Economics and relationships

Relationships are an important part of life but it isn’t clear that economics involves  relationships until one starts reading anthropology. As anthropology sometimes deals with small societies in which there is no money it is much clearer that relationships are very much a part of the exchange of goods and services.

Where there is no money generally people have to work together or make exchanges via gifts. In both situations ones relationship to others is a part of the cooperation or the exchange.  In some cases what appears to be items of little apparent use or value are exchanged in order to define a friendship.

The use of money allows exchanges with many more people most of whom are strangers.  Even so we can consider there to be an economic  relationship  in these exchanges.

It might be possible to analyze economic history and economic development in terms of how relationships have changed or are changing. Clearly relationships in a feudal society were different from those in our own times and probably relationships during early industrialization were different still.

It may be that our relationships are more complex than in earlier times.  We now have relationships, with the people who produce the goods and services we consume, the people we work with, the people we sell to, our neighbors, people with common interests and people who represent government.

In my experience one of the most important things about relationships is that to have a satisfactory relationship there must be an equal exchange between the people involved..  Unfortunately not all relationships are satisfactory.

Studying relationships as a part of economics may not help predict future GNP but it might encourage us to  make our economy more rewarding and satisfactory.

Mild inflation to help the economy?

Another suggestion to get the economy rolling again is for central banks to encourage a mild increase in inflation.   Here are one, two articles proposing this.

Let’s look at my favorite economic formula which happens to show the connection between the financial and real economies:.


where M is the total money supply in the economy, V is the velocity or rate at which money is circulated,  P is the price and Q is the quantity of goods and services being exchanged.

Encouraging inflation would mean an increase in P.  This would lead to an increase in one or both of the variables on the other side – probably the M.  There have been reports lately that banks are not lending out money to the full extent of their balance sheets.  Therefore increasing P would probably help the banks to make more profits.

What’s not clear is how increasing P would lead to any increase in Q. The quantity of goods and services produced depends upon the resource base and the ease with which resources can be made available.

Natural gas in British Columbia

There are major concerns about the recovery of natural gas from shale deposits.  However, here in British Columbia we don’t hear much about those concerns, even though we produce a lot of the stuff.

I suspect there are three reasons we don’t pay much attention to the environmental concerns.

The gas is located in the north-east corner of the province,  a sparsely populated area a long way from the major population centers.  The tax revenues are a major contribution to the provincial budget. And a company that wants to export the gas has given an Indian band a lot of money to build a terminal on their reserve. To criticize this gas production would be to criticize natives and that is not politically correct.

But I should not be saying anything about this.  As a resident of British Columbia I and my family benefit from the tax revenues and quite a few of the natives involved are personal friends.

Protesting the Alberta oil sands

Last Thursday evening my wife forwarded an email about a protest of the Keystone pipeline.  Previously she has sent me notes about protesting the proposed pipeline through northern British Columbia.  Both would transport oil from the Alberta tar sands.  What did I think?

So I suggested that if she really wanted to protest the oil sands she should cancel our  weekend trip to a fourth birthday party some five hours drive away.

Oil from the tar sands is some of the most expensive to extract – it has a high marginal cost.  A relatively small decrease in demand for gasoline  might just bring the price down so as to make the tar sands project no longer viable.

The birthday party was fun and helped contribute to the Canadian Gross National Product.

The blackboard and the economic crisis

This week’s edition of The Economist has a series of articles focusing on the European financial crisis.

If we want to understand what is happening in Europe and the rest of the world I suggest we need to start by going back to the blackboard.

When my economics professors stood in front of the blackboard most of them drew a graph with two lines in the form of an x.  The macroeconomic professors usually labelled  one as representing the economy in financial terms and the other as representing the economy in  real or physical terms.  This is an important distinction which tends to be forgotten when we analyze problems away from the blackboard.  It is to easier to look at an economy in terms of its currency.

It is important to note that these two lines intersect so that what happens on one side will influence what happens on the other side.

So we need to ask if the current European crisis and if the crisis in the rest of the world is really a financial crisis or is it a crisis  on the physical side, in the resource base, which is showing up in financial terms.

There are some people who believe we are using  up resources at a rate which is  beyond sustainability.  If this is the case it is no wonder the people of this planet are dealing with a multitude of economic problems.

The Economist is pushing for policies which its  writers believe will restore growth.  It may be that instead we need to look for policies to manage negative growth.  The problem with policies to create more growth is that they will probably lead to even more using up of resources and will thus bring forward an even worse economic crash.

“Anti-American” bank safety issues.

There were a couple of bank safety issues in reports on today’s Huffington Post.

One suggests fears of the impact of the European debt crisis on American banks are overblown with only two banks exposed.  I am a skeptic.  Anytime a bank loses money the loss is likely to reduce the money supply which makes the exchange of goods and services more difficult.  It is hard to see that a major bank crisis in Europe would not be felt in North America.

The other item quotes the chief executive of JP Morgan Chase as saying new international capital requirements for banks are anti-American.

Once again I am skeptical.   In this case anti-American probably means anti-the short-term interests of the large banks. (His bank was one of the two named as being exposed to the European debt crisis.)

In normal circumstances the lower the reserves kept by banks the more they can loan out and the greater their profits.  Reserves are required to protect the bank against heavy defaults on money loaned and the prevent a run on the bank.

Considering the current state of the world economy we should be asking if reserves are high enough.

Leisure or consumer spending?

Some Canadian economists are saying economic recovery depends upon consumers spending more and that probably applies to most other countries.

Isn’t there something wrong with our lifestyle and our thinking when our well-being, even our having enough to eat, depends upon buying things whether we need them or not or no matter how long they will last?

Wouldn’t it be nice if we as individuals could choose leisure which could include a multitude of activities?

Job prospects for young people and grandchildren

This week’s issue of The Economist on jobs has left me feeling down and discouraged, especially the article on youth employment.

I was born in Western Canada during the 1940s and except for three years in England and Belgium I have lived here all my life.  This means most of my life has been lived through an unprecidented period of prosperity and in one of the most prosperous corners of the planet.  There is now reason to fear that prosperity is coming to an end.

At my age the end of prosperity will not be terribly serious but  my grandchildren are coming into their school years – one grandson started kindergarten yesterday – and I fear for their prospects and the future of all the young people throughout the world.

If we lived in a perfect world it should be possible to rearrange our economy so that most people could continue to live comfortable and fulfilling lives.   However, most of us most of the time think and act in our own short-term interests as opposed to our own long-term interests let alone the long-term interests of everyone.

I consider myself and my generation to be extremely lucky in the time and place in which we happened to be born and raised.

How to increase economic equality

Here’s another prescription for getting the economy back on track, this one from Robert B. Reich, the former secretary of labor, a professor at the University of California, Berkeley, and the author of “Aftershock: The Next Economy and America’s Future.”

The economy won’t really bounce back until America’s surge toward inequality is reversed.

I’m not certain this would restore us to the golden age of prosperity but it would certainly ease the human pain of the downturn.

One way to deal with inequality would be to try to move the economy closer to the perfect competition ideal because in perfect competition there are no profits and therefore everyone would be equal economically.

Here are some things we could do. (yeah, right)

– Basically rescind all economic legislation most of which works to restrict competition so that some people can make profits.

– Do away with patent and copyright legislation

– Give subsidies to consumers rather than producers.

– End most licensing requirements.

Wages on Labor Day

This being labor day it may be a good time for some observations on wages.

People and their wages are subject to  supply and demand. Thus when there is overpopulation then somehow or the other wages will decline.  For example there has been contracting out or  importing of goods made in counties with cheaper labor,

The exception (so far)  is in fields where there is a strong union providing a monopoly service which includes most civic employees.

Food prices, speculators and marginal cost

Here’s a link to a rather lengthy article blaming high food costs on speculators and investors in industrial agriculture.  It discusses many of the problems currently facing agricutlure and the human suffering caused by high food prices around the world.

I don’t want to defend either group but here is an alternative theory that  high food prices can be explained by the economic principal that prices are equal to the marginal cost of producing the last item.

This principal can be illustrated with two examples – oil and telecommunications.

As the demand for oil has increased and the easily accesible oil has been extracted oil producers have sought out more difficult deposits. – and the price has gone up. If the price had not gone up or if governments had legislated  a top price,  producers would not extract the more expensive oil.  Therefore the cost of oil is equal to the cost of the last unit extracted.  The result has been windfall profits for all those producers who still have supplies of cheaper oil.

The opposite has happened in telecommunications.  As capacity has increased and costs have fallen the cost of making one more phone call is nearly zero.  In this case we have all benefited.

Agriculture is probably more like oil. As demand has increased farmers are using less productive land and more expensive inputs and costs are going up. As the marginal cost of the the last unit produced goes up so do all the prices and once again their are windfall profits.for somebody.

Food supply and pricing is complex – some people claim there is no shortage of food in the world. and it is hard to believe otherwise when one visits a supermarket or farmers market in British Columbia   But then we can afford to pay the cost of bringing food in from other places which many people on this planet cannot.

Agriculture is of course complicated by subsidies which distort prices and interfere with efficient operation of the market and this may be a big source of problems.

Now back to the article,

I suspect the authors of this article are using speculators and investors in industrial agriculture as scapegoats.  Generally it is easier to identify symptoms than it is problems and it is more satisfying to seek out scapegoats than solutions.

Speculators take the risk. of price movements.  When prices are going up there are fewer risks although generally prices go up and down even if there is a strong trend.   If they weren’t in the market then somebody else would take the risk and make the profits or losses

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