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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Prices and running out of resources

When one takes an unconventional position it is comforting to find somebody who takes a similar stand.  Here’s an article by someone who is also concerned that we are running out of resources.

I like the following paragraph because it show that resource prices declined during a period of growth and then started to increase when growth slowed.  I think it  supports my claim that to have economic growth marginal cost has to be falling.  When marginal costs start rising new resource discoveries only slow the rate of decline.

The price index of 33 important commodities declined by 70% over the 100 years up to 2002 — an enormous help to industrialized countries in getting rich. Only one commodity, oil, had been flat until 1972 and then, with the advent of the Organization of the Petroleum Exporting Countries, it began to rise. But since 2002, prices of almost all the other commodities, plus oil, tripled in six years; all without a world war and without much comment. Even if prices fell tomorrow by 20% they would still on average have doubled in 10 years, the equivalent of a 7% annual rise.

This writer also points out there are threats to our food supply from climate change and the depletion of two non-renewable fertilizers – phosphorus (phosphate) and potassium (potash).   Agriculture is so important we need to be aware of what is happening on the farm or rather the factory farms.

 

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The deceptive wealth of nations

This weeks Economist has an article about a report from the United Nations on calculating the wealth of nations.

At least this report recognizes that natural resources are as important as  infrastructure and human capital  but are they all of equal importance?

The article says “A country can lose $100 billion-worth of pastureland, gain $100 billion-worth of skills and be no worse off than before.”

The problem with this statement is that if a country loses $ 100-billion worth of pastureland it probably will not be able produce as much food as before and some of its people may starve regardless of how many skills they have acquired.  The same applies to energy and mineral resources.

Another concern is that the value of natural resources is based on current prices which are based on current supply and demand.  Current prices may not take into account stocks and future shortages.

I have a problem with the idea that economic activity produces wealth.  What economic activity really does is to use up our resource base and is actually decreasing out wealth.  Infrastructure and skills allow us to use up resources more quickly.

While this report is valuable in that it focuses attention on the components of wealth it may be deceptive.  If natural resources are more important than infrastructure and human capital, it is telling us we are doing well when we are not.

 

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.

Inflation – another worry

It appears inflation is something else about which to worry.  Two news items: one reporting a doubling of the money supply in three years and the other reporting an increase in the British inflation rate.

With an increase in the money supply and no corresponding increase in the quantity of goods and services being produced something will have to give –  either the velocity, the rate at which money moves through the economy, will have to go down or prices will have to go up.  There have been some indications banks are holding cash and not making loans and therefore the velocity has probably gone down.  It will not be surprising to also see some inflation happening – maybe a lot.  Inflation is one of the ways in which people can lose their savings.

The mitigating factor is that financial institutions are likely suffer some extensive losses over the European debt crisis.  Because banks are the key factor in creation of the money supply this will work to reduce the money supply.

Money supply is a difficult thing to evaluate as there are number of definitions and velocity is impossible to measure.

I’m wondering if my wife and I should go on a shopping spree and max out our Visa card.

How will overuse of resources show up in the economy?

On a number of occasions this web log has noted the Living Planet report and its claim that we are currently using 150 per cen of the resources that the planet will sustain.  If this is true, how is it going to affect the economy and how will we notice it?

It may be that the quantity theory of money can help us.  This theory states that

MV=PQ

Where
M is the amount of money in circulation
V is the velocity at which the money is exchanged in the economy
P is the prices at which goods and services change hands
Q is the quantity of goods and services produced.

If we are using resources faster than they can be replaced where will it show up in this equation?

The first place to look is on the PQ side.  As the demand for resources increases, and as resources become more difficult to extract or produce then we can expect prices to increase.

There may also be shortages or declines in some components of Q  some resources will be at or near depletion and many will require increasing amounts of energy to extract.  This again will cause an increase in prices.

On the other side of the equation velocity is difficult or impossible to  measure so we have to ignore it.  Money supply is also difficult to measure.  Definitions  usually start with cash in circullation and demand deposits in the banks known as M1.  However, other types of deposits are often added to M1 sot that we can have multiple defitions of money – your choice.  Money is created when the banks make loans and central banks try to control the total by purchasing or selling government bonds.

One thing is clear:  changes in the Q part of the equation are going to force changes on the other three variables.  If there are stressful or abrupt changes in Q, there will probably be turmoil in the financial side of the economy.  We probably need to evaluate what is happening to Q in physical rather than monetary terms.

We should also note that changes in M can affect production of goods and services. For example, what would happen to the North American food factory if a failure in the banking system were to prevent farmers from getting the loans to put chemicals on their crops?  Also a major drop in the money supply (such as probably happened with the housing crisis a couple of years ago would and did create turmoil in the economy.

So if we are using resources at a faster rate than they can be replaced how are we likely to notice it?  Overall there will probably be a steady rise in prices and a steady decline in living standards,  unless there is a huge major shock  to the system.  Also where there are localized shocks such as earthquakes, tsunamis  or an electro magnetic pulse from the sun (forecast for sometime in the next two or three years) we can expect major drops in local standards of living as people will find it difficult to recover.

As time passes, more and more people will be faced with a lower standard of living.  But people being people, some will prosper.  The rich will continue to get richer and the poor will continue to get poorer.

Wouldn’t life be nicer for everyone if we could go back to the golden years of prosperity?

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