Daydreaming reform: basic income, money and work ethic

To say we face an economic crisis is hardly controversial but the crisis is so severe that the reforms needed make Karl Marx look a part of the establishment.   The changes needed are radical beyond the comprehension of many people as they require more than just tweaking what we already have.

The basic problem is that we have used up most of the easily accessible energy and mineral resources.  Those that are left require so much energy to extract that they are almost useless.  There have been other times in economic history when humans have had to cope with resource shortages but these were temporary as more resources were waiting to be discovered.  This time the problem is not knowing where the resources are located but the cost/energy required to extract them.

The three basic changes are a basic universal income, the way in which we create money and overcoming the work ethic.  To accomplish anything all three reforms will be needed at the same time.  As there are so many conflicting vested interests this will be an impossibility.  Prove me wrong.  While these appear to be radical ideas, this writer did a degree in conventional economics at the University of British Columbia and has a strong commitment to a market economy.   The radical comes from wanting a market economy when a major feature of the current economy is that competition is restricted by government legislation.

The basis for an income scheme is the agricultural surplus resulting from all the technology which has developed at least since a farmer discovered he could produce more by using a collar on a horse rather than a harness on an ox.  Through the centuries the elite have confiscated most of the surplus with the use of force. Since the industrial revolution psychological tactics such as legal restrictions on competition,patents, copyright and the work ethic have been less messy.  The need for labour to man the empires has allowed workers to claim a share of the surplus.  As robots replace workers it will be interesting to see what happens to the agricultural surplus – and workers.

This writer would like to see the agricultural surplus treated as an inheritance to be shared equally by all the people of the world.  The way to distribute this inheritance is with a basic income scheme.  Some ideas as to how to do this are in the free e-book, Funny Money: Adapting to a Down economy, available from this weblog.

One of the advantages of an income scheme is that individuals would be able to take action on social and environmental issues related to their employment.  Workers would no longer have to work for exploitive employers and people who disagreed with a firm’s social or environmental policies would not have to bite their tongues for the sake of a pay check.

There is an old saying that money is the root of all evil.  When I studied the economics of money and banking I decided it was the lack of money that is the root of all evil.  I now think the way in which we create money is the root of all evil.

In most of the world’s economies money is created when the banks  make loans and because banks are generally required to keep a fraction of their deposits on reserve most loans become additional deposits in the banking system.  This is called fractional reserve money.  It is a problem because loans that have to be written off reduce the amount of money available, with a multiplier, and because interest is charged on the loans.  A sudden reduction in the money supply is the most difficult of all economic crises.   If all the loans outstanding had to be repaid at the same time there would not be enough money to repay the principle and the interest.  We would recognize the problem as a financial crisis.  This is why I titled my book Funny Money.  I encourage you to get a free copy from Smashwords for an explanation of this problem.

Money is useful because it is a tool which facilitates the exchange of goods and services especially when a lot of our exchanges are with strangers.  We have traditionally used gold or other material items as a basis for money.  Some people still talk about the gold standard although fractional reserve money is based on faith rather than gold.

A few small groups around the world have established what they call Local Exchange Trading Systems.  These people base their exchanges on credits.  You get a credit when you sell a good or service to another member and use credits when you purchase something.  I like this system because the credits are a form of money without the problems of fractional reserve and interest.  In my book I propose we adopt a national exchange trading system and combine it with credits from a guaranteed income scheme.  This would be using money as a tool rather than a commodity.  See the book for more details.

Adopting this system would be revolutionary because it would be a transfer of decision making power from bankers to individuals.  Under fractional reserve bankers get to make decisions about what projects get funded and who gets to do them.  A National Exchange Trading System would allow individuals to make these decisions as they decided what to do with their share of the agricultural surplus.  Some of us would use our share to vote for zero economic growth and more leisure activities.

Many people feel guilty if they do not work continuously.  The work ethic and a distribution of the agricultural surplus via employment are the main motivators that keep our economy going. But the truth is that we do not need everyone to work full-time to provide foods, shelter and entertainment to everyone.  Most of the work people do is work for the sake of work and to maintain the empires of the one per cent.

The bushmen of the Kalahari desert in Africa are/were known for not being interested in material things and for not working hard.  But as hunters and gatherers they had no need to store food.  Any day of the year they could go out and collect the food they needed for that day.  When our ancestors moved to agricultural pursuits, they had to store food and this meant working at least at some times of the year.  We have now taken this need to an extreme.

One of the reasons work is so important is that most of us get our self-identity from our employment.  To save our resource base and to preserve the environment we will have to get our self-identity from other activities.  How about a leisure ethic which encourages people to perform operas, write poetry, write economic weblogs or many other useless things.

This blogger keeps by his computer a little statue of the Laughing Buddha to remind him not to take life too seriously.  Most of the time it works but when thinking about the current economic outlook it is hard to laugh.  Most of us think and act in our own short-term interests as opposed to the long-term in interests of our selves or our communities.  So long as that holds true the outlook is for a lot of human suffering.  But  what does it matter.  To quote a famous economist, in the long term we will all be dead.

 

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The next economic crisis: financial or real?

A few people are prepping themselves for the next economic crisis and speculating about what will cause it.  This blogger thinks there are several possible causes.  It is about 99.99 per cent certain there will be another crisis.

Even if somebody does make an accurate prediction it will probably do no good because there are so many vested interests there will be no consensus about the cause and about what to do to prevent it.  However, for some of us there is some fun in trying to think out economic problems and we might be able to improve our understanding of economics.  So, here goes.

The possibilities are for the cause to be within the financial system or for the cause to be within the physical or real side of the economy.  As the two are interconnected it may be difficult to determine just what is happening.

Problems within the financial system relate to money. Either there is too much money or not enough.  Ideally the available money supply needs to be just right for the quantity of goods and services exchanged and as this varies it needs to be flexible.  When there is too much money available there is potential for inflation and this is a problem for people with invested savings as they lose some of their purchasing power.  Deflation is a problem for lenders as the money they have loaned out will have less purchasing power when it is returned, if it is returned.

The really serious problem comes when there is not enough money as this curtails economic activity.  Most of the money supply is based on loans made by the financial industry and involves a multiplier.  When the industry has to write off a large quantity of loans, as with the recent subprime housing crisis, the money supply goes down, again with a multiplier effect.  Without money the exchange of goods and services becomes difficult and lots of people lose their jobs. Big time suffering.

Currently it appears there is lots of money floating around the economy.  Lots of firms are reported to have piles of cash on hand and are probably unable to see investment opportunities.

On the real side of the economy, many people assume there are lots of energy and mineral resources available and therefore no physical restraints on the exchange of goods and services.   This may not be true.

A common argument is that as resources are consumed higher prices will bring on a greater supply which happened with oil and lots of minerals.  The problem is that they also require more energy to extract which reduces the energy available for other activities and at some point the value of the energy exceeds the value of the resources.  This blogger figures there are lots of energy and mineral resources available on the earth’s crust,  but the cost of getting them makes them useless.  This could be changed by technology and the decreasing cost of solar energy will make the high cost of oil irrelevant.

Children, workings in a vegetable garden.

However there may be some economic  disruptions in the transition.  How much oil infrastructure will have to be written of and what would that do to the money supply? Also there are all the other minerals for which there are no clear cheap substitutes.

This guy fears the greatest threat to our economic well-being is from resource restrictions on the physical side of the economy.  An even greater threat is that too many people will not see the problem because they analyse problems only in financial terms and will be looking for solutions on the financial side.  Changes in how much money is available or even in the way in which we create money will not add to the resource base or make it cheaper to extract them.

I fear for the future of my grandchildren.

 

 

 

Recycling is not enough

In this corner of the world recycling is almost universal.  Plastics, glass, metals, compost and drink containers are separated from the rest of the garbage.  Some people also take their own shopping bags to the supermarket.  The exceptions are that we have not mastered the technology of recycling energy and most of us continue to drive a lot

Unfortunately we are still experiencing environmental degradation, inflation and unemployment.  Recycling is not enough.  Its main function is to allow us to feel we are doing something. It allows us to ignore the real issues –  population levels and values.

I believe the most important way in to protect the environment is to reduce the number of people trying to live on this planet.  There are just too many people and I do not like the idea of saying some people should not have the same standard of living as others.  Who is to decide who gets shorted?

I also recognize it is a near impossibility as we cannot tell people not to have sex and not to have children.  What are the consequences of not taking action to reduce the population?  When the Europeans came to North America they brought with them some new diseases and close to 90 per cent of the native population died.  I understand there is some archaeological evidence that there was a similar population reduction in the Mediterranean some millenia ago.  If these precedents hold for us, then there is likely to be one hell of a stench.

We also need to get over our fear of death as so much energy and resources go into prolonging life.  Quite a few years ago The Economist reported that 80 per cent of health care spending is in the last six months of life.  I do not want to go into the 80 per cent and I hope that when my time comes I and those close to me will be able to accept it gracefully.

The other big challenge to protect  the environment deals with values many of which are a part of our committment to economic growth.

According to anthropologist James Suzman who recently published the book Affluence without Abundance, the most successful and long-lasting civilization was that of the Bushmen of the Kalahari desert.  These hunters and gatherers “worked” only ten to 15 hours a week.  As they relocated up to ten times a year they had little interest in material things and their society had high equality.  We cannot all go back to being hunters and gathers but we can choose some of their values and apply them to our daily lives.

If we really want to protect the environment then we should have fewer children, live in place, live a healthy lifestyle, have fewer and smaller toys, drive less, go easy on the travel and work as little as possible.  Recycling may make us feel we are doing something but it is not enough.

 

 

Trade, foreign exchange and big hamburgers

Foreign exchange and trade is hardly a sexy subject and it is one most of us would prefer not to think about. However, when people get excited about globalization or fear their jobs are threatened by trade, then we need to take it seriously.

Foreign exchange involves the financial transactions which go with trade with other countries.  Economics is a social activity and involves relationships even if some are very fleeting.  For any relationship to be satisfactory there needs to be a more or less equal two-way exchange.  This applies to trade with people from other countries.  Trade should be a two-way.

In analysing economic issues it is important to distinguish between physical transactions and financial transactions because sometimes the physical analysis gives a clearer picture than the financial analysis.  If this world had a perfect market economy each physical trade with a foreigner would be matched by a financial transaction.   Changes in prices would reflect changes in supply and demand and would be signals to producers to increase or decrease production or to even stop producing an item. This is true for domestic trade as well as international trade.

As exchange rates are based on supply and demand for currencies, financial only transactions distort the exchange rate and therefore distort prices. Not good.

An interesting approach to foreign exchange is the Big Mac index created by The Economist. I like this because it is based on a physical item, the big mac hamburger,  sold around the world.  If we had international perfect competition and everything were equal a big mac would cost the same in each currency.  The Economist compares the costs at current exchange rates to determine if a currency is over or under valued.

Obviously the world is not equal. Different countries have different values, different resources and different access to energy and mineral resources.

What happens if money is loaned or gifted from one country to another.  If the recipient uses the money to purchase goods or services from the first country, then the money becomes a part of the foreign exchange calculations.   If it is kept in foreign currency reserves,  it is removed from the money supply of the first country until it is used. If the money is exchanged and used to purchase local goods and services, it distorts the exchange rate.  If the money is kept and used to purchase local goods and services, it adds the second country’s money supply and subtracts from that of the first country.

Another complication is that a lot of people speculate about what will happen to the price of one currency in terms of another.  These transactions will be financial only in that they do not match exchanges of goods and services.  It could be that speculation smooths out fluctuations or they could distort prices.  It is hard to know as we do not know which transactions are speculative.  We do know that the volume of foreign exchange trades is massive. This writer suspects that if all financial transactions matched physical trades there would be little fluctuations in exchange rates as changes would take time.

This blogger has spent a lot of time and effort in trying to understand the economics of money, including a degree at the University of British Columbia.  Foreign exchange and trade are difficult probably because there are problems in the way in which we create money.  For more on this please get a free copy of my e-book Funny Money: Adapting to a Down Economy.  One of the problems is that our way of creating money gives some people a lot of power and control over others.  Vested interests are difficult to deal with.

 

 

 

 

 

Why the joke should not be impeached

The biggest problem now facing Americans is the emotional fears of those of them who elected the joke currently occupying the oval office.  Getting rid of Donald Trump by impeachment or otherwise will solve nothing and may be even worse.

We have to give Trump credit for having the brains to get himself elected.  He identified some of the emotional issues which are giving Americans nightmares and promised to deal with those issues. Emotional fears are  difficult to deal with and it is probable that his proposed solutions will not solve anything.  But at least he is trying and people appreciate that.

This blogger thinks the fears are legitimate.  I believe the current economic turmoil is because we have used up the most easily accessible energy and mineral resources.  We are going to have to adapt to life without the abundance to which we have grown accustomed.  Most of us realize something not good is happening but we do not know what.  Many people are afraid.

One of the ways to deal with fear is to blame other people, especially people who are different.  Lots of people around the world, including Americans and Canadians, are doing this.  It is unfair and morally wrong but it is also natural to blame others for our problems. It is not only right-wing people who are afraid.  Bernie Saunders in the United States and Jeremy Corbyn in Britain have also attracted a lot of support with emotional appeals.

The best way to deal with these fears is to deal with the source problem.  However the problem is so serious and so difficult there is probably no solution.  We might be able to relieve things a little by changing our values, the way we create money and introducing a basic income plan.  These things would have to all be done at once and that is expecting a lot of human beings.

Another alternative might be to attack emotions with emotions and try to point out how people will themselves be hurt by blaming others.  Fighting fear with more fear could be dangerous.

Americans have very clear rules for replacing a president whose term is incomplete.  Whoever replaces him will be looking for support from the same people with the same emotions.  It might be better to have a joke in the Whitehouse rather than a serious far-right conservative.

The best way to deal with Donald Trump is to ignore him.

Brexit: the unilateral free trade option

 

As the British and the Europeans renegotiate the European Union following a British referendum a number of options are being considered.  What will not be considered is the option which would in the long term give the best standard of living – unilateral free trade.

For a long time this blogger has believed the best way to do free trade is for a country to do it on its own by removing all barriers to imports.  “Free trade” agreements are not free trade, they are negotiated trade.  To get the full benefits of the law of comparative advantage there must be no barriers to imports. There should be no import duties, no quotas and health and safety restrictions should be genuine rather than to restrict imports.

Unilateral free trade could easily be done by any country as each country has the right to control its imports.  This will leave them open to “dumping” or subsidies by trading partners.  If another country wants to subsidize our standard of living, then we should say, “Thank you very much”.

The case for free trade is based on the law of comparative advantage which says that two countries will be better off if they specialize in their most efficient production and trade even if one of the countries is more efficient in all trading items.  With our background we generally think of better off as meaning more economic growth but it could also mean more leisure time.  The law still applies.

There are two major problems with unilateral free traded – our  commitment to economic growth and the difficulty in making employment changes.

This blogger believes there will be little if any future economic growth because we have used up the easily accessible energy and mineral resources.  There are lots left on the surface of this planet but they are so difficult to extract they are mostly useless.  I also believe many people are aware of this economic uncertainty even if they do not understand what is happening.  This is probably behind the British vote for Brexit, the United States election of Donald Trump,  the increasing popularity of extreme left and right wing politicians and the rise of dictatorships around the world and a lot of other unpleasant developments.

The fear of losing one’s job is highly emotional and this is the second big problem with free trade.  Free trade means changes in production and this means some people will lose their jobs and have to find new employment.  The other side of this problem is that economic changes are a fact of life and will happen regardless of free trade.  We try to deal with changing market conditions with subsidies, import quotas, health and safety restrictions on imports and other trade restrictions. In the long term market forces usually win.

Under current economic conditions a lot of people are likely to lose their employment and a lot of people are going to suffer.  The challenge should be to facilitate the changes and reduce the suffering.  Most people are going to have to accept a lower standard of living.  This blogger believes the best way to adjust is to introduce a basic income plan.  For more discussion of this please see the rest of this weblog and my book Funny Money: Adapting to a Down Economy.

This guy believes the British and the Europeans would benefit if the British were to use the referendum as an opportunity for unilateral free trade.  I also would not want to be a part of the negotiating team as there is unlikely to be a consensus as to what degree of trade to negotiate.  There is so much fear, so many emotions and so many conflicting interests that it will be difficult to come up with something most people will be able to accept.  There is likely to be a lot of turmoil.

 

 

Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

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