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.


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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.

Forecasting markets and a no-so-random walk along the Nile River

It would be a long walk from Wall Street to the Nile River but data about river flows has provided an interesting tool for analysing investments (and the economy).  This tool raises doubts about the theory of the random walk on Wall Street.  It may the basic tool used by a lot of “quants” who have had some success working the markets.

Harold Edwin Hurst was a hydraulic engineer working on the Nile River early in the twentieth century who was concerned with managing the river flows with the new dams.  With access to extensive historical data on the varying annual flows he decided to prove that they were random.  Through a number of years he worked out a way to determine if a time series is random or not.  If the Hurst Exponent is .5 then the series is random.  If it is greater than . 5 there is some probability a the series will continue its trend.  (The maximum is one.)  To Hurst’s surprise the exponent for the Nile River flows was about .8.

If the Hurst exponent for a time series is greater than .5 then it is not random and there should be some potential to predict what it will do.  There is software available to calculate the Hurst exponent using several different calculations.  One requires just 32 data points.  When one applies the Hurst exponent to market (and probably) economic data one finds it varies up to .8 and sometimes higher.

Not only are markets non-random, they are also fractal in nature.  This means they go up and down and within each up and down there other ups and downs.  This applies regardless of the time applied to the series.  If you have a time series at one minute intervals all the series at longer intervals will also be fractals and when a longer time series changes direction all the shorter ones will also change direction.  The key to analysing fractals then is to identify the turning points.

The key is a concept called fractal dimension.  This is a measure the extent of the ups and downs.  It appears that changes in fractal dimension indicates changes in the direction of the time series.  If several time series of the same data change fractal dimension at the same  then the time series is probably going to change direction.  If one is playing a market or trying to predict the economy this should  be useful information.

The formula for fractal dimension is simple: 2 – H, where H is the Hurst exponent.

If one wants to apply this to market data one probably needs a lot of programming skills and some very fast computers. These are available to the “quants” who also certainly know about the Hurst exponent and fractal dimension.   There is also a problem in that if this works and a lot of people are successful they will even out the swings in the prices.

Who is correct:  the academics who claim Wall Street is a random walk or those who believe it is not true?  My guess is that some times it is random and at other times there are patterns which may be identified.

Could this be used for forecasting economic ups and         downs?  Perhaps.  Economic data are difficult and expensive to obtain and not always accurate.  There may also be problems with the number of data points needed to get accurate results.

When Hurst walked along the Nile River I wonder if he thought about Wall Street and economic forecasting?  He probably realized the potential for his exponent beyond river flows as he published an article about his exponent.

A grumpy old man in favour of a basic income scheme

The “free money” giveaway or basic income or universal income scheme being proposed by a few people is a great idea but one that is probably impossible to implement.  However it is nice to dream and fun to think out how to solve economic problems; so here goes.

The basic questions are where does the money come from and how to give the money to people?

The simple answer to the first question is that with a universal income scheme there will no longer be a need for subsidies to producers.  A more difficult answer is that the introduction of an income scheme would be the ideal time to reinvent money.

Generally subsidies (sometimes as tax exemptions)  are given to firms to encourage them to establish plants and provide employment or to save the business and save jobs.  This is great for those who get the jobs or whose employment is saved but it leaves a lot people with nothing.  Subsidies also distort prices so that when we make purchasing decisions based on price we are not necessarily getting the item that was cheapest or most efficient to produce.

Money is something most of us use daily and is probably the least well understood of all the things that are a part of our economy.  When central banks were doing quantitative easing there was some disbelief that they could create money out of nothing.  This is because we have for so long associated money with gold that we think of it as a commodity with value in itself.  It might be better to think of it as a tool with which to facilitate the exchange of goods and services.  It represents purchasing power.

Most of what we use as money is created by bankers making loans.  How this works is explained at numerous locations throughout the world-wide web.  My own version along with some of the problems with fractional reserve money is included in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.

One way to reinvent money and implement a universal income scheme would be to take the concept of “local exchange trading system”  and expand it to the national level.  A good part of the essay talks about how this could work and again  I refer you to the essay.  There are many details to be worked out and many problems to be overcome.  The mechanics of the money supply would be easy.  Getting people to accept new ways of thinking about money would be extremely difficult.   Getting people to accept that others should be allowed to do as they wish, whether that be creating art works or drinking beer, would also be difficult.  Getting people to change their vested interests would probably be impossible.

One of my concerns is that our economic order is going to return to something similar to what existed before the industrial revolution in which there was a small group living in relative luxury and the balance of the population lived at a subsistence level. (The ultimate inequality)  I am concerned because I think our economy is possibly going into an extended period of decline.  While there are lots of energy and mineral resources left on this planet the energy required to extract them is becoming more and more excessive to the point it will be less viable.  Without resources it will difficult to maintain everyone at what has been the North American standard of living.

An income scheme would make it a lot easier to cope with an economy on a downward slope.

More and more I am getting to be a grumpy old man.  My generation has been very lucky in the time and place we have lived out our lives.  More and more I am recognizing the next generations, including my grand children, are going to have to deal with a lot of economic pain.  I hope I am wrong and if not I hope I won’t have to see it.


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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