Economic growth and thinking outside the box

This column in The Economist leaves me feeling extremely uncomfortable because it speaks for all those economists (and others) who are in denial about the reasons  for the economic crisis and the need for thinking outside the conventional economic box to deal with it.

For some time The Economist has been saying the economic crisis must and can only be solved with more growth.  And the way to attain economic growth is innovation and increasing productivity.  This column claims aging workers become less productive than younger workers and the aging workforce dooms us to decreasing rather than increasing productivity.

clownIf only older workers could increase their productivity then all our problems would be solved.

Another article in the same issue talks about the economic crisis around the world.  I find it a bit of a stretch to think that all these problems are a result of an aging workforce in the rich world countries.

One has to observe that in the last few years the marginal cost of a lot of energy and mineral resources has gone up.  This means the most easily extracted of these resources have now been used.  What is left will require more energy to extract.  This has to have a negative impact on our economy.   It could even mean that future growth will be difficult if not impossible.

This is a much more serious issue than what most people can admit.  Rather than asking people to work harder and to use  Google glasses we need to look for ways to organize our economy so that our welfare does not depend upon continued economic growth.

 

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.

Innovation, growth and marginal cost

Mainstream economic wisdom says innovation is one of the things that will return the world economy to growth.  Therefore governments should adopt policies to encourage knowledge development and innovation.

As I meditate on this I think that in a previous reincarnation I must have been a charter member of the skeptics society.

Lets consider the effect of innovation on marginal cost.  Price is determined by supply and demand and  is set at the marginal cost of producing an item.   Marginal cost is the cost of the last item produced and will be the price at which any item will be sold.  If price is above marginal cost, then another producer will enter the business and more items will be produced.  If the price is below marginal cost, some producers will leave the business until the price rises.

The traditional view is that innovation reduces marginal cost and encourages growth.  For the most part this has probably been true.  What’s the point of innovation that doesn’t reduce costs?  Keep in mind that to contribute to growth new products have to be useful and people have to buy them.

However, there is no law that says innovation has to reduce costs and it may be that we are now using innovations that are more expensive.  I’m thinking of oil, gas and mineral extractions where new and expensive techniques have made possible the recovery of difficult deposits.

In these cases the marginal cost is rising and the innovations are used only when the price rises enough to pay for the innovation.  Rather than encouraging growth these innovations are slowing the rate of negative growth.

Another complication in all this is that spending more money on energy is reducing the resources for other items.  This means a whole raft of adjustments throughout the economy.

Innovation has been important to our standard of living and no doubt innovators will make further changes to our quality of life.  It is not clear that innovation will return us to economic growth and save us from an economic crisis.

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.

Subsidies distort prices

Here is a  news report that the Quebec government is giving a $58 million subsidy to an asbestos mine in that province.

I am opposed to this subsidy because I believe subsidies should be given to consumers rather than producers.

Subsidies given to producers distort prices and encourage us to make poor purchasing decisions.

The article says there are “predictions that worldwide demand for asbestos would increase — especially in India — while the supply would drop.”  If this is correct then prices would go up and the mine would be able to reopen without subsidies.

Subsidies should be given to consumers in the form of a guaranteed income scheme or a negative income tax,

 

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 guaranteed income scheme

This writer has long been in favor of a guaranteed income scheme in part because I believe subsidies should be given to consumers rather than producers.

Therefore I am pleased to provide you with this link to a report on a recent congress on a basic income guarantee.

Not only is there a need for an income scheme there is also a need for  changes in the way we create money in our economy. The two should go together.

I have tried to show a way in which the two could be combined in my essay “LETS go to market: dealing with the economic crisis.”

At a time when the economy is clearly going down there is a need to provide support for everyone.  There is also a need for economic efficiency and an overwhelming need to fix a sick financial system.

Extending “too big to fail”

This weeks Economist has an article about extending the definition of “too big to fail” to include a number of other types of financial business.

When dealing with banks I think we need to distinguish between too big to fail and too important to fail,

When any business fails its shareholders and customers stand to lose. Is it the responsibility of government to protect shareholders and customers from the risks of doing business?

Financial intermediaries which take deposits, make loans and follow fractional reserve policies, i.e. banks, are  special cases in that in making loans they are creating the money supply with which we exchange goods and services.  This makes them too important to fail because a bank failure decreases the money supply.

One has to note most bank deposit customers are protected by deposit insurance to the extent there is enough money in the insurance fund.

This money creation role provides the rationalization for regulating banks and other financial intermediaries.  But what is the rationalization for regulating other types of business that handle money?  Perhaps by extending regulatory powers it appears the authorities are doing something about the economic crisis.

A business for our times

As I reads the headlines these days I keep thinking the best business to go into is market gardening.

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