no profits to tax.

Some people think profits are a divine right for entrepreneurs and shareholders and others see them as evil.  I see them as an  indication of the extent to which our so-called market economy is not performing the way we like to believe it does.

In a market economy a firm making profits is a signal for others to get into that field.  Competition will then force prices down till an equilibrium is reached at which there are wages and a return on investment but no profits.

Generally, the owners of businesses want to limit competition to  make as much profit as they can.  The most effective way is to get governments to pass legislation which restricts competition.   Governments are usually willing.  It is an easy way to repay obligations to supporters.  Licensing, trade restrictions, subsidies, copyright and patents all restrict competition.  The result is that consumers pay more than they should and firms make profits.   During the recent golden age of prosperity most people didn’t notice but now that things are much tighter we are noticing growing inequality and the disappearance of the middle class.

I think there is a pattern here.  Firms get legislation to limit competition and when the profits become too much for people to accept the calls for reform result in regulations.  As corporations have more lobbying power than consumers the regulations, if anything, restrict competition even more.

As profits result from a lack of competition the extent to which firms make profits are an indication of the extent to which we do not have a market economy.

If we really believed in economic equality and if we really want to limit profits we would repeal legislation that restricts competition.

 

If you like this post you are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Is minimum wage legislation the appropriate way to deal with poverty?

The problem with minimum wage legislation is that it is an inappropriate tool to solve a very difficult problem.  A universal basic income would be a more effective way of dealing with poverty.

People working for low wages are only a part of the problem of people struggling to survive on minimum incomes.  Legislated minimum wages may help some people at the bottom of the wage scale, but it will do nothing for the others and may even add to the number of unemployed.

The agricultural surplus is the excess food a farm worker produces beyond his/her own needs.  This is what allows the rest of us to do the things we do. With the huge agricultural surplus we currently have and with modern technology we do not need for everyone to “work” for the most part of their lives.

In our society we have traditionally distributed this surplus via jobs and wages.  It may be this system is breaking down and we should be looking for alternatives such as a basic income scheme.  Unfortunately many people have a religious quality belief that employment is essential and that anyone who does not work his/her entire life is a deadbeat.  The work ethic is great for those who want to build empires based the work of others.  Maybe the minimum wage is appealing because it is seen as a way of transferring profits to workers.

Another problem with minimum wage legislation is that it distorts the operation of the market and some low paying jobs may be lost as the minimum wage raises costs.    A universal income scheme would allow individuals to decide the minimum wage at which they would work.  Those people who want to eat fast foods would have to pay enough for the restaurant to attract workers as people would not be obligated to work in order to survive.

We probably should not take for granted the agricultural surplus will continue indefinitely as there are many things which could wreck our food factories.  There could also be problems with the non-agricultural part of our economy.  In either case minimum wage legislation will not be of much use whereas a universal income scheme might make adjustments easier.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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