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?

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