Paying the piper/economist and making economic decisions

He who pays the piper calls the tune. This applies to economists as well as musicians and explains why economists have so much difficulty coming to terms with the ideological aspects of their field.

This post was prompted by an article about whether economists are biased towards the free market or towards regulation.  This blogger would prefer to evaluate economies according to who makes decisions.

I get suspicious when I hear economists talk about the “free market”  because they usually mean something different to what I understand is a free market economy.  To me a free market economy is one based on the perfect competition model.  What we actually have is an economy where governments pass legislation to restrict competition.  Copyright, patents, licensing, tariffs, health and safety regulations all work to restrict competition and allow some people to make profits they would not get in a competitive economy.

Sometimes the profit making gets out of control and the way to deal with this is to introduce  regulations  rather than to return to more competition.  Therefore I figure the debate in this article is irrelevant.

What is relevant is who makes economic decisions.  If we had perfect competition most if not all decisions would be made by consumers who would vote with their spending decisions.  Unfortunately there are too many people in this world who like to make decisions for others.

One of the big things which influences decision making is the fractional reserve way of creating money.  In this process money is created when bankers make loans and as they get to decide who gets loans they have a say over what economic activity is  going to take place.  If we had a national exchange trading system as proposed in the essay “LETS to market: Dealing with the economic crisis” on this weblog money would be created via payments to individuals who would then make decisions in their purchases or investments.

The fractional reserve system  also limits decision making in that many people, especially during their working years, carry a large debt load.  As most of us have to work to repay our debts, we are forced to support another person’s decisions.  And the work ethic adds a lot of support.

Governments also interfere with decision making by passing legislation which restricts competition and by accessing large amounts of created money.  This of course allows them to make economic decisions according to their values which don’t always agree with their citizens.

My view of how the economy works is less than consistent with conventional economic wisdom.  Readers will decide for themselves which view  they want to accept but I will point out that economists who don’t promote the conventional view probably don’t stand much chance of holding important high paying jobs.  People in power, industry or government, want to feel they are doing good and it is the role of economists to say what their employers want to hear and most economists are paid directly or indirectly by business or government.

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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.

Greed, financial crises and regulation

When greed. irrational exuberance or willful misconduct within the financial industry are seen to cause a financial crisis, then we start hearing calls for more regulation as if regulation can control unacceptable human behaviors.

Here’s a theory to explain it all.

Business people, especially financiers,  don’t  like competition and call upon governments to pass legislation which restricts competition.  This allows profits on top of wages and a return on investment.  It also provides opportunities for exploitation.  When the exploitation gets out of hand and becomes obvious or when there is a financial crisis caused by the way in which money is created, then we get calls for more regulation.

The best way to deal with greed and willful misconduct is probably to increase competition by repealing legislation which restricts competition.  The way to deal with financial crises is to change the way in which we create money.

Happy birthday Milton Friedman

In honor of what would have been Milton  Friedman’s 100th birthday the Webb has a number of suggestions that we need him to solve current economic problems.

If he were born in 1912 then he would have been in his 20s as the world was coming out of the depression and his thinking was strongly influenced by the world’s going into a period of unprecedented economic growth.

For his advice to be relevant now he would have to had adapted to current circumstances in which it is doubtful economic growth can continue.

Even so I like a lot of what he said.  Here’s a link to ten of his best quotes.

 

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Regulating banks and competition

This week’s The Economist has an article about a small bank in Texas which is challenging in court the Dodd-Frank act passed two years ago to increase the regulation of the banking industry.

I have a theory that most if not all economic legislation works to restrict competition and it appears the Dodd-Frank act does this by making life difficult for the small banks.

It also appears small banks, or at least this one, being small have to follow prudent banking practices and have fewer opportunities to gamble with other people’s money.

Maybe the best way to regulate the financial industries is to ensure they are highly competitive and repeal legislation which restricts competition.

Of course the big banks would turn their lobbyists loose on this one.

 

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Bashing Paul Krugman

I’ve been having difficulty coming up with an idea for a post but one can always fall back to bashing Paul Krugman.  While it’s fair game to disagree with someone I prefer not to put him down. I can’t resist this one.  The guy generates so many words he must have a DBS degree.  (The D stands for doctor.)

There are four areas of disagreement.

First, the stimulus and money creation policies he promotes  were what was needed in the 1930s but are probably not right for current circumstances.  Both of these have been tried and appear not to be working.

Second, if the underlying problem is with the resource base, then increasing economic activity is going to make things worse and possibly bring forward the date of a major economic collapse.

My third concern is that even if we have the resources to prepare for an alien invasion, is that really what we want to do with our time and resources. There are so many things to do in arts, music, crafts and social fields that some of us would find more rewarding.  Also I think each individual  should decide for him/herself what to do rather than have to do what some economist decrees.

A fourth concern is that inflation which he also promotes is a form of theft.

On the other hand Krugman does have some uses.  He gives us something to think about and he has helped me come up with a post for this weblog.

 

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 inflation conflict

It could be that inflation is at the core of the political divisions on the economy in some industrial countries.

This is because people or organizations that owe money, including governments, benefit from inflation and those who have made loans stand to lose.  It might be useful to make a distinction between money and purchasing power.  Inflation increases  the purchasing power of borrowers and decreases the purchasing power of lenders.

As this is at the core of our well-being we want government economic policies that promote or discourage inflation.  Those who would benefit from inflation want stimulus and an increasing money supply.  Those who stand to lose their savings want austerity and smaller government.

Inflation may be a way of dealing with the one percent but it also catches a lot of people who have worked hard to build up some savings.  It should probably be considered a form of theft.  It is no wonder the victims of inflation have such strong feelings.

It probably doesn’t help for them to hear economists call for inflation to solve debt or economic problems.

It is interesting that when  the representatives of those hurt by inflation get into government they appear unable to get debt under control and frequently increase it.   This may be because they enjoy spending, have friends who need to be rewarded for past support and because they now have to deal with the debt problem.  This may explain the rise of the tea party with its strong feelings of frustration.

The way to deal with the inflation conflict is to aim for price stability. This is probably easier said than done because I figure inflation is built into the way we create money.  For more on this please look at my essay “LETS go to market: Dealing with the economic crisis.”

It may be that inflation is becoming a moot point as it has been going down in spite if attempts to stimulate the economy and increase the money supply via quantitative easing.   Does this indicate some other things we don’t understand are happening in the economy?

This analysis is probably an over simplification as some people may be standing on both sides of the inflation issue and others may change from one side to the other during their lifetime but may not change their politics.

 

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.

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