Economic growth, sustainability and degrowth

A lot of people realize there are problems with the economy but few if any understand what is happening. Therefore we have varied reactions. Many people cling to faith in economic growth, some are exploring the concept of sustainability and a few are looking at “degrowth”. This blogger thinks of the three approaches as points on the ray of a matrix.

Predicting the future is difficult although the shorter the term the easier it is. Economists are little help because most are paid directly by business people or indirectly through government. Very few people get away with telling the whole truth to the people who pay them. Most economists find it expedient to say what their employers want to hear and that is mostly that the economy will continue to grow and that there will be continuing profits.

Nor can we expect the truth from political leaders as their positions depend on maintaining the support of the people. It is hard to think of any government leader telling us we will have to tighten our belts and remaining in power. Are citizens mature enough to listen to that? It would be interesting to see a political leader try.

trafficOur recent economic memory is based on a tremendous use of energy and mineral resources. Not only have we fought two world wars we have also had the resources for an incredible standard a living in which the rich have grown richer and the rest of us have done okay. The result is we have a strong committment to economic growth and a belief that it will continue forever.

Many economists are fond of regression analysis because it assumes constant economic growth. It is a mathematical formula which takes a series of data points and calculates the best fitting straight line through them. It is generally assumed this line will angle up.

This guy thinks we would get a more truthful picture of what happens in the economy if we were to use fractal analysis. Fractals are series of ups and downs each with a subseries of ups and downs within them. The sea coasts are often used as examples. The mathematics of fractals is not as clear as regression analysis but there are some useful concepts. I am fairly certain those people who do “black box” analysis of stock markets are using fractal analysis. They are apparently having some success. The concept of fractal dimension can be calculated (two minus the Hurst exponent) and changes indicate a change in direction.

If we were to apply fractal analysis to economics it would be easier to see and accept ups and downs in the economy and easier to develop mechanisms to deal with them.

The word “sustainable” as applied to economic growth is a buzzword in some circles but I find it challenging as its meaning is not clear. I suspect it is mostly a cover for continued economic growth.

To the extent that some people use fewer energy and mineral resources it is good but I suspect that sustainable development maintains a committment to economic growth. Sustainable to me means going on forever and that is what a lot of people believe about economic growth.

The reality is that the quantity of goods and services we can produce and exchange depends upon the quantity of energy and mineral  resources we have and can retrieve with a reasonable expenditure of energy. The concept of sustainable development is probably 100 years too late.

Our committment to economic growth is so strong I am not aware of any career economist having thought about what happens when the economy goes into decline. This is unfortunate as the economy regularly goes into recession and this time it may be extended.

This blogger figures current economic problems are because we have used up the most accessible energy and mineral resources. Sure, there are lots left but they require massive amounts of energy to retrieve them. Solar may help but not yet. I fear that we will be forced into degrowth.

If so the challenge will be to figure out how do distribute fairly the goods and services we have, how to cope with leisure, how to create money that will not disappear during a crisis and how to not fight over the available resources.

Money will be a special problem as fractional reserve banking works only in times of economic growth. When growth stops and banks stop making loans  the money supply goes down and because it is fractional reserve the money supply goes down with a multiplier effect. Ouch. A super big ouch.

There are lots of anecdotal evidence from around the world that we are going into a down economy. This could easily be an explanation for a lot of the negative news, both economic and non-economic, to which we are becoming accustomed.

If we could get away from our committment to economic growth we could focus instead on happiness. This concept is impossible to measure although there is some evidence that people do not need a lot of material things to be happy.

What ever happens and wherever humanity ends up it looks as if we will experience a lot of human suffering. I would like for us to minimize the suffering and maximize the happiness.

 

 

 

 

 

 

 

 

 

 

 

 

 

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Self-driving cars: promises and some problems

Self-driving cars will be an incremental but disruptive step into science fiction in that we will be abandoning a major part of the economy and replacing it with something different. Science fiction will become a reality. Do we really want to go there? Probably we have no choice but to drive down this road.

A recent special report in The Economist discusses some of the technology and outlines the promises of autonomous vehicles. There are also some economic problems of which we should be aware – the resource base, marginal cost and potential disruption in the money supply.

driving-clipart-45The promises are mostly based on a continuation of the North American growth economy. We will be continuing to use machines to move individuals or small groups mostly to places of employment. Probably self-driving vehicles will be used in combination with mass transit, especially if vehicle sharing comes into its own. Great benefits will accrue to a lot of people in the form of greater inexpensive mobility which will also allow us to contradict Facebook with more direct social activity.

Self-driving vehicles may add to the over population problem if there are fewer accidents and fewer fatalities.

One of the problems will be the availability of resources. This blogger figures the economy is currently on a down trend because we have used up the most easily accessible energy and mineral resources. Sure, there are lots left in the crust of this planet but the amount of energy required to retrieve them makes them mostly useless.

The exception is solar energy, the cost of which has been dropping and will probably continue to drop. This could mean a major change in economic power as it appears solar will become cheap enough for individuals to make their own decisions about using it. No longer will bankers and governments be deciding which power provision projects go ahead and by whom.

The replacement of the current fleet of internal combustion vehicles with electric and driverless vehicles will probably mean a lot of the current infrastructure will need to be replaced. This will require large quantities of mineral resources which may be very expensive. Henry Ford realized that in order to sell automobiles they had to be inexpensive enough for working people to buy them. Since then we have extracted a lot of the most easily accessible mineral resources. It is not clear we will able to retrieve or recycle enough resources for the transition.

The economic concept of marginal cost creates a couple of problems for the introduction of self-driving vehicles. This states the price of an item is equal to the marginal cost of producing the last item. As the cost of solar energy is falling and is likely to continue falling at some point solar will determine the price of electricity. When that happens all those firms currently producing electricity from hydro, gas or oil will find their facilities and investments worthless. Not good news for bankers or for the rest of us when all that debt has to be written off.

Recycling may be another source of problems. Most of us accept that recycling is a civil responsibility and believe that doing so will help to save the environment and the economy. However we may find marginal cost interferes with some things. Suppose a pound of copper can be recycled for half the cost mining new stuff. Does this mean manufacturers will be able to purchase recycled copper for half the cost and their customers will benefit from the cheaper prices? Not likely. Copper prices will be set by the last pound mined and the recycler will make a windfall. So the benefits of recycling will likely go to the recyclers rather than the rest of us. This is what happened in the oil industry as prices rose. We all paid higher prices and those producers who could extract the stuff at lower cost did very well. Recycling may be a joke on us.

Most of us know how to manage our money but few understand how money is created in our economy. Most of the money we use to exchange goods and services is based on the debt created when bankers make loans. This works so long as the economy is growing and bankers make more and more loans.

Economists seldom if ever talk about what happens when the economy stops growing and loans have to be written off. Loans are being written off all the time but so long as the economy is growing they are replaced with even more loans. However, when large amounts have to be written off such as the recent mortgage crisis the money supply goes down and without money it becomes difficult to exchange goods and services and lots of people lose their savings and their employment. Because of the fractional reserve system we use the money supply goes down with a multiplier effect.

I do not know how much of the current money supply is based on debt to the automotive and energy firms. The introduction of self-driving electric vehicles could hit the banks and us with a double whammy if firms in both industries cannot repay their debts. We could lose a lot of the money supply as well as a lot of people losing their savings and pensions.

A lot of changes are likely to be forced upon us. Some of those changes we may not appreciate.

Through the millenia of history when there have been major economic upheavals up to 90 percent of populations have died. If something like that happens in the near future, the technology of self-driving electric cars will not be lost and the promises may be available to the survivors.

Money creation by bankers, central banks or individuals

That the Swiss are going to have a referendum on changing the way in which they create money is great news. That the referendum is certain to fail is even greater news.

(First link and second link.)

As regular readers of Economics 102 will know this blogger is extremely committed to reforms in how we create money. You will also know that I am strongly opposed to state control over the economy. I also believe there is an urgent need for reforms in the way we produce and exchange goods and services. There is a 99.99 percent probability of economic turmoil as the economy continues its downward decline and without major changes there will be a lot of human suffering.

CurrencyThe Swiss proposal is that the creation of money be restricted to the central bank rather than the current fraction reserve process in which money is created when banks make loans. The authors of the proposal should be lauded for recognizing that there are big-time problems with money based on debt and that charging interest on money created makes our economic problems even worse.

My problem with the proposal is that it wants all money creation to be in the hands of the central bank. The central bank would have direct control over lending. “The money created by the monetary authority would be transferred to the Treasury and would come into circulation by public spending; thus, it would benefit the public purse and contribute to the reduction of national debt. ” Money creation and this type of spending would also mean a lot of economic control by the government.

The essay about this proposal lists private control as one of the problems with the current system. Control is a major economic issue and I can see where a lot of people are strongly opposed to anything but “public” control.  However “public” control is just control by different people with slightly different interests from the bankers. They will still be acting in their own interests – such as getting re-elected. I want an economic system in which control and decision-making is by individuals and I believe the way to get this with a true competitive market economy which we do not have. I also figure the current system is marginally better than money creation in the hands of a government agent.

The authors also point out there is a need to “secure the independence of the monetary authority.’ This is a serious concern as the people who control money creation get to determine which economic projects go ahead and by whom. There are very few prime ministers of any political leanings who would allow that kind of power into any hands but their own.

There is an alternative to money creation by a central bank and that is to combine money creation with a guaranteed annual income scheme. This would solve the problems of lots of people without jobs and it would put primary economic decision-making into the hands of all of us as individuals.

This guy has written extensively about this on this weblog and in an e-book Funny Money: Adapting to a down economy. The book is available free by following the link on the sidebar.

Any changes in how money is created, whether to a central bank or to an income scheme, would hit the profits and power of bankers. Expect them to be more than just vocal in their opposition if either becomes a serious threat.

I figure economics is largely about relationships and to be satisfactory relationships need to be based on a more or less equal two-way exchange. I also believe money should be considered a tool to facilitate the exchange of goods and services and it should encourage good relationships rather than be an instrument for exploitation. To maintain good relationships money should not give power to some people over others. I fear that giving a central bank the sole right to create money would make it easy for governments to exploit their citizens.

There are lots of serious problems with the fractional reserve way of creating money and there is an urgent need for reform. The big question is what the reforms will do to the way in which we exchange goods and services and how we relate to each other.

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