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A mountain lake in British Columbia

economics102

Brexit: the unilateral free trade option

 

As the British and the Europeans renegotiate the European Union following a British referendum a number of options are being considered.  What will not be considered is the option which would in the long term give the best standard of living – unilateral free trade.

For a long time this blogger has believed the best way to do free trade is for a country to do it on its own by removing all barriers to imports.  “Free trade” agreements are not free trade, they are negotiated trade.  To get the full benefits of the law of comparative advantage there must be no barriers to imports. There should be no import duties, no quotas and health and safety restrictions should be genuine rather than to restrict imports.

Unilateral free trade could easily be done by any country as each country has the right to control its imports.  This will leave them open to “dumping” or subsidies by trading partners.  If another country wants to subsidize our standard of living, then we should say, “Thank you very much”.

The case for free trade is based on the law of comparative advantage which says that two countries will be better off if they specialize in their most efficient production and trade even if one of the countries is more efficient in all trading items.  With our background we generally think of better off as meaning more economic growth but it could also mean more leisure time.  The law still applies.

There are two major problems with unilateral free traded – our  commitment to economic growth and the difficulty in making employment changes.

This blogger believes there will be little if any future economic growth because we have used up the easily accessible energy and mineral resources.  There are lots left on the surface of this planet but they are so difficult to extract they are mostly useless.  I also believe many people are aware of this economic uncertainty even if they do not understand what is happening.  This is probably behind the British vote for Brexit, the United States election of Donald Trump,  the increasing popularity of extreme left and right wing politicians and the rise of dictatorships around the world and a lot of other unpleasant developments.

The fear of losing one’s job is highly emotional and this is the second big problem with free trade.  Free trade means changes in production and this means some people will lose their jobs and have to find new employment.  The other side of this problem is that economic changes are a fact of life and will happen regardless of free trade.  We try to deal with changing market conditions with subsidies, import quotas, health and safety restrictions on imports and other trade restrictions. In the long term market forces usually win.

Under current economic conditions a lot of people are likely to lose their employment and a lot of people are going to suffer.  The challenge should be to facilitate the changes and reduce the suffering.  Most people are going to have to accept a lower standard of living.  This blogger believes the best way to adjust is to introduce a basic income plan.  For more discussion of this please see the rest of this weblog and my book Funny Money: Adapting to a Down Economy.

This guy believes the British and the Europeans would benefit if the British were to use the referendum as an opportunity for unilateral free trade.  I also would not want to be a part of the negotiating team as there is unlikely to be a consensus as to what degree of trade to negotiate.  There is so much fear, so many emotions and so many conflicting interests that it will be difficult to come up with something most people will be able to accept.  There is likely to be a lot of turmoil.

 

 

Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

Why debt is a huge problem

Generally accepted wisdom tells us that excessive debt is a serious problem although some people question why government debt to a central bank is problematic. After all what is wrong with one government agency owing money to another?  Why not just let the debt build up?

In this case the generally accepted wisdom is probably correct because debt is an important part of our money supply.   If we were to lose our money supply our economy would be in big trouble.

Money is a complex part of our economy and I suspect few people, including a lot of economists, really understand how it works.  Fractional reserve banking is complex but I have found it relative easy to understand.  I have explained it in the essay  LETS go to market: Dealing with the financial crisis on this weblog and there are numerous explanations that can be found with any search engine.  I encourage you to figure it out.

About 90 per cent of our money supply is based on the debt created in fractional reserve banking. This is a problem for three reasons.

The first is that the money supply needs to be flexible up and down.  The amount of money we need to facilitate the exchange of goods and services must be proportional to the quantity of goods and services we need to exchange.  I know economists like to model the economy on a least squares regression formula which gives an upwards line with a steady slope.  However, the reality is that the economy behaves like a fractal which means there are a series of ups and downs and more ups and downs within each trend. The amount of money needed varies with each up and down but fractional reserve money can only keep on increasing.  This sort of works when there is continuous economic growth but if growth slows or reverses, then there are problems.

The second problem with fractional reserve banking is that interest is charged on the debt created. This adds a purely financial demand for more money in that it is not needed for exchange of goods and services.  If all outstanding debts plus interest had to be repaid at the same time there would not be enough money in the economy. From time to time this feature of fractional reserve banking catches up with us and we call it a financial crisis.

The third problem is that when there is a financial crisis lots of people lose their savings.  The need to save for a rainy day, or retirement, is a part of our psyche and fully exploited by the marketing arm of the financial industry but there are three ways in which we can lose our savings: a financial crises, inflation or a major economic downturn. these are more likely when the economy is not growing or declining. With the current economic climate most of us would probably be better off to live for today and worry about tomorrow when that day comes.  The best way to secure one’s future is probably a market garden.

These are real problems and from time to time they cause havoc in the lives of most of us.  Therefore we are right to worry about excessive debt.  The good news is that there are other ways of creating money and the bad news is that money is such an emotional concept that most people are not prepared to consider other ideas.

One of the other ways of creating money is discussed in my ebook Funny Money: Adapting to a down economy which is available free from the link at the top of this weblog.

We tend to take money for granted so long as the economy is working but it is such an important concept that we would do well to try to understand it and make changes.  I cannot see that happening so in the meantime we should remember the advise of Shakespeare: Neither a lender nor a borrower be.

 

The theology of being good or mean

Do we need religion to tell us to be kind to others or do we need religion to give us permission to be selfish and inconsiderate of others?

This question follows from an article which outlines some of the scriptures used by some North Americans to justify policies which some of us might think are mean.

Shortly after leaving high school this guy came across a book called The Panchatantra which is part of the wisdom literature of ancient India.  One of the verses which has stayed with me through the years is:

Forget you prosings manifold,
the moral law is easily told,
to help your neighbour, that is good,
to hurt him, that is devilhood..

This simple verse is straight forward and one would think  it, or something similar, is all people need for moral guidance.  How ever , at least in our culture, some people follow it some of the time, some people ignore it all the time and some people follow it all (or most) of the time.

It would be interesting to know if this applies to all cultures or are there some in which all people follow the  principle all  the time.  To answer this one would probably have to spend several reincarnations doing field work in anthropology.

Reading the above article I note that almost all the scriptural references provide justification for being mean to others.  Could it be that if one wants to be selfish or nasty one needs divine assistance?  A lot of our economic culture is based on exploiting and taking advantage of other people.  If you are a part or nearly a part of the one percent your fortune and your status depend upon others working hard.

I think we should make a distinction between economic well-being and theological salvation.  It may be that we alone are responsible for our salvation, but people should not have to go hungry.

This blogger believes the technology which allows us to produce so much with so little effort should be a part of our collective inheritance.  The benefits should be shared equally rather than going to  few people.

Regardless of what Christian or other scriptures say, I think we should expect people to follow ancient Hindu moral law.

Guaranteed work or guaranteed income?

As an alternative to a basic income scheme a commentator on Medium is proposing universal guaranteed work.  This writer has put a lot of thought into his proposal and deserves to have it given some consideration.  I have a strong commitment to a guaranteed income scheme and I have some heavy-duty concerns about his work plan.

My first concern is a belief that we do not have enough energy and mineral resources to provide employment for all the people who inhabit this planet.  There are still lots of resources but we have cherry picked the most accessible and those which are left will require lots of inexpensive energy to extract.  Even if the cost of solar energy continues to drop there may not be enough other resources to maintain the economic growth required to provide work for everyone. Topsoil is a major resource which may deteriorate and restrict growth.

The proposal for guaranteed work is probably based on a belief in economic growth and a long tradition that people must “do their share” and work to support themselves.  It may be that some people see a basic income scheme as a way of distributing goods and services rather than as an economic necessity.

Technology has been changing our economy at least since an ancient farmer discovered he could increase his production by using a horse with a collar instead of an ox with harnesses.  This development and all those that  followed allowed fewer people to work the land and more people to do other things such as fight and prey.  (In medieval times there were three classes of people – those who prayed, those who fought and those who worked to support the first two.)  My professor of European economic history spent a lot of time talking about agricultural developments which increased productivity.

Modern technology is an extension of this trend releasing more people to do things other than work to provide food and shelter.  A major question is what is this free time going to be used for.  There are many choices beyond preying and fighting including making more electronic gadgets and performing or listening to music.  Another question is who is going to make the decision about what to do with this time.  I believe individuals should be able to make the decisions for themselves.

My third concern is that a guaranteed work scheme is a continuation of the work ethic which allows a few people to tell the rest of us what to do.  We should consider the agricultural surplus and the benefits of technology an inheritance for all of us rather than a right which can be expropriated by a few.  We should be able to decide for ourselves what we want to do with the free time we have inherited from our ancestors.  That could be drinking beer or creating great works of art.  Who is to say one activity is better than another? We need a leisure ethic rather than a work ethic.

Sadly there are some people who feel they should be able to tell others how to live their lives.  A universal guaranteed work scheme is an open invitation to these people to practice this dark business.

Our civilization has to deal with some serious economic problems.  I fear the work program as proposed would make a lot of those problems even worse.  A guaranteed income program would not be enough to solve all the problems but it would be a start and needs a lot more thought.

 

 

Pensions: Promises and reality

It is difficult for this blogger to get excited about pensions because he grew up to Doris Day singing “Whatever will be, will be“.  I heard that song so many times I still believe it.

There are two things that make pensions difficult.  They are part of a big business and they involve promises to be redeemed  in an unknown future.

This post was inspired by this article in The Economist about pension problems in Taiwan but the ideas here apply anywhere around the world where people rely upon pensions for their future.

Pensions are a problem because we evaluate economic problems in monetary terms and assume there will be no inflation or deflation.  We would get a more accurate evaluation if we did it in physical terms.  The reality is that our future standards of living depend upon the ratio of population to the quantity of goods and services we will be capable of producing. Monetary savings will probably be irrelevant thanks to inflation or bankruptcy.

We know, or we should know, from experience that the economic growth is fractal in nature rather than linear as we learned in university economics.  Being fractal means there are a series of ups and downs and sometimes major changes in direction.  There is some evidence that we are experiencing a major turning down.  This blogger  believes current economic problems are because we have used up the most easily accessible energy and mineral resources.  Yes, there are lots left but they require so much energy to extract they are mostly useless.  Regardless of what financial people say there may  be some grim prospects. If this analysis is correct the best career and investment is a market garden.

Pensions and other forms of savings are a big business in which sales people earn  commissions and profits on current sales.  They are selling promises for a future they probably will not have to keep.  The reality is that there may not be enough resources to keep them.

To believe in pensions one must have a lot of faith that the world is going to continue as it is for the rest of one’s life.  We can sometimes see into the near future but the further out we look the more blurred is our vision.

Back to Doris Day.

 

Solar energy – excitement and challenges

The most exciting, and challenging, economic news of recent days has been that in some parts of the world solar is now lower cost than other forms of energy and that is without subsidies. (One, two, three.) This is exciting because so much of what we call civilization is dependent upon cheap energy.  There are indications that the cost of solar energy will decrease even further and that it will become  available to most of us.

This is also challenging because of the economic changes which will have to be made including the writing off of a lot existing infrastructure.

We must start this discussion by noting that energy is only one input into economic growth.  A shortage of other minerals, agricultural land and over population may make a return to economic growth difficult.

A major problem in adapting to lower electricity costs will be the existing infrastructure. The price of an item is equal to the marginal cost of producing the last unit.  This means that if solar energy can be produced cheaper than other forms of electricity the producers of that energy will have to lower their prices or go out of business.  It may take time to work out but we can anticipate a lot of infrastructure will become obsolete.  Do not be surprised if there are demands for subsidies to protect firms from unfair competition.

The falling marginal cost may be a problem for the production of solar energy.  With fossil fuels we have been used to rising marginal costs which means the owners of cheaper oil have been reaping windfall profits as the price of oil has gone up.  This writer is not aware that much economic thought has been put into dealing with falling marginal costs on this scale but some people will have more expensive solar energy than others or will have to write off their initial investment.

Another interesting feature of solar energy is it is unlikely any corporation will get an exclusive license to use it.  With costs falling to the point where most people will be able afford their own solar collector(s) decision making power will be transferred to individuals.  No longer will bankers and governments be making decisions for us.

I am skeptical that cheap solar energy is going to mean a return to economic growth and the way our economy is currently organized requires growth for most of us to live in comfort.  Changing our economic organization will be far more difficult that introducing solar technology.

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