Self-driving cars: promises and some problems

Self-driving cars will be an incremental but disruptive step into science fiction in that we will be abandoning a major part of the economy and replacing it with something different. Science fiction will become a reality. Do we really want to go there? Probably we have no choice but to drive down this road.

A recent special report in The Economist discusses some of the technology and outlines the promises of autonomous vehicles. There are also some economic problems of which we should be aware – the resource base, marginal cost and potential disruption in the money supply.

driving-clipart-45The promises are mostly based on a continuation of the North American growth economy. We will be continuing to use machines to move individuals or small groups mostly to places of employment. Probably self-driving vehicles will be used in combination with mass transit, especially if vehicle sharing comes into its own. Great benefits will accrue to a lot of people in the form of greater inexpensive mobility which will also allow us to contradict Facebook with more direct social activity.

Self-driving vehicles may add to the over population problem if there are fewer accidents and fewer fatalities.

One of the problems will be the availability of resources. This blogger figures the economy is currently on a down trend because we have used up the most easily accessible energy and mineral resources. Sure, there are lots left in the crust of this planet but the amount of energy required to retrieve them makes them mostly useless.

The exception is solar energy, the cost of which has been dropping and will probably continue to drop. This could mean a major change in economic power as it appears solar will become cheap enough for individuals to make their own decisions about using it. No longer will bankers and governments be deciding which power provision projects go ahead and by whom.

The replacement of the current fleet of internal combustion vehicles with electric and driverless vehicles will probably mean a lot of the current infrastructure will need to be replaced. This will require large quantities of mineral resources which may be very expensive. Henry Ford realized that in order to sell automobiles they had to be inexpensive enough for working people to buy them. Since then we have extracted a lot of the most easily accessible mineral resources. It is not clear we will able to retrieve or recycle enough resources for the transition.

The economic concept of marginal cost creates a couple of problems for the introduction of self-driving vehicles. This states the price of an item is equal to the marginal cost of producing the last item. As the cost of solar energy is falling and is likely to continue falling at some point solar will determine the price of electricity. When that happens all those firms currently producing electricity from hydro, gas or oil will find their facilities and investments worthless. Not good news for bankers or for the rest of us when all that debt has to be written off.

Recycling may be another source of problems. Most of us accept that recycling is a civil responsibility and believe that doing so will help to save the environment and the economy. However we may find marginal cost interferes with some things. Suppose a pound of copper can be recycled for half the cost mining new stuff. Does this mean manufacturers will be able to purchase recycled copper for half the cost and their customers will benefit from the cheaper prices? Not likely. Copper prices will be set by the last pound mined and the recycler will make a windfall. So the benefits of recycling will likely go to the recyclers rather than the rest of us. This is what happened in the oil industry as prices rose. We all paid higher prices and those producers who could extract the stuff at lower cost did very well. Recycling may be a joke on us.

Most of us know how to manage our money but few understand how money is created in our economy. Most of the money we use to exchange goods and services is based on the debt created when bankers make loans. This works so long as the economy is growing and bankers make more and more loans.

Economists seldom if ever talk about what happens when the economy stops growing and loans have to be written off. Loans are being written off all the time but so long as the economy is growing they are replaced with even more loans. However, when large amounts have to be written off such as the recent mortgage crisis the money supply goes down and without money it becomes difficult to exchange goods and services and lots of people lose their savings and their employment. Because of the fractional reserve system we use the money supply goes down with a multiplier effect.

I do not know how much of the current money supply is based on debt to the automotive and energy firms. The introduction of self-driving electric vehicles could hit the banks and us with a double whammy if firms in both industries cannot repay their debts. We could lose a lot of the money supply as well as a lot of people losing their savings and pensions.

A lot of changes are likely to be forced upon us. Some of those changes we may not appreciate.

Through the millenia of history when there have been major economic upheavals up to 90 percent of populations have died. If something like that happens in the near future, the technology of self-driving electric cars will not be lost and the promises may be available to the survivors.

Solar energy – excitement and challenges

The most exciting, and challenging, economic news of recent days has been that in some parts of the world solar is now lower cost than other forms of energy and that is without subsidies. (One, two, three.) This is exciting because so much of what we call civilization is dependent upon cheap energy.  There are indications that the cost of solar energy will decrease even further and that it will become  available to most of us.

This is also challenging because of the economic changes which will have to be made including the writing off of a lot existing infrastructure.

We must start this discussion by noting that energy is only one input into economic growth.  A shortage of other minerals, agricultural land and over population may make a return to economic growth difficult.

A major problem in adapting to lower electricity costs will be the existing infrastructure. The price of an item is equal to the marginal cost of producing the last unit.  This means that if solar energy can be produced cheaper than other forms of electricity the producers of that energy will have to lower their prices or go out of business.  It may take time to work out but we can anticipate a lot of infrastructure will become obsolete.  Do not be surprised if there are demands for subsidies to protect firms from unfair competition.

The falling marginal cost may be a problem for the production of solar energy.  With fossil fuels we have been used to rising marginal costs which means the owners of cheaper oil have been reaping windfall profits as the price of oil has gone up.  This writer is not aware that much economic thought has been put into dealing with falling marginal costs on this scale but some people will have more expensive solar energy than others or will have to write off their initial investment.

Another interesting feature of solar energy is it is unlikely any corporation will get an exclusive license to use it.  With costs falling to the point where most people will be able afford their own solar collector(s) decision making power will be transferred to individuals.  No longer will bankers and governments be making decisions for us.

I am skeptical that cheap solar energy is going to mean a return to economic growth and the way our economy is currently organized requires growth for most of us to live in comfort.  Changing our economic organization will be far more difficult that introducing solar technology.

Pricing solar energy – the marginal cost factor

 The costs of solar energy are falling quickly and will probably soon be cheaper than more conventional sources.  Does this mean we will once again have large quantities of cheap energy and a return to economic growth?  Maybe and maybe not.

There may not be an immediate drop in the consumer price of power.

The maybe is because of the economic principle that price is equal to the marginal cost of the last unit produced and sold.This means solar will not influence the grid price until the whole current power infrastructure has been replaced. Until then the price will be set by whatever is the most expensive conventional power still being produced.  

It also means firms producing solar power for the grid  will be able to reap some windfall  profits as their costs of production will be lower and falling. Given the current corporate culture that firms have an obligation to maximize their profits regardless we have to anticipate most firms will take full advantage of the windfall. We observe that lots of oil reserves can be extracted at costs much lower than the current marginal cost for more expensive oil. This means some firms and/or governments are reaping windfall profits

The bright spot will be if and when the cost of solar falls enough for small units to be economical and for consumers to be able to afford them.

A further complication is the debt factor.  How much of the debt used to build the current infrastructure is outstanding?  If a large amount has to be written off, it will probably come out of what is called high power money.  If this declines rapidly  it could affect the money supply and cause some economic decline.

As the price of solar falls no doubt lots of large companies will get involved but sadly most if benefits may go to the one per cent in profits and the rest of us will be left out in the cold.  Expect turmoil rather than growth.

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.

 

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Payday loans, slavery and money creation

What is the marginal cost of making a payday loan? Or any other type of loan?  The answer to this question should help to answer a question about interest rates on loans raised in the Buttonwood column of The Economist, November 30, 2013 issue. What interest rates should lenders be allowed to charge?

Unfortunately loans and credit are complicated beyond simple economics because the making of loans is an instrument of exploitation even to the point of slavery and because credit is involved in how we create money.

Economic theory tells us that so long as there is competition the price of a product should be equal to the marginal cost of producing that product.  Therefore for loans the marginal cost would be the cost to the lender of acquiring the money to loan (i.e. the interest paid to the depositor of for payday lenders to their source of funds) plus the operating costs and the cost of loans written off.  The legitimate interest rate to charge on a loan should be easy to calculate and for banks we can compare the rates they pay on deposits and the rates they charge for loans.

It appears the need for credit is almost universal at least in large-scale economies.  I’m not sure about hunting and gathering groups which practice a sharing economy.  It appears there has always been a need for short-term lending of the type done by payday lenders.

The problem is that the making of loans can be an instrument of exploitation.  One of the quickest ways to get control over a person is to lend them some money.  In peasant societies people borrow to put on funerals and weddings and if they cannot repay they sometimes find themselves in slavery.

In our own society there are probably lots of people with dreams of doing something other than the daily employment but they are unable because of their debt load.  All this consumer debt works as an instrument of social control for the one percent.  So long as we are in debt we work to support their goals and interests rather than for our own.  If a person wants to be truly free one should try to live without  borrowing.

As for payday loans Mr./Mrs./Miss/Ms Buttonwood says:

“Provided the terms of the loan are made clear, then it should be up to borrowers to decide whether to accept the costs involved. An interest rate is simply the price of money.”

Once again this is simple economics without the human factor.  For many people there are times when  it may not be easy “to decide whether to accept the costs involved.”

The other complication with lending is that our money supply is based on fractional reserve loans by financial institutions.  As money is essential for the exchange of goods and services it is also essential that we carry a debt load.  Says Buttonwood

“But businesses and consumers are positively encouraged to borrow. Indeed, when debt growth slows, as it has in recent years, an air of panic develops about how to get it going again.”

There are a number of problems with the fractional reserve method of creating money, most of which have been discussed elsewhere on this weblog and especially in the essay “LETS go to market: Dealing with the economic crisis.”  Basically it is a Ponzi scheme which is urgently in need of reform.

The reform proposed in that essay, a national Local Exchange Trading System (LETS) should also help with the need for short-term credit.  It would be a lot less exploitive as no interest would be charged and control over the money supply would be in the hands of all people.  A national LETS system would transfer a lot of economic decision-making from bankers and governments to individuals.

There are consumer loans and there are business loans.  Loans are a transfer of purchasing power from one person  to another and interest is compensation for the transfer.  A LETS system  should take care of the need for short-term consumer  credit.  The compensation for business loans should come out of the profits in which case they should be considered equity.

Back to the question of caps on interest charged on payday loans.  Is it the role of government to prevent some of its citizens from exploiting others?  If yes, then governments should limit interest  rates  charged (marginal cost is a guideline) or find another way of creating money so that the need for short-term consumer credit is easily satisfied.

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.

Fossil fuel reserves

An article in this week’s The Economist talks about reserves of fossil fuels and points out existing reserves exceed what can be burned if governments stick to plans for controlling climate change.  It seems many people in the business don’t expect governments to hold the line.

regelatwork_Oil_rigAnother factor which may limit the value of these deposits is the marginal cost of extracting them. As we extract the most easily accessible of resources the cost of extracting the remaining resources increases.  Perhaps we should calculate the costs in terms of energy.  How many units of energy does it take to extract 100 units of energy?  As this figure goes up it is going to reduce the energy available for other economic activity and is certain the have a negative influence on economic growth.

Those who have a religious-like faith in economics will say innovation and technology will save the day and we are bound to return to economic growth.  They could be right, or partially right, but it might be wise be a little skeptical.

The costs of extracting fossil fuel reserves should be considered in determining their value and evaluating their potential contribution to the economy

There are still lots of energy resources in the crust of this planet and the energy companies will probably identify more of them.  What isn’t so clear is that these resources will be available either because of government policy on climate change or the economics of extracting them.

Economic salvation from shale gas?

A lot of people believe economic salvation depends upon economic growth and some people believe that salvation will come as a result of shale gas.

It could be true.

However, in a previous reincarnation I was a charter member of the skeptics club.  A more likely scenario is that shale gas may give us a temporary reprieve.  There are environmental and economic concerns.

The environmental concerns relate to global warming and earthquakes.  Also the current availability of cheap shale gas is interfering with the development or renewable energies such as wind and solar.

The economic concern relates to marginal cost.  (Marginal cost is the cost of extracting the last unit sold.)  If shale gas is going to be our salvation, then the marginal cost of extracting it will have to decrease as more gas is taken.  If the marginal cost increases, then it will only slow down the rate of economic decline.

The exploitation of shale gas is the result of high oil prices and the development of new and expensive technology.  It takes a lot of energy to get it out of the ground.  Certainly the gas currently being extracted is the easiest and cheapest.  There is some probability that future extractions will be more difficult and expensive.

Another concern about the potential for a return to economic growth is what is happening to the marginal cost of other minerals and resources such as topsoil and copper.

Rather than seeking a return to economic growth we might be better off to adapt our lives and our economy to zero or negative growth.  For some ideas about how to do that please see my essay: LETS go to market: Dealing with the economic crisis.

Here are links to three articles on shale gas. One, two, three.

 

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.

Gasoline, oil sands and marginal cost

The price of gasoline at our local gas station has gone down by 11 cents a liter in the last couple of days.  This coincides with this article about concerns for the future of the Alberta oil sands project.

Oil from the Alberta tar sands is expensive to extract and illustrates the workings of marginal cost.  As everyone knows price is equal to marginal cost, the cost of producing the last unit.

As demand for oil has increased the price has gone up making it economic to go after more difficult deposits such as the tar sands.  This may keep up production but I fear that rather than allowing economic growth to continue it just slows down the rate of negative growth.  Economic growth would be more likely if marginal cost were falling with increasing production.

It also means a reallocation of financial resources to maintain our energy use which must be causing problems throughout the rest of the economy.  The more we spend on oil the less we have for other products.

We should not assume that the cost of exploiting the oil sands is consistent through the whole deposit.  It could be the marginal cost will keep increasing as the easiest of the deposits is depleted.

A further problem for oil sands producers is that if the price of oil falls as a result of an economic slowdown, then they may not get enough to cover their costs and will have to stop production.

Probably most of us Canadians benefit from the oil sands but we shouldn’t be too complacent.

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.

Water and economics

It could be that one of the great injustices of the world is that for some of us the marginal cost of water is zero.

As this injustice is likely to get worse, the way for its victims to cope will be to apply supply and demand and marginal cost to pricing.  Here is an article about water markets.

When we were looking for a place to build our home we focused on a part of British Columbia through which there is a diagonal line.  One one side of this line it is dry sometimes getting close to desert.  On the other side is a cedar-hemlock forest.  Having previously lived in areas short of water I was determined we should be on the wet side.

As it turned out the  “pile of rocks” my wife refused to look at the first time we drove by has three streams on it.

The stream from which we take our water goes underground and flows into a river.  The water that goes through our house goes into a septic field and flows underground into the river.

Therefore the marginal cost of our water is zero and we don’t worry about water conservation.

I am not saying where we live because I don’t want a lot of other people coming to live in this valley.

Are we running out of resources?

Are we running out of resources?  This question was asked on the Linkedin forum “The Economnic Outlook”.  Following is my answer.

Your asking this question indicates there may be a problem.

Probably we are not running out of resources but it could well be that we have used up a lot of the easily available resources which could be just as serious.  We are already seeing rising prices and lower standards of living for many people.

The using up of easily accessible resources is complicated by the fact that price is equal to the marginal cost of producing the last unit.  This  means that as resources become more expensive to extract the price of the cheaper to extract resources which are still left also goes up.

This in turn leads to a transfer of purchasing power from consumers to the owners of the cheaper resources.

Peak oil and energy costs

Our civilization has been built upon energy stored in the earth’s crust and which has been easily extracted.  The continuation of the lifestye we know depends upon a continuing supply of cheap energy.

Therefore this article on peak oil on the Scientific American website is of particular interest.  It appears we are relying more and more on oil which is expensive to extract.

In evaluating energy sources the key question is how many units of energy does it take to acquire 100 units of energy.  Clearly for new sources of oil this figure is increasing.

The next question is what proportion of the energy comes at the higher cost and what is happening to this figure.  As the proportion goes up there will be less energy with which to maintain our lifestyle.

A further complication is that price is equal to the marginal cost, i.e. the cost of producing the last unit.  As the price goes up to pay for the latest discoveries the owners of the remaining  easily extracted energy will receive windfall profits.  This will be a transfer of purchasing power from consumers to the original owners.

Farming land degradation

A United Nations report published this week claims 25 percent of the world’s land is “highly degraded” and 44 percent is “moderately degraded,” while only 10 percent was classified as “improving”.

http://www.google.com/hostednews/afp/article/ALeqM5iQy5L4eCxi09FKvEyerBIk6uJOlA?docId=CNG.c82786f82bcfae51b6990ccf05bfd82b.5a1

http://www.cbc.ca/news/technology/story/2011/11/28/un-world-land-report.html

Even if these figures are an exaggeration we should take the report seriously.  No matter how many technical gadgets we have and no matter how much of our economy is based on services,  if we can’t produce enough food for everyone there will be serious economic and social problems.  The less we think about this report and how to deal with its implications the more human suffering there will be.

Almost certainly food prices will rise even more than they already have.

Some people argue there is lots of surplus food and we should have no trouble feeding everyone. But food is not always produced where it is most needed and not everyone has the resources to pay for its transportation.

With higher prices it may become feasible to try new and innovative ways to produce more food such as hydroponic growing in super tall buildings.

As price is equal to the marginal cost of the last items produced those people who can continue to grow food at less cost will find themselves with some windfall profits.

In order to purchase a copy of this report a person will need at least some disposable income. The paperback costs $49.95 and the hardcover costs $140.

http://www.earthscan.co.uk/?tabid=102754

Housing prices, marginal cost and an increasing income gap

The following post was written as a comment for the Huffington Post Canadian website for an article claiming that a widening income gap is forcing up housing costs for everyone.

http://www.huffingtonpost.ca/2011/11/21/canada-income-inequality-house-prices_n_1101655.html?ref=canada

Here’s an alternate explanation for high house prices.

Prices are determined by supply, demand and the marginal cost of producing the last item.  This means that in any segment of the housing market the price for all houses will be equal to the cost of manufacturing the last one built.  If  supply and demand brings the price below this figure no more houses will be built and if supply and demand takes the price higher more houses will be built until an equilibrium is reached.

In Canada the cost of building houses has clearly been increasing.  Marginal cost explains why many people have made large sums by selling their older homes.

The income gap explains why rich people can continue to buy expensive houses while those people whose income is shrinking can’t.

For people at lower-income levels to be able to resume buying homes one of three things would need to happen.  Their incomes in real terms could increase,  new building techniques or new cheaper sources of materials could be discovered so that houses could be built for less money or the lack of demand could result in a reduction in prices below marginal cost.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

Oil – lots of profits and high risk

Here’s an article on the oil industry from The Economist which  nicely illustrates the economic principle that price is equal to the marginal cost of the last unit produced.

The big oil companies are raking in the profits from oil fields discovered and developed when costs were lower and for which they now receive the higher prices.   At the same time they feel a need to invest in more difficult to obtain oil in politically unstable parts of the world – a double risk.  As well as risk from political changes there are also risks if the price of oil were to drop making these new sources uneconomic.

If I were the chief executive of one of the big oil companies I would want to consider just taking the profits and forgetting the search for new oil.

Food prices, speculators and marginal cost

Here’s a link to a rather lengthy article blaming high food costs on speculators and investors in industrial agriculture.  It discusses many of the problems currently facing agricutlure and the human suffering caused by high food prices around the world.

I don’t want to defend either group but here is an alternative theory that  high food prices can be explained by the economic principal that prices are equal to the marginal cost of producing the last item.

This principal can be illustrated with two examples – oil and telecommunications.

As the demand for oil has increased and the easily accesible oil has been extracted oil producers have sought out more difficult deposits. – and the price has gone up. If the price had not gone up or if governments had legislated  a top price,  producers would not extract the more expensive oil.  Therefore the cost of oil is equal to the cost of the last unit extracted.  The result has been windfall profits for all those producers who still have supplies of cheaper oil.

The opposite has happened in telecommunications.  As capacity has increased and costs have fallen the cost of making one more phone call is nearly zero.  In this case we have all benefited.

Agriculture is probably more like oil. As demand has increased farmers are using less productive land and more expensive inputs and costs are going up. As the marginal cost of the the last unit produced goes up so do all the prices and once again their are windfall profits.for somebody.

Food supply and pricing is complex – some people claim there is no shortage of food in the world. and it is hard to believe otherwise when one visits a supermarket or farmers market in British Columbia   But then we can afford to pay the cost of bringing food in from other places which many people on this planet cannot.

Agriculture is of course complicated by subsidies which distort prices and interfere with efficient operation of the market and this may be a big source of problems.

Now back to the article,

I suspect the authors of this article are using speculators and investors in industrial agriculture as scapegoats.  Generally it is easier to identify symptoms than it is problems and it is more satisfying to seek out scapegoats than solutions.

Speculators take the risk. of price movements.  When prices are going up there are fewer risks although generally prices go up and down even if there is a strong trend.   If they weren’t in the market then somebody else would take the risk and make the profits or losses

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