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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Capitalism – a meaningless concept in which we can believe

As one surfs the economic forums of Medium and other media one often sees the word “capitalism” in the headlines but mostly I ignore these items because the word’s definitions are generally so vague the word is meaningless.  Because capitalism is such a meaningless word it is something in which we can believe while ignoring a less pleasant reality.

When we study economics we can try for an honest understanding so we can solve problems and reduce human suffering or we can seek rationalizations for things which will make us rich in spite of exploiting others, destroying the environment and overusing scarce resources.  If I were the chief executive of a large corporation or a politician I would want the second approach to economics.  Guess who pays the salaries of most economists.  This blogger makes no money out of his study of economics, so he can take the first approach.

The main feature of the economic organization with which most of us are familiar is that a lot of it is based on legislation which restricts competition.  Patents, copyright, licensing and subsidies all work to restrict competition  and/or distort prices.  These are so pervasive that we cannot say we have competitive market economy.

The problem with a perfectly competitive economy is that it does not allow for profits.  Competition reduces profits until each firm makes wages and a return on investment but no profits.  If one wants profits one needs government to pass legislation to restrict competition and most current  governments are happy to oblige.  Once upon a time this blogger used to make pottery.  I suggested that in order to make a good living we should form the Canadian Potters Association and get the government to pass legislation that all the people in Canada should eat only from dishes make by members.  Other potters laughed but lots of other occupations have that legislation: teachers, doctors, lawyers, septic tank installers, most large corporations (patents and copyright), etc.

Like lots of other people I would like to see an economy with more equality and less exploitation.  I believe the best way to get it would be to have more competition.  To get there we should repeal or at least reduce copyright, patent and licensing legislation and drop all subsidies.

This would leave many people exposed to economic adjustments which often cause suffering. A guaranteed income scheme would be a better way of coping with these problems than restricting competition.

Money difficulties

The following is my response to an article on natural money posted on Medium.

Dear Christopher

Thank you for your article about money.  I believe money is a major problem in our economy and it is urgent for us to have this discussion.  There are a couple of things I liked in your proposal, however I have some serious concerns.

My qualifications to write on this topic are that I did a degree in economics at the University of British Columbia with an informal specialization in money and banking.  I think I have a good understanding of how the financial system works and an even better understanding of some of the problems. And I have written a book about money.

My first concern is with the six properties of money.  I recognize this is conventional economic thinking and is based on the traditional use of commodity money but I prefer to define money as a tool which facilitates the exchange of goods and services.  It is important to note that tools get their values from how well the do the job.  It is unfortunate that money has a history of values as a commodity.

Another concern is with the idea there are two varieties of money – precious metals and fiat money.  A third type of money is fractional reserve money and is based on loans made by the financial system.  Believe it or not when bankers make loans they are creating money and adding to the total money supply in the economy. If you do not know how this process works there are lots of explanations on the internet and I urge you give it some priority.  It can appear complex but I think it is easy to understand if one takes it slowly.  Approximately 90 per cent of our money supply is this type.

I believe the major problems with fractional reserve banking is that the quantity is not flexible downwards when economic activity decreases and the interest charged on the loans.  If all the loans upon which our money supply is based had to be repaid on the same day there would not be enough money because of all the interest which would also need to be paid.

I am also concerned with the idea of basing money on a commodity – any commodity or even a group of commodities because this limits the total money supply.  When money was based on gold there were some severe recessions because there was not enough money for the quantity of goods and services people wanted to exchange.  Deflation can be a serious problem which limits economic activity. Please do not forget a lot of economic activity is based on services.

Your suggestion that CBC units should be destroyed when redeemed is very important as money units can keep piling up until they cause problems.  A big problem with fractional reserve money is that it does not get destroyed until we have an economic crisis and lots of people lose lots of money.

Your concept of countercyclical is also important because the money supply needs to be flexible in both directions.  If it is not flexible then we have either inflation or deflation both of which devalue people’s  saving.

There is a rather obscure concept called local exchange trading systems (LETS) (https://en.wikipedia.org/wiki/Local_exchange_trading_system) which a few groups around the world have tried.  These groups have not met with much success because they are small and do not include all the goods and services we need to live.  However, they create credits which are in effect money which avoid the problems of fractional reserve money.  If only we could establish a national exchange trading system (NETS) we would probably have fewer economic problems.

This commentator has written an ebook about money, its problems and NETS as a possible solution. You can get a free copy from Smashwords by following this link and using this code:

LE78V

Money is extremely important in our economy and causes a lot of problems.  I encourage you to keep thinking.

(FREE! The author of this comment has written an Ebook Funny Money: Adapting to a down economy. Information is on my weblog:https://economics102.wordpress.com/

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