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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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.

Why debt is a huge problem

Generally accepted wisdom tells us that excessive debt is a serious problem although some people question why government debt to a central bank is problematic. After all what is wrong with one government agency owing money to another?  Why not just let the debt build up?

In this case the generally accepted wisdom is probably correct because debt is an important part of our money supply.   If we were to lose our money supply our economy would be in big trouble.

Money is a complex part of our economy and I suspect few people, including a lot of economists, really understand how it works.  Fractional reserve banking is complex but I have found it relative easy to understand.  I have explained it in the essay  LETS go to market: Dealing with the financial crisis on this weblog and there are numerous explanations that can be found with any search engine.  I encourage you to figure it out.

About 90 per cent of our money supply is based on the debt created in fractional reserve banking. This is a problem for three reasons.

The first is that the money supply needs to be flexible up and down.  The amount of money we need to facilitate the exchange of goods and services must be proportional to the quantity of goods and services we need to exchange.  I know economists like to model the economy on a least squares regression formula which gives an upwards line with a steady slope.  However, the reality is that the economy behaves like a fractal which means there are a series of ups and downs and more ups and downs within each trend. The amount of money needed varies with each up and down but fractional reserve money can only keep on increasing.  This sort of works when there is continuous economic growth but if growth slows or reverses, then there are problems.

The second problem with fractional reserve banking is that interest is charged on the debt created. This adds a purely financial demand for more money in that it is not needed for exchange of goods and services.  If all outstanding debts plus interest had to be repaid at the same time there would not be enough money in the economy. From time to time this feature of fractional reserve banking catches up with us and we call it a financial crisis.

The third problem is that when there is a financial crisis lots of people lose their savings.  The need to save for a rainy day, or retirement, is a part of our psyche and fully exploited by the marketing arm of the financial industry but there are three ways in which we can lose our savings: a financial crises, inflation or a major economic downturn. these are more likely when the economy is not growing or declining. With the current economic climate most of us would probably be better off to live for today and worry about tomorrow when that day comes.  The best way to secure one’s future is probably a market garden.

These are real problems and from time to time they cause havoc in the lives of most of us.  Therefore we are right to worry about excessive debt.  The good news is that there are other ways of creating money and the bad news is that money is such an emotional concept that most people are not prepared to consider other ideas.

One of the other ways of creating money is discussed in my ebook Funny Money: Adapting to a down economy which is available free from the link at the top of this weblog.

We tend to take money for granted so long as the economy is working but it is such an important concept that we would do well to try to understand it and make changes.  I cannot see that happening so in the meantime we should remember the advise of Shakespeare: Neither a lender nor a borrower be.

 

Why your savings and pensions are at risk

The fractional reserve way of creating money means a lot of people are at risk of losing all or part of their savings and pensions.

If there is too much money supply in the economy then we have inflation and people with savings or pensions lose some of their purchasing power and those who owe money benefit because they repay their loans with less purchasing power.  Now you know why governments and the people who speak on their behalf promote mild inflation.  This is at least unauthorized taxation if not theft.

pexels-photo-2105902If you have deflation, then people who are owed money win because they are repaid with more purchasing power than they loaned.  The borrowers lose because they have to repay with more purchasing power.

To be fair to everyone we need to manage the economy so that just the right amount of money is available at all times.  At a time when the economy is on a down trend, this is very important as too much money puts us in danger of hyperinflation.

Getting this amount right has long been a challenge to central banks although the common sense answer is fairly simple.  The money supply should vary with the quantity of goods and services we want to exchange and it should be flexible up and down.

The wrench in the simplicity is the fractional reserve way of creating money.  When banks make loans they must (or should) keep a fraction of the amount on reserve for when the depositor wants his/her money returned.  As the amount is only a fraction banks are at risk of a “run” if depositors lose faith.  And because of the fractional reserve there is a multiplier effect involved.  Does not this sound like a set up for a crisis?  The mechanics of this process are a little complex although I have always found it easy to understand. To figure it out I suggest you Google “fractional reserve” or look at my free e book Funny Money: Adapting to a Down Economy or look at the essay Going to Market on this weblog.

The other end of the wrench is  that interest is charged on the loans made by the banks.  Mainstream economists have given little or no thought to the consequences of this. Because all of our money is created by the making of loans, if all the outstanding debt were to be paid off at one time there would not be enough money to repay it all because of the interest.  The charging of interest on the debt/money means there is never enough money available to repay all outstanding debt. Inflation is built into the fractional reserve way of creating money.

The system works only so long as the economy and the money supply continues to grow.  An upset in either means crisis of which we have had many.

The relationship between money supply and economic output is expressed in a formula, MV=PQ, some times known as the quantity theory of money.  Money times the velocity at which it circulates in the economy is equal to a price index times the quantity of goods and services produced.

I get ticked off because this is frequently taken to mean there is a direct, proportional relationship between the money supply and the inflation rate or price level.   Can’t people see there are four variables in this formula?  Total output is an important part of this formula.  If it should happen to go down something needs to happen to another variable.

Our society has a strong commitment to economic growth and a need to keep it growing so that people will not suffer from unemployment.   Some desperate people are trying to stimulate growth by increasing the money supply. This may increase inflation but it will not lead to growth unless we can find inexpensive energy and mineral resources to support it.  I suspect the new American president has  his eye on parks and reserve lands to encourage more economic activity.  He will probably succeed in the short term to be followed by a major economic collapse.

This blogger thinks we need some major economic reforms, not only in our financial system but in our commitment to economic growth.  We need to minimize our production and exchange of goods and services so we are using fewer energy and mineral resources.

A lot  of people operate on faith in our financial system and ignore suggestions we need reform.  I think the risk is so great that prudent people will at least give some thought to these issues.  It is your savings and your pensions and your future that is at risk.

 

 

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Power of individuals and the universal basic income

Proposals for a universal basic income are bringing out lots of arguments which show a lack of understanding of the UBI and the nature of money. Here is an example in an article from  The Independent.

The author of the article claims a UBI will open the door for increased government control over people’s lives. This blogger figures the opposite will be the case and an income scheme will be a tremendous transfer of power to individuals.

The first and most important thing to say about a UBI is that it needs to be a part of a radical overhaul of the way in which we exchange goods and services and the way in which we create money.  Probably the current economic crisis is the result of our having used up the most easily accessible of energy and mineral resources.  There are lots of these left but they require lots of energy to extract.  The fractional reserve way of creating money also has lots of problems and needs to be reformed.

There are lots of people who want to tell others how to live and those of us who value Independence will always have to be vigilant and assertive.  This is separate from the UBI and will be an issue regardless.

Money represents purchasing power and giving it to people empowers them in that they can make purchasing decisions according to their values. This is different from food stamps in that stamps are for specified products and can hardly be the equivalent of money. A UBI will be a tremendous transfer of power to individuals and one would expect a lot of people to object to this.  Some of those who object will likely be the bankers whose power derives from creating fractional reserve money.

Another UBI issue is dependency.  Some people including the author of the reference article fear it will make us more dependent upon the state. I beg to differ because we should think of the UBI as an inheritance.  We can have it because we have such large agricultural surplus which is based on hundreds of years of agricultural and technological development.  We should all have a right to a share of the agricultural surplus.

The universal basic income will lead to a revolutionary change in the way we exchange goods and services.  Many of the issues are discussed in my book Funny Money: Adapting to Down Economy.  I encourage  you to have a look at it.  Details at the top of this blog.

Answering concerns about an income scheme

A discussion forum on the Canadian Broadcasting Corporation website brought out a number of concerns about proposals for a basic income scheme. There were more than 2,000 comments.  Here are answers to some of the concerns.

How do we pay for a basic income scheme?

There are two answers to this question.  The first is that it would replace a range of existing social welfare payments and would make these payments with more efficiency.  Employing fewer people this would increase the need.  Also I believe subsidies should be given to consumers rather than producers so this would release a lot more money for an income scheme.

For the second answer we have to focus on the agricultural surplus, the excess production by each agricultural worker which allows food for people to do other things. Without the agricultural surplus we would not have civilization as we know it.

Until now the agricultural surplus has been distributed via employment but the current level of technology is making this more difficult.  Thus the interest in a universal basic income scheme.  We should note that the agricultural surplus is based largely on petroleum and could be somewhat precarious.

As most of the technology that has gone into the agricultural surplus has been developed over the last 2,000 years and most if not all of us have ancestors who worked on that, we should consider it a part of our inheritance. We are all entitled to a share.  We should have a collective responsibility to ensure everyone has the opportunity for the same standard of living as most other people.  The amount of payments should depend upon the population and the quantity of goods and services we are able to produce.  If this ratio goes up then the payments should go up and if this ratio goes down then the payments will have to go down.

I believe there are some serious problems with the way in which our economy creates money.  As an income scheme involves money this would be a good time to deal with that problem.

How do we stop people from smoking dope all day?

The simple answer to this question is that we do not. We do not need everyone to work all the time to maintain the agricultural surplus.    We no longer need a work ethic.

A basic income scheme would be a tremendous transfer of decision-making power to individuals (from governments and from bankers who create money via the fractional reserve banking system) and we have to allow people to make their own decisions and to take or benefit from the consequences.  The agricultural surplus should give us all the right to decide what to do with our time.

An income scheme would be communist.

This blogger dislikes the isms because they tend to be mostly meaningless.  As I understand communism it involves treating people humanely and government control of the economy.  It seems to appeal to people who wants to tell others how to live their lives.    I believe we should try to treat people humanely and I do not want others telling me how to live my life. As decision making power goes with money an income scheme would be a transfer of power to individuals.  It is difficult to think many communists would want that.

A guaranteed basic income scheme would help with a lot of social and economic problems but such major changes would go against a lot of vested interests.  Even people who would benefit the most are likely to fear the unknown.  Therefore concerns need to be taken seriously.

This blogger has just published an eBook Funny Money: Adapting to a Down Economy which discusses a lot of these issues. The price is only 99 cents.  I encourage you to have a look at it. Until April 19, 2016 you can get a free copy from Smashwords.  Use the link and code at the top of this weblog.

Hiding from the economic crisis

Why are interest rates so low?  It’s a question which has apparently been occupying a couple of North America’s top economists but this blogger sees the discussion as a screen hiding some very important economic issues.such as the root cause of the economic crisis and values which will guide us in trying to  find a solution.

On the surface the answer is simple.  Interest rates are the price of money and are determined by supply and demand.  They are low  because that is where the two balance.  They appear low because we are used to high returns on our investments and are reluctant to give them up.  There is no reason why interest rates could not be zero and maybe they should be.

To understand the root cause of the economic crisis we need to go into a macro economics classroom and watch the lecturer draw his basic diagram on the blackboard.  It is in the shape of an”x” with one side representing the financial side of the economy and the other the real or physical side.   This is important.  As we measure the physical part of the economy in financial terms it is easy to forget the distinction and analyze economic problems only in financial terms.  We need to ask what is happening to the physical side of the economy because it could be that is where the problem is.

This blogger figures the problem is with the resource base.  There are lots of energy and mineral resources left on this planet but we have exploited the most easily accessible.   Those that are left take a lot of time and energy to extract and this is causing a lot of economic problems.  It could even force us into negative growth.  This is a much more serious problem than why interest rates are low.  It is also an extremely difficult problem because it challenges some deeply held beliefs and values.  It’s a lot easier to talk about why interest rates are low.

Some ideas about how to fix the economy are included in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.  A major feature of that essay is a proposal to change the way in which we create  money.

The emotions surrounding money make it a such a difficult subject that few people understand the economics of money and banking. This is unfortunate as money is so essential to how we exchange goods and services.  I encourage you to take a look at the essay.

While I prefer to see low interest rates as a symptom rather than the problem here are  some observations.

Money should be considered a tool to facilitate exchange rather than as a commodity with a value of its own As the quantity of goods and services we want to exchange varies up and down  so does the amount of money supply we need,  If there is too much money there will be inflation and if there is too little money there will be deflation.   Some people believe there should be mild inflation but this reduces the value of savings and should be  considered theft.

Quantitative easing has been an attempt to stimulate economic activity by increasing the money supply.  It has resulted in a rising stock market but has done little for the real economy.  That has to be a sign of a serious problem which has not been identified.

The way in which we create money, known as fractional reserve banking, is a heavy-duty problem because it is based on loans on which interest must be paid.  If all debts had to be repaid at one time there would not be enough money in the economy.  It is a Ponzi scheme on a grand scale and it is no wonder we experience frequent financial crisis.  For more on this topic see these previous posts on this weblog.

I believe we are facing a serious economic problem in that it is not clear there can  be a return to economic growth.  Dealing with this will require some major changes in our way of life.  It is disappointing that two of our most well-known economists are protecting us from having to deal with this with a frivolous argument. It’s as if they are playing in the turkey poo on animal farm and producing gobbledygook.

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