The British Labour Party and economic decision making

It appears the British are getting ready to elect a Labour Party government which is hoping to introduce some “structural” changes to economic decision-making.

This blogger believes economic changes are urgently needed but also figures the changes proposed by the Labour Party will only change the faces making decisions and will do nothing to change the well-being of English people.

0*V_sRwC4Rvi4GfN3ZWhen socialists realize that central planning does not accomplish what they want they try to reform by decentralizing the central planning. To see how the British are likely to try this, see this article in The Economist.

The main issue in capitalism versus socialism is who gets to make decisions about what economic projects are undertaken and who gets to do them.

There are three main ways in which this decision-making can be done.

The first is that major decisions are made by bankers who get to do this via their control over money creation. Fractional reserve banking means bankers create money when they make loans and this gives them a great deal of power to decide what projects go ahead and by whom. The capital in capitalism comes from the money created when loans are made. Even small decisions like who gets to build housing and who gets to buy the houses are made by bankers when they approve the loans and mortgages. Any meaningful reform will require changes in the way in which money is created. There are ways to do this. Not only will bankers object to the loss of power but a lot of people have an emotional committment to money and will fiercely oppose changes. Another strong feature of this system is that governments pass legislation that restricts competition and allows some people to make profits. This system we call capitalism.

The second approach to decision-making is called socialism or central planning. Decisions are made by political leaders or their bureaucrats. Socialists like to use words such as “democratic” and “public interest” but in reality make decisions according to their own values and interests. Because of this socialist economies tend to be an inefficient use of resources. Decision making is still made by a few people even if they claim it is on behalf of others.

The third way of making decisions is a true market or perfect competition. We like to think our economy is based on markets but a lot of it is based on legislation that restricts competition such as patents, copyright,licensing and tariffs. In North America one area of life in which competition is allowed is religious services. As we are committed to freedom of religion the government does not interfere. One often hears of people who go church shopping.

Greens often say they want an economy based on small business but they also automatically reject everything said by economists. This is unfortunate because economics has worked out the theory of small business and can say exactly what to do.

In order to have perfect competition all participants in a market, sellers and purchasers, must be so small that no one can influence the price by increasing or decreasing the amount they buy or sell. There must also be perfect knowledge. All participants need to know all prices. Entry to and exit from an industry needs to be easy which means there can be no patents or copyright.

For the purposes of this post decision-making is made by customers who vote with their buying decisions. Price changes are signals to producers to increase or decrease production.

One of the reasons this blogger likes the true market economy is that it allows a lot of decisions to be made by individuals. One of the problems is that individuals to not have a lot of power. People with common vested can form powerful lobbying groups and can get governments to pass legislation which restricts competition and provides them with excess profits.

Socialists talk of giving workers influence over economic decisions, but their proposals give decision-making to boards or councils. Workers are also consumers and with a market system they will have the same influence as all consumers. A market system also allows for a great variety of products. For example, if schools were based on a market there could easily be schools based on different educational philosophies and parents could choose which they wanted for their children. A voucher system could ensure that all children got an education.

Socialists also argue that capitalism encourages greed. This may be true when decisions are made by bankers, but in a true market there are no profits, just wages and a return on investment. If there are profits being made in an industry, more people will go into it until there are no profits.

If the British Labour Party gets elected and is successful in changing the “structure” of their economy, they may change the size of a few of the units for which decision are being made. However, they will still be steering the same ship in the same ocean. Jeremy Corbyn is not radical or brave enough to change the way in which money is created or to drop a committment to economic growth, both of which are urgently needed to protect people from an economic collapse.

 

 

 

 

 

 

 

 

 

 

 

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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.

How can we afford a universal basic income?

How can we possibly afford a universal basic income?

This appears to be the strongest argument against an income scheme. It also illustrates one of the basic problems in economic analysis.

When macroeconomic professors stand at the black board they generally draw an x-shaped graph and label one line to represent the real or physical part the economy and the other to represent the financial side. This is an important distinction because if one analyses economic problems only in financial terms the complexities of the financial system get in the way of clearly seeing problems.  Too often economic problems are analyzed in financial terms.

In the case of the universal basic income the question should be are we capable of producing enough goods and services to provide everyone with the desired standard of living.  The answer should determine the level of the basic income.

There are a number of economic issues with which we need to deal:  we have extracted the most easily accessible energy and mineral resources and those left require a lot of energy to get; there are serious problems resulting from the fractional reserve way of creating money; the work ethic is a problem in a high technology world; and there is a need to recognize our economy, what we call capitalism,  is based on legislation which restricts competition and allows some people to make profits they would otherwise not get.

I believe most of these need to dealt with at the same time.  Certainly a UBI should be introduced at the same time as a reform of the financial system. These are complex emotional issues and will be extremely difficult to resolve.

The book Funny Money: Adapting to a Down Economy, by the author of this post discusses these issues. Please have a look at it.

Regulating business with competition

Generally we try to protect ourselves from the excesses of capitalism with regulations.  An alternative method may be to increase competition.

Capitalism is known for its disregard for health and safety concerns and for its excessive profits.  To deal with these problems we impose regulations on firms.  As people are good at getting around regulations the natural reaction is to increase the regulations.

An alternative approach would be to increase competition.

One of the myths of our economy is to equate competition and capitalism.  The reality is that capitalism depends upon governments passing legislation which limits competition.  Most economic legislation, while labeled as consumer protection, works to restrict competition.  For example, many manufactured items are subject to strict regulations as a safety thing. .  But these regulations tend to be set so that only large producers can comply.  This means that specialty manufacturers cannot afford to get started as the extra costs have to charged to a small production run.

Health and safety regulations, copyright and patent legislation and licensing requirements all work to limit competition.

Here in Canada we have a strong commitment to separation of church and state.  The result is that the provision of spiritual and religious services comes closer than anything else to the perfect competition model.  When people move into a new area they often go church shopping, even among churches of the same denomination. 

Churches are also the least regulated institutions in the country as their members look after that either by asking their ministers to leave or by leaving themselves.  (Ministers get fired for one of two reasons – they get into relationships their congregations consider inappropriate or they over stay their welcome.)    When the United Church of Canada decided to ordain and marry gays and lesbians a lot of people switched denominations.

This blogger figures  increasing competition in most if not all industries would do a lot to resolve the excesses of capitalism and reduce the need for regulations.

One of the requirements of perfect competition is that all participants have perfect knowledge.  Therefore the only regulation needed is that firms be required to publish all the information customers need to make good decisions.  This would require us to take responsibility for our own lives rather than expecting the government to look after us.

I realize this suggestion is a political can of worms as people don’t like to reveal secrets.  However with internet and smart phone technology more and more information will be easily available.  Rather than trying to increase regulations we should demand that this information be made generally available so that we as consumers can become the regulators – just like church goers.

 

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.

Capitalism, competition and profits

Capitalism is about profits but economic theory tells us price should equal the marginal cost which does not allow for any profit.  It could be there is a contradiction between what we say we believe and the way we actually behave.  Figuring this out may be a major step in understanding our economy.

Price should equal marginal cost, the cost of the last item produced, because profits will attract more producers into an industry until competition forces prices down to the marginal cost level.  For this theory to work there must be perfect competition.  Perfect competition requires easy entry into a business, a uniform product,  that no participant in the market be large enough to influence prices by limiting sales or purchases and that all participants in the market have full knowledge of the market.

In perfect competition there are no profits because competition will force prices down to breakeven point.

This would be great for customers but producers, believing they have a right to profits want to restrict competition.  As producers tend to have more power than consumers there are in our economy lots of restrictions on competition.  There  are many ways to restrict competition but probably the best is to get governments to pass legislation that interferes with the operation of a competitive market. Look at the four requirements for perfect competition in the second paragraph above for ideas how to restrict competition.  Some of the legislation which interferes is patent and copyright, tariffs, subsidies and licensing.

An advantage of legislation restricting competition is that the state and its legal system can be used to enforce it.

Sometimes definitions can be fuzzy and most definitions of capitalism fit this.  The definition of perfect competition (see second paragraph above) is more precise even if it appears unrealistic.  We have jokes about economists making assumptions.  It is not safe to assume that capitalism is perfect competition.

I think the perfect competition model is very useful in that it provides an ideal towards which we could be working.  It provides guidance for policy even though there are lots of forces working against that policy.

Whatever name we apply to our way of organizing our economy, it is important to understand that it is based on governments passing legislation to restrict competition.

 

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.

The pyramids, central planning and capitalism

Three or four millenia before anyone ever thought of the word capitalism the ancient Egyptians built the pyramids using an economic system which was probably closer to the Soviet’s central planning than American “capitalism”.

This blogger has just finished reading A history of Ancient Egypt from the First Farmers to the Great Pyramid (2012) by John Romer and found several points of interest.

It is amazing how much archeologists can tell about ancient Peoples but we also have to realize that we know very little about them.  Romer points out that some good stories have been told about ancients on very little evidence and that often the stories tell more about the authors than the ancients.  My speculation about Soviet style central planning may be an example.

Probably the most significant thing is there is no evidence of money.  The building of the pyramids involved up to forty or fifty thousand people, about ten percent of the working population.  This must have  involved a lot of planning and coordination.

Money and decision-making may be an issue here.  I am wondering if the pyramids could have been built if the ancient Egyptians had money.  Money as we know it represents purchasing power and control over resources.  With money decisions are made by those people who hold the money and they may not always agree.  Who made the decision that the ancient Egyptian  agricultural surplus was going to be used to build pyramids?  Was it one person, was it a small group or did they have a society wide consensus. Unless human nature has changed a lot in four thousand years I doubt if it was the later.  I bet a lot of current national leaders, even  some from democratic countries, would love to have the decision-making power the Pharaohs may have had.

It could be that freedom is in part the right to decide what to do with one’s share of the agricultural surplus and money is an important part of that freedom.  If you have money you have control over some resources. The more people who have money the more spread out is the decision-making and the greater variety of decisions.

Without money there would have been no saving as we think of it.  There was probably some storage of food and maybe some stockpiling of materials for construction but most of the work would have been done with current production and was dependent upon the agricultural surplus which allowed food for the construction workers.  This probably also applies to our own economy where a huge agricultural surplus allows most of us to work on other projects.

While working on the draft of this post I read this article in The Economist about capitalism and inequality.  There appears to be an assumption that capital is something which can be accumulated.  Certainly a large manufacturing or construction project requires resources beyond those available to most individuals but after reading about the ancient Egyptians it is not clear that one can accumulate “capital” .  What is required is control over a quantity of current or very recent production (or agricultural surplus).  The capitalist gets this control by getting money (purchasing power) from others in the form of loans or investments.  Governments sometimes have the ability to get control over large chunks of current production

Economics is about relationships including the relationship between people and their government.  For ancient Egypt the archeological record has two pieces of evidence.  A number of hieroglyphics show tribute being brought to the leaders and there are also the pyramids.

I enjoyed reading about the ancient Egyptians but I probably would not enjoy living in a society where all or most of the agricultural surplus went to another person’s project – except perhaps if I didn.t know anything else.

Co-operatives and competition

Here’s an article from The Guardian promoting the virtues of  co-operatives as an alternative to the profit-motivated capitalist system of organizing economic activity.

I am not sure the ownership structure of a firm is relevant to how it behaves within the economy.  Whether it is state-owned, community owned, privately owned or cooperatively owned it still has to acquire the resources (capital) with which to start and operate the business.   It also has to arrange for management.  A lot depends upon the personality of managers.  There are many dominant people who are skilled at manipulating democracy and consensus decision-making.  The exception is that state-owned firms may have deep pockets and may make decisions for political rather than economic reasons.

I see co-ops as a reaction to excessive profits of private firms. Generally firms are able to make profits because governments pass legislation which restricts competition.  Probably the best way to deal with excess profits is to repeal the legislation that restricts competition.

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