Happy birthday Milton Friedman

In honor of what would have been Milton  Friedman’s 100th birthday the Webb has a number of suggestions that we need him to solve current economic problems.

If he were born in 1912 then he would have been in his 20s as the world was coming out of the depression and his thinking was strongly influenced by the world’s going into a period of unprecedented economic growth.

For his advice to be relevant now he would have to had adapted to current circumstances in which it is doubtful economic growth can continue.

Even so I like a lot of what he said.  Here’s a link to ten of his best quotes.

 

l

Decision making and subsidies for bio fuels

In spite of low prices for shale gas there appear to be increasing concerns about energy availability.

We need energy to keep our bodies alive and we need energy to operate the machines upon which we depend. All energy comes from the sun and we use it in different forms for food and fuel.

The problem comes when the same form of energy can be used for both  as is the case with bio fuels such as corn and sugar.  Who is to decide the balance?

Some people concerned about fuel shortages have sought and been given subsides for bio fuels.

The chairman of Nestle, wanting people to buy more of his processed food products is complaining about the subsidies as they appear to be contributing to high food prices.

So long as the subsidies continue the balance is being determined by some politician and/or bureaucrat.

If there were no subsidies you and I would be making the decision in our shopping  decisions.

As we live a 45-minute drive from the store where we do most of our shopping our decisions would probably be different from yours. If all government subsidies for all products were to be dropped we would probably have to make some major lifestyle changes.

Even so, I repeat that subsidies should be given to consumers rather than producers.

 

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.

Adam Smith and election funding

For some time I have been saying capitalism as we practice it should be defined as a system in which governments pass legislation which allows some people to make profits by restricting competition.

I hate to admit it but I have never read Adam Smith’s Wealth of Nations although some years ago I purchased a second-hand copy.

Therefore I perked up when I read a column in The Guardian that Adam Smith said something similar.

 

However, what is less well known is that Smith shared some of the key concerns of today’s critics of neoliberalism. His most famous work, The Wealth of Nations, offered a powerful political critique of the “one per cent” of his day, to borrow the terminology of the Occupy movement. In what he himself described as a “very violent attack” on an unjust status quo, Smith repeatedly emphasised the role of power, influence and class in distorting economic policy to serve the interests of a narrow elite.

 

Smith noted that the “English legislature has been peculiarly attentive to the interests of commerce” because policymakers were continually “imposed upon by the sophistry of merchants”. The vested interests “like an overgrown standing army … have become formidable to the government, and upon many occasions intimidate the legislature”. They argue their case “with all the passionate confidence of interested falsehood”, predicting national ruin if their demands are not met.

 

Now take a look at this item from The Huffington Post which reports on some aspects of financing for the current U.S. election.  It appears a lot of people with an interest in restricting competition are putting a lot of money into the election campaign.

I figure one of the most neglected features of the perfect competition model is that there should be perfect knowledge.

Therefore rather than restricting election financing I would suggest all parts of the campaign should include the source of funding and what legislation the source is interested in influencing or retaining.

I have now downloaded Adam Smith’s book onto my ereader.  That was a lot quicker than trying to find the hard copy.

 

Regulating banks and competition

This week’s The Economist has an article about a small bank in Texas which is challenging in court the Dodd-Frank act passed two years ago to increase the regulation of the banking industry.

I have a theory that most if not all economic legislation works to restrict competition and it appears the Dodd-Frank act does this by making life difficult for the small banks.

It also appears small banks, or at least this one, being small have to follow prudent banking practices and have fewer opportunities to gamble with other people’s money.

Maybe the best way to regulate the financial industries is to ensure they are highly competitive and repeal legislation which restricts competition.

Of course the big banks would turn their lobbyists loose on this one.

 

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.

Understanding the Euro crisis

The key to understanding the crisis in Europe (and around the world) is to go back to the classroom.

When economics professors start their lectures they often draw on the blackboard (or used to) an x-shaped graph with an x and y-axis.  One of the lines represents the real or physical aspect of the economy and the other represents the financial.

This is an important distinction which is mostly forgotten when we leave the classroom.

If we want to understand what is happening in Europe we must look at both sides of the graph.

On the financial side I think the way in which we create money is a Ponzi scheme which collapses from time to time.  We are probably dealing with a financial collapse which is made worse by what is happening in the physical world.

Since the depression of the 1930s the people of this world have used up a lot of resources.  There may be lots of resources left but we have used the most accessible.  What is left will require a lot more energy and work to extract.   This has to have a major impact on the economy.

To deal with the financial crisis we can regroup and continue until the next crisis or we could try to figure out a new way of creating money.

To deal with the resource crisis we may have to reevaluate our commitment to economic growth.

Considering the psychological and political difficulties in changing the way we create money or dropping a commitment to economic growth one starts to think we may be better not to try to understand the crisis.  But that too might pose some problems.

 

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.

Bashing Paul Krugman

I’ve been having difficulty coming up with an idea for a post but one can always fall back to bashing Paul Krugman.  While it’s fair game to disagree with someone I prefer not to put him down. I can’t resist this one.  The guy generates so many words he must have a DBS degree.  (The D stands for doctor.)

There are four areas of disagreement.

First, the stimulus and money creation policies he promotes  were what was needed in the 1930s but are probably not right for current circumstances.  Both of these have been tried and appear not to be working.

Second, if the underlying problem is with the resource base, then increasing economic activity is going to make things worse and possibly bring forward the date of a major economic collapse.

My third concern is that even if we have the resources to prepare for an alien invasion, is that really what we want to do with our time and resources. There are so many things to do in arts, music, crafts and social fields that some of us would find more rewarding.  Also I think each individual  should decide for him/herself what to do rather than have to do what some economist decrees.

A fourth concern is that inflation which he also promotes is a form of theft.

On the other hand Krugman does have some uses.  He gives us something to think about and he has helped me come up with a post for this weblog.

 

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.

The power of professionals

This week’s The Economist has two articles on medicine and doctors in China which prompted the following thoughts.

One of the more fascinating courses I took in university was on the sociology of work where the professor spent some time talking about what makes a professional.

We go to a professional when we are in a crisis and the professional has specialized knowledge which can help us.

This gives professionals a great deal of power over us and it encourages them to let us think they know more than they do.

It also means some of them are able to take advantage of us and it appears this applies to doctors in lots of countries.

The way for us to deal with this is to try to live a reasonable lifestyle (exercise and good diet) and when our turn comes, try to accept it gracefully.

 

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.

The inflation conflict

It could be that inflation is at the core of the political divisions on the economy in some industrial countries.

This is because people or organizations that owe money, including governments, benefit from inflation and those who have made loans stand to lose.  It might be useful to make a distinction between money and purchasing power.  Inflation increases  the purchasing power of borrowers and decreases the purchasing power of lenders.

As this is at the core of our well-being we want government economic policies that promote or discourage inflation.  Those who would benefit from inflation want stimulus and an increasing money supply.  Those who stand to lose their savings want austerity and smaller government.

Inflation may be a way of dealing with the one percent but it also catches a lot of people who have worked hard to build up some savings.  It should probably be considered a form of theft.  It is no wonder the victims of inflation have such strong feelings.

It probably doesn’t help for them to hear economists call for inflation to solve debt or economic problems.

It is interesting that when  the representatives of those hurt by inflation get into government they appear unable to get debt under control and frequently increase it.   This may be because they enjoy spending, have friends who need to be rewarded for past support and because they now have to deal with the debt problem.  This may explain the rise of the tea party with its strong feelings of frustration.

The way to deal with the inflation conflict is to aim for price stability. This is probably easier said than done because I figure inflation is built into the way we create money.  For more on this please look at my essay “LETS go to market: Dealing with the economic crisis.”

It may be that inflation is becoming a moot point as it has been going down in spite if attempts to stimulate the economy and increase the money supply via quantitative easing.   Does this indicate some other things we don’t understand are happening in the economy?

This analysis is probably an over simplification as some people may be standing on both sides of the inflation issue and others may change from one side to the other during their lifetime but may not change their politics.

 

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.

A different way of creating money – a federal credit card

Here’s another proposal for stimulating the economy but this one is different in that it proposes a different way of creating money.  In fact it’s close to the LETS (Local Exchange Trading System) suggested in my essay LETS go to market;  Dealing with the economic crisis.

The proposal is for each adult to be given a $2,000 federal credit card at a very low interest rate and it comes from Miles Kimball, an economics professor at the University of Michigan,

Here is a link to an article about his proposal and here is a link to his blog posting.

This would allow each person to borrow $2,000 at a low interest rate to be repaid after the economy has fully recovered.

What makes this proposal interesting is that rather than the federal government borrowing money for the program it would be financed directly by the federal reserve and show up on its balance sheet.  This would be creating new money and new purchasing power but it would be different in that it would bypass the banking system.  Therefore the fractional reserve process would be avoided as would commercial interest rates.  I figure interest rates combined with fractional reserves are the cause of inflation and financial instability.

I also like this approach because it gives decision-making powers to individuals rather than politicians and bureaucrats.

But will it work?

The purpose of stimulus programs is to increase the quantity of goods and services produced and consumed and the hope is to jump-start the economy so that it would return to growth.

Certainly it would provide a one-shot stimulus the same as a government works program and it would do so without adding to government debt loads.

So far as returning to economic growth there have already been a number of attempts by increasing the amount of money available (quantitative easing) and there is no evidence they have worked.  It  may be that as well as a financial crisis we are also up against problems with the resource base.

Even though I am skeptical about the effectiveness of Professor Kimball’s proposal I like it because it introduces a new way of creating money.   The next step would be to make it a monthly thing and stop all other government handouts to either consumers or producers.

 

 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.

How many subsidies?

A blogger who is opposed to subsidies because they distort prices and who believes subsidies should be given to consumers rather than producers cannot ignore this link.

It features a graph showing many ways in which governments provide assistance to businesses..

No way can we think of our economy as one based on a competitive market.

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.

Poverty

In exploring the world beyond the view from my study window (a large, lush green yard surrounded by tall trees and the mountain beyond the river valley) I came across a discussion of reasons for giving money to the poor.

I believe we have a collective responsibility to ensure that everyone has the opportunity to experience the same standard of living as everybody else.   This should apply to all the people of the  world.

This does not mean that everyone should have to take that opportunity. If a person chooses to do something else that is okay whether it be a life of poverty and medication in a cave or a life ruined by  drinking.

I also believe that full employment is not a realistic goal.  Nor is full employment desirable if it means working for the sake of working when there are other things people could do if they wanted. Nor is full employment desirable if it means using up scare resources or destroying the environment.

I also believe subsides should be given to consumers rather than producers.

And I believe that we as individuals should be able to make our own decisions according to our own values.

Therefore we should deal with poverty and/or ensuring everyone has the opportunity with some sort of universal income scheme.  Milton Friedman proposed a negative income tax.  I take the concept further and suggest an income scheme combined with a new way of creating money in the form of universal subsistence payments.

In either case the income scheme would replace all subsidies to producers and all other income support to individuals.

This approach would require some heavy-duty changes in our ways of thinking and behaving.  Many people would find it difficult to get their minds around these changes.  However, considering the current economic crisis and all the threats it may be that we need drastic changes.

A credit/money bubble and the financial crisis

The Buttonwood column in this week’s Economist discussed a book by Richard Duncan which proposes a quantity theory of credit and suggests the current financial crisis results from the collapse of a credit bubble

That Mr. Duncan would talk of a “credit bubble that would end in collapse” is surely a step towards understanding financial crises.

I am not sure there should be a distinction between credit and money because money is created when bankers make loans. As there is a fractional reserve system involved the bulk of our money supply is credit.  Thus the quantity theory of money and the quantity theory of credit are basically the same thing.

We could just as easily say the money bubble ended in collapse.

A further complication is that all this credit/money involves interest charged on those loans.

I am not aware of any economist who has tried to think out the implications of charging interest on the loans that make up the money supply but I suspect it is a big problem.  It seems to be something like a Ponzi scheme and Ponzi schemes eventually collapse.

A more detailed look the problems of money creation  is a part of the essay “LETS go to market: Dealing with the economic  crisis” on this weblog.

 

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.

Friedman, capitalism, freedom and a negative income tax

Another Milton Friedman book. This time Capitalism and Freedom.  I was a little surprised and quite relieved when I got to Chapter 12, the second last, and found Friedman advocating a negative income tax.

I was surprised  because one hardly ever hears about this part of his economics in spite of so many people claiming  to be followers.

I was relieved because as I read I liked most of what he said.  However, I believe we have a collective responsibility to ensure that everyone has the opportunity to share the same standard of living as everyone else.  I also believe full employment is not a realistic goal.  Therefor we need some sort of income plan.

If you think about it Friedman without the negative income tax proposal provides a rationalization for the who what to say “to hell with everyone else.”  I must say I figure this applies to only a few of the people who like his approach.

There are two groups of people to whose attention his negative income tax should be brought..

The first are all those who want a smaller and less intrusive government.  We can have that without destroying the lives of many other people so long as we combine it with a negative income tax or some other universal income scheme.

The second group is those who reject a market economy on humanitarian grounds. These are the people to whom “economics”. “profits”, and “business” are dirty words.  I suspect a few of the people who want the government to intervene in the economy are people who like to tell others how to live their lives.

If these people were to study the competitive economic system they would find it promotes a high degree of equality and minimizes profits, goals of which they should approve.

When these two groups have adapted their thinking to a negative income tax or a guaranteed income scheme they should have no trouble coming to a consensus that we should be moving towards a market economy based on the principles of perfect competition.

The problem then would how to deal with those who don’t care about others and those who think they have a right to tell others how to live their lives.

In conclusion I would like to state I believe there is a need to change the way we create money and that an income scheme should be part of  a new monetary plan.  For more on that see the essay “LETS go to market: Dealing with the economic crisis.

 

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.

An excess of energy from the sun

In a comment on this weblog  Robert Dagg Murphy makes some  interesting points.

That we are using only a tiny portion of the energy from the sun is a valid point.  A breakthrough in the use of solar energy would certain change the outlook.

I figure we are currently using solar energy concentrated in the form of oil, coal and wood.

I like to say my wife and I live on a 53-acre solar collector.  We have in the past used wood from our property although the last few years we have burned industrial waste.

Murphy’s comment that “High unemployment is a sign of success” reminds me of a passage in the book Social Credit by C. H. Douglas, a British engineer and published in 1924.

He pointed out that technological developments freed people from drudgery and allowed then time to do other things.  If only we had allowed that to happen.

I read this book some years ago and the last time I looked I was unable to find the passage.

This book was picked up and adapted by a radio preacher in Alberta who started a political party and became premier of that province.  British Columbia also elected a Social Credit government but these governments soon forgot all about Douglas.

 

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.

%d bloggers like this: