Free trade; not trade wars or negotiated trade

With a lot of Americans fearful for their jobs and their president saying he can protect jobs with tariffs, international trade has become a big emotional issue.

Trade is such an emotional issue because our economy is organized such that our physical and psychological well-being requires us to have steady employment. At the same time economic changes require employment flexibility. One way to deal with this conflict would be to have a guaranteed income scheme so that individuals can cope with changes. My committment to such a scheme stands behind the rest of this post and indeed all the posts on this weblog. If people can survive comfortably without employment then this fear should no longer be a factor.

We should also analyse economic issues in physical or real terms rather than financial terms. Trade is the exchange of goods and services, not money which is a tool to facilitate the exchanges. It is very easy to get a distorted picture of the economy when people analyse economic problems in financial terms.

For all merchant-pull-1398066_1920we talk about the market economy and our devotion to competition, we have a long tradition of restricting competition. One of the ways we do that is by imposing tariffs on imports from other countries. Other ways we restrict competition with subsidies and legislation.

The economics law of comparative advantage says countries are better off to specialize and trade, even if one country is more efficient in the production of all items. This is attractive to people who want economic growth. This blogger also likes the idea of efficiency so that we can have more time for leisure activities.

I also believe the best way to do free trade is unilaterally. To do free trade and get the full benefits Canada should abolish all tariffs and restrictions on foreign goods and services coming into the country regardless of what other countries do. If other countries want to subsidize our lifestyle, then that is up to them. If they do not want to buy from us, then that is saving our resource base for the benefit of our children.

The free trade agreements of which governments are so fond are in reality negotiated trade agreements. They are negotiated for the sake of special interests of producers. These are the same interests as those who want legislation to restrict competition – patents, copyright, licensing – and who want subsidies for their firms. To get a feel for the complexity of these negotiations look at this article in The Economist. Trying to negotiate to satisfy the special interests of multiple countries must be an impossible challenge.

International trade is not such an important issue for Americans because the United States is one large free trade zone and they are or have benefited from the law of comparative advantage.

Economics is a social activity and like all relationships, to be satisfying for all parties there needs to be a more or less equal exchange. Those Americans who promote trade wars are being anti social. To me that sounds un-American.

Lots of politicians and commentators worry about the dire consequences of American tariffs and the resulting trade wars. Yes. we are headed into some even more serious economic problems but they will not be caused by tariffs and trade wars. The basic problem is that we have used up the most easily accessible energy and mineral resources. Increased efficiency from free trade will help us cope with this issue but will not solve it.

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Fake promises in the next presidential election

It appears the next American presidential election will be a battle of fake promises as Donald Trump and a left-wing democrat appeal to American emotions.

Trump will almost certainly bases his campaign on the formula that worked last time; vague general promises (make America great again) and some easy to keep promises that appeal to his core supporters (move embassy to Jerusalem.). Most of his promises will be appeals to emotions.

White House Flag Democrates RepublicanThe democrats will base their campaign on a promise of full employment as reported in this recent article in The Economist. Full employment has been an American policy goal for a long time, If it were possible it would have been attained a long time ago. To promote it now is an emotional appeal to counter Trump’s emotional promises. And it is destined to failure and will probably destroy the economic future of a lot of Americans.

One could probably predict that both Trump and the democrat will come out of the election with DBS degrees. (The D stands for doctor and the rest all English speakers should know).

The main issue, which will not be acknowledged during the campaign, is the size of the resource base for future economic activity. This blogger believes there are loads of energy and mineral resources left on the planet. However, we have cherry picked those which are readily available. Those which are left are so difficult to extract they are for the most part useless for future economic development.

If this analysis is correct then promises of full employment will be impossible to keep. Attempting to keep them will accelerate the use of the remaining energy and mineral resources and bring forward a major economic collapse.

Another factor when employment is an issue is our commitment to the work ethic. Some people believe their salvation depends upon their working hard and others worry that some people will receive benefits which they have not earned or to which they are not entitled. Everyone must do their share.

This blogger believes the material standard of living to which we have become accustomed is based on the agricultural surplus which allows a few people to produce enough food for everyone. As this surplus is the result of several millenia of technological development it should be a part of our inheritance. All of us should be entitled to a standard of living equal to everyone else regardless of what we do with our time.

With our standard of living dependent upon jobs and with our psychological well-being also dependent up on our having a job, promises of full employment will have a very strong appeal to many Americans. The success of the promise depends upon the ability of the economy for even more growth. This blogger has serious doubts about that. I am old enough to remember when people were saying we will just have to get used to an unemployment rate of three per cent.

The economic challenges facing the people of this world are overwhelming. Solutions will required a major rethinking of values about work and economic growth. An American presidential election would be an ideal time for a serious debate about the economic future.

The toughest part of this issue is how to deal with it. In the past I have voted for candidates with the least chance of winning because they have been the most honest. I have also deliberately spoiled by ballots. Both of these seem like a cop-out. I do not have the personality nor the skills to be a candidate let alone convince people of my economic policies. I do not even have the skills to go to election meetings and challenge the candidates. I also believe any candidate who tried to be honest would be nailed to the cross by fake election promises and appeals to emotions.

 

 

 

 

 

Economic growth, sustainability and degrowth

A lot of people realize there are problems with the economy but few if any understand what is happening. Therefore we have varied reactions. Many people cling to faith in economic growth, some are exploring the concept of sustainability and a few are looking at “degrowth”. This blogger thinks of the three approaches as points on the ray of a matrix.

Predicting the future is difficult although the shorter the term the easier it is. Economists are little help because most are paid directly by business people or indirectly through government. Very few people get away with telling the whole truth to the people who pay them. Most economists find it expedient to say what their employers want to hear and that is mostly that the economy will continue to grow and that there will be continuing profits.

Nor can we expect the truth from political leaders as their positions depend on maintaining the support of the people. It is hard to think of any government leader telling us we will have to tighten our belts and remaining in power. Are citizens mature enough to listen to that? It would be interesting to see a political leader try.

trafficOur recent economic memory is based on a tremendous use of energy and mineral resources. Not only have we fought two world wars we have also had the resources for an incredible standard a living in which the rich have grown richer and the rest of us have done okay. The result is we have a strong committment to economic growth and a belief that it will continue forever.

Many economists are fond of regression analysis because it assumes constant economic growth. It is a mathematical formula which takes a series of data points and calculates the best fitting straight line through them. It is generally assumed this line will angle up.

This guy thinks we would get a more truthful picture of what happens in the economy if we were to use fractal analysis. Fractals are series of ups and downs each with a subseries of ups and downs within them. The sea coasts are often used as examples. The mathematics of fractals is not as clear as regression analysis but there are some useful concepts. I am fairly certain those people who do “black box” analysis of stock markets are using fractal analysis. They are apparently having some success. The concept of fractal dimension can be calculated (two minus the Hurst exponent) and changes indicate a change in direction.

If we were to apply fractal analysis to economics it would be easier to see and accept ups and downs in the economy and easier to develop mechanisms to deal with them.

The word “sustainable” as applied to economic growth is a buzzword in some circles but I find it challenging as its meaning is not clear. I suspect it is mostly a cover for continued economic growth.

To the extent that some people use fewer energy and mineral resources it is good but I suspect that sustainable development maintains a committment to economic growth. Sustainable to me means going on forever and that is what a lot of people believe about economic growth.

The reality is that the quantity of goods and services we can produce and exchange depends upon the quantity of energy and mineral  resources we have and can retrieve with a reasonable expenditure of energy. The concept of sustainable development is probably 100 years too late.

Our committment to economic growth is so strong I am not aware of any career economist having thought about what happens when the economy goes into decline. This is unfortunate as the economy regularly goes into recession and this time it may be extended.

This blogger figures current economic problems are because we have used up the most accessible energy and mineral resources. Sure, there are lots left but they require massive amounts of energy to retrieve them. Solar may help but not yet. I fear that we will be forced into degrowth.

If so the challenge will be to figure out how do distribute fairly the goods and services we have, how to cope with leisure, how to create money that will not disappear during a crisis and how to not fight over the available resources.

Money will be a special problem as fractional reserve banking works only in times of economic growth. When growth stops and banks stop making loans  the money supply goes down and because it is fractional reserve the money supply goes down with a multiplier effect. Ouch. A super big ouch.

There are lots of anecdotal evidence from around the world that we are going into a down economy. This could easily be an explanation for a lot of the negative news, both economic and non-economic, to which we are becoming accustomed.

If we could get away from our committment to economic growth we could focus instead on happiness. This concept is impossible to measure although there is some evidence that people do not need a lot of material things to be happy.

What ever happens and wherever humanity ends up it looks as if we will experience a lot of human suffering. I would like for us to minimize the suffering and maximize the happiness.

 

 

 

 

 

 

 

 

 

 

 

 

 

The quantity theory of money and transforming economists into fairy godmothers

It could be that the quantity theory of money is controversial and often dismissed because it deals with two aspects of economics where we most want to deceive ourselves – money and economic growth.

When I  started to research and think about this post I quickly got so ticked off that I went downstairs to my lathe to transform a piece of firewood into a magic wand for one of my grandchildren.  (Abracadabra.  All economists will become fairy godmothers – in their next reincarnations.)

The theory states that MV=PQ  where M is the money supply, V is the velocity at which the money changes hands,  P is the price level and Q is the quantity of goods and services exchanged.  What gets me ticked off is that 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?

The value in this formula is in that it explains relationships and shows how the real or physical side of the economy connects to the financial.  It is difficult because there are problems with fractional reserve money and because some people believe (or need to believe) that economic growth will always continue.  I think these are two aspects of economics where some people have psychological problems accepting the truth.    It becomes even more difficult if one tries to use this formula in a computer model as the four variables are difficult if not impossible to measure.

To maintain the equality, if one variable goes up then one or more of the other variables must also change,  For example, if the money supply increases then velocity must go down and/or one or both of the price level or the quantity of goods and services produced must go up.  It could be that during  recent decades the money supply was increasing faster than Q was increasing. We saw the difference as inflation.

The way we create money is a  major problem.

The fractional reserve creation of money works only so long as more and more money is being created.  Bankers create money by making loans. The problem is the interest.  If all loans plus interest had to be repaid at one time there would not be enough money in the system.. This is similar to a Ponze scheme and works only so long as more and more money can be created.

This means there is constant upwards pressure on the M in the formula – until the money creation breaks down and the M goes down suddenly and either prices fall or the quantity of goods and services produced goes down or both.  When the United States was trying to stick to a gold standard there were frequent economic crises because there was not always enough gold to support the amount of economic activity for which there were human and material resources.  The gold discoveries of the 19th century contributed to prosperity because they added to the money supply.

The big problem on the other side of the equation is Q.  A lot of people believe or assume economic growth will continue forever.  I figure Q behaves as a fractal, that is with ups and downs and ups and downs within each up and down – something like the seashore.

Some of the things which drive Q are not likely to be steady.  Discoveries of energy and mineral resources are erratic;  agricultural  production can vary with the weather; and new technology comes in spurts.  I think Q is currently being restrained because we have used up the most easily accessible energy and mineral resources.  We have picked the low-hanging fruit and what is left is going to take a lot of energy to get.

As Q is a fractal its changes in direction are likely to throw the equation out of balance and force one or more of the other variables to adjust.

Prices appear to respond mostly to changes in M or Q.  Sometimes governments decide to try to control inflation with price controls. and this usually causes problems with the balance of the equation.  Inflation is to the advantage of borrowers and deflation is to the advantage of lenders.  To be fair to everyone we need price stability.   As governments are large borrowers it is natural for people concerned with government finances to favor inflation.  Probably the best way to price stability would be to find another way of creating money so that the total is flexible.  Then the money supply rather than prices could respond to changes in the quantity of goods and services produced.

To the best of my knowledge not much is known about velocity.  I understand that in the days of the gold standard people would hoard gold if they were worried about other forms of money.

To call the formula MV+PQ the quantity theory of money is probably a little misleading. It would be better to think of it as the connectivity formula.  As such I believe it is very valuable in understanding what is happening to the economy.

Perhaps if we had more fairy godmothers we would have  a better understanding of what is happening to us.

 

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.

Infinite economic growth and the best things in life are free

Please pass the salt.  Here’s an economist, Tim Worstall who writes in The Telegram, arguing that infinite economic growth is possible even though we live on a finite planet with finite resources.

His argument, as I understand it,  is that applying new technology to recycled resources will increase the value of those resources so that GDP can  go up forever.  It’s an argument which a lot of people will want to accept because empires or even livelihoods depend upon continued economic growth.

If we are going to talk about economic growth there are two questions that should be considered.  Is growth necessary or desirable?  Do we need to make changes in how our economy is organized to adjust to the impact of using up the most available of resources?  Some people build empires and amass riches thanks to economic growth.  Others, myself included, are not ambitious in that way  and question the need for economic growth.  I would prefer to do things other than work on the building of somebody else’s empire.  Our agricultural surplus is so great that we have to “work” very little to do our share to support ourselves.  The question is who decides how to use the surplus.  I would like to see our economy organized so that as much as possible each individual could decide how his share is to be used.

The argument is that applying new technology to recycled resources will allow infinite economic growth. The difficulty is that not all resources, especially energy, can be recycled and there is no certainty that there will always be new technology.  There are still tremendous oil reserves in the crust of this planet. However it is not clear how easy it will be to extract those reserves.  How many units of energy will it take to extract 100 units of energy?  If technology can bring the answer down to the point where a barrel of oil sells for $15 to 20,  then we might expect more  old-fashioned economic growth.

Worstall  defines economic growth as an increase in GDP which is the value at market prices of all final goods and services.   In this view the value of an item is determined by its market price which is determined by supply and demand.  I would like to make a distinction between price and value because somethings we value have a low price as their supply is plentiful.  (There’s and old song The Best Things in Life are Free.)  A walk in the forest usually involves only the cost of getting to the forest which depends upon where one lives.    There are lots of things we value which are not captured by GDP.  Some of us might like to see “growth” in these things.  It would be nice if we as individuals could make that decision rather than having an economist tell us what to do.

Economic growth is a complex issue.  There may be problems with the resource base and the most widely used definition excludes a lot of activities which a lot of people value highly.

The current economic crisis is affecting people around the world.  Many people believe that only economic growth will solve our problems.  This blogger figures that to minimize the human suffering resulting from economic problems it may be necessary to reorganize our economy.  Some suggestions are in the essay “LETS go to market: Dealing with the economic crisis” on this weblog.

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.

Wages, union bashing and supply and demand for workers

The media has recently been giving some space to union-bashing right-to-work legislation and the low wages being paid to unskilled workers such as hotel maids and fast food workers.

One of the most basic laws of economics is that price is determined by supply and demand and this also applies to wages and working conditions for employees.

During the long period of almost continuous economic growth there was generally a need for workers.  During this time unions gained strength, wages went up and working conditions improved.  We are now in a situation where growth is stagnating or maybe even going down and there is high unemployment.  Wages can be sticky going down but some how or the other they are going to continue dropping. .

We also have such a high level of technology that it should not be necessary for everyone to “work” most of their lives.

One way to limit the exploitation of workers would be with and income scheme such as Milton Friedman’s negative income tax or my proposal for universal subsistence payments outlined elsewhere on this weblog.

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