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.


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 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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Regulating those evil payday lenders

Here is a link to an article from the Mises Institute opposing regulations for the American payday lending industry.

This simple proposal to regulate short-term lending raises important questions about how we treat poor people, about the role of money in our economy and how we regulate business activity.

This writer believes we should have a collective responsibility to ensure every one has the opportunity for the same standard of living as most other people.  Probably the best way to meet this responsibility would be a universal basic income scheme.  Such a program would not stop everyone from mismanaging their finances but it should eliminate the need for a lot of short-term credit.

Money can be an instrument of exploitation and is based on the debt created when banks make loans.  Debt is a path to slavery, especially for poor people.

We need a radical revision of the way in which we create money.  We treat money as a commodity which has its own intrinsic  value.  We would be better to treat money as a tool to facilitate the exchange of goods and services.  As a tool rather than a commodity there would be no need for interest.  Also the total amount of money available needs to be flexible up and down as the quantity of goods and services we need to exchange expands or retracts.  This guy has written extensively on this topic on his weblog and in his book.

As much as possibly economic forces, competition, should be used to regulate business activity. The more competition the fewer profits and the less need for regulation.  Regulations tend to restrict competition, allow greater profits and increase the demand for more regulations.

This writer is not enthusiastic about supporting the payday loan industry but does recognize that in our society there is a need for short-term credit.  I also believe there is a need to reform our financial system and the reforms could reduce the need for credit from all of us including the poor.

How can we afford a universal basic income?

How can we possibly afford a universal basic income?

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

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

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

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

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

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

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.

Some concerns about the Swiss money creation referendum

The Swiss are going to hold a referendum on a proposal to change the way in which money is created by transferring this function from private banks to the central bank.  The more I think about this the more I see it as an attack on banks by people who do not really understand what money is and how the financial system functions, or should I say by people whose understanding of money is different from mine.

I believe there are some serious problems with the current fractional reserve way of creating money and anything which might lead to reform is to be encouraged.  However, I would like to see some debate rather than letting those who would tell the rest of us how to live win by default.  I want to see a libertarian reform in which decision-making is by all individuals rather than a select few.

Here are two links to information about the referendum. One, two.

Money is a tool to facilitate the exchange of goods and services and is backed by the agricultural surplus of which we have a huge amount although its continuation is somewhat precarious.  The fractional reserve way of creating money gives great power to bankers who create money each time they make a loan.  The Swiss critics are right about that. Money represents purchasing power for people who hold it and those who create money can decide to whom they will transfer that purchasing power. Transferring the money creation function to the central banks would be transferring power from one small group to another. I am not certain bureaucrats would be any better at making decisions in the public interest than private bankers.

A more libertarian approach would be to combine monetary reform with a universal income scheme and to call money agricultural surplus credits.  This is explained in my just released ebook Funny Money: Adapting to a Down Economy.  The book also talks about the problems with fractional reserve banking. (You may get a free copy of this book from Smashwords until March 19, 2016. See previous post.)

In reforming the way in which we create money two other factors need to be considered.  The total amount of money available needs to be flexible up and down as the quantity of good and services exchanged varies. If it is not flexible we should expect inflation or deflation, both of which rob people of their savings.  The Swiss proposal says the central bank would use its statistics facilities to help in this.

The other concern is interest.  I believe the charging of interest on loans is a Ponzi scheme which leads to periodic financial crises.  This too is in the book. I did not see anything in the proposal to indicate how interest would be handled.  It could be the people who crafted the proposal do not see that interest is a problem in money creation.

I fear that not too many people truly understand how money works in the economy and how the fractional reserve way of creating money is a serious problem.  Reforms are needed although I can not see that transferring money creation from one small group to another small group will be a satisfactory reform.

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