Compassionate economics

Are the words compassion and economics compatible?

Absolutely. If we were to exchange goods and services without interference from legislation which restricts competition we would have an economy with a high degree of equality, fairness, environmental sustainability, peace and compassion.


Major evidence for this comes from the hunters and gatherers who used to inhabit this planet and especially the bushmen of the Kalihari Desert who lived a peaceful and sustainable lifestyle for close to 200,000 years


This writer has come to this conclusion after a lifetime of interest in current affairs and relationships, through a first class degree in economics from the University of British Columbia and lots of informal reading in economics, economic history, history, ancient history and anthropology.


That I feel it necessary to start this book with this question indicates how poorly so many people, including economists, understand economics and money. At least since Marx many people have equated economics with the evils of the current economic system and shut off whenever the word economics is used. This is sad because economics is about the relationships involved in the exchange of goods and services and most of us have to exchange with at least a few people. Money is a tool to facilitate this exchange. Both economics and money involve a lot of distortions of the truth which makes it easy for some people to exploit the rest of us.


team-spirit-2447163_1920As we work through compassionate economics the issue of the resource base hangs over us and makes life difficult for all of us.

Economics professors often start their lectures by drawing a simple x graph on the black board. One line represents the physical side of the economy and the other line represents the financial side of the economy. This is a very important distinction as ignoring it diverts our attention from the reality of economics.

As we mostly discuss economic problems in terms of money we ignore the physical side of the problem. For example, pensions are very important for most of us but we always talk about saving enough money rather than having enough energy and mineral resources. Two things could and probably will happen to most of the money people save for their retirement – inflation or bankruptcy. Our standard of living in retirement will depend upon the quantity of goods and services we are capable of producing relative to the number people making demands on that production. A key factor in this ratio will be the energy and mineral resources we have. There are still lots of these on the surface of our planet but we have consumed the most easily accessable.Those that are left will require a lot of energy to extract and may not be feasible.


The cost of solar energy has recently been falling quickly and has some potential. I also like that solar has the potential for each of us to make decisions about adopting it. It is great that individuals can make these decisions instead of bankers. The down side is that most of our money supply is based on debt and will disappear if a lot of loans have to be written off. I fear a lot of our money is based on loans made to support petroleum.


We need to exchange goods and services because we are social creatures. It may be this is what distinguishes us from animals. In some circumstances it may be possible for an individual to live alone but for most of us we must live with at least one other person and this means living in a relationship. On the Canadian Prairies the early explorers found they needed a female partner for survival because the division of labour was too much for one person. Later the settlers found that during harvest labour requirements were such that they needed to help each other and took turns at several farms. Now, with modern equipment one person can seed, fertilize and harvest up to 7,000 acres. But he still needs a huge support staff of suppliers. These he pays in cash rather than return labour. Economics is about how we exchange goods and services and the relationships which are a part of these exchanges.


Decision making is an important part of compassionate economics. When we make decisions for others we can and often do make those decisions by what is best for us rather than them. As there is no place for exploitation in compassionate economics we should as much as possible exchange goods and services so that individuals can make decisions for themselves. In capitalism bankers and government make decisions about what and how much is to be produced. In socialism bureaucrats in the form of central planners make those decisions. The only way I know to allow individuals to make economic decisions is the perfect competition model upon which the formal study of economics based.

At least since Marx economics has been defined as either capitalist or socialist. Both of these are very vague terms which is good for people who want to control or exploit others but meaningless for those of us who want to understand how we exchange goods and services. The main feature of capitalism as we know it is that governments pass legislation which restricts competition and we call it a market economy. The main feature of socialism is a matrix known as central planning and they say it is “by the people and for the people”. Both concepts are the idealogical equivalent of the stuff through which one would walk if one visited a cattle feed lot.

For four years this guy lived on a British Columbia coastal Indian reserve. One evening a old timer told us about the time consuming process his people used to make themselves a sweet treat,

“Do you still do this,?” I asked?

“No,” he replied. “It is a lot easier to go to Dairy Queen.”

These people did most of their hunting at the local supermarket but they still fished and they still had a few of their old traditions. One of these traditions was the sharing of fish and we had a lot of salmon, halibut, crab and oolichans (a very small, oily and smelly fish.)

It appears that in a lot of hunting gathering cultures sharing mostly with family or clan members was the predominant way of exchange. This is a major difference from our culture where it is assumed the exchange of goods and services should yield a profit. I would like us to plagiarize the hunters and gathers and make sharing the key concept in our economy. This is somewhat radical and would open the door to some major changes in our economy – a guaranteed income policy, a new way of creating money and a zero growth economy. All of these are important for resource and environmental concerns. All of these are important if we are to have a compassionate economy.

One of the major issues we have to deal with is the incompatibility of economic growth and environmental issues such as global warming, pollution, mono culture agriculture, health and overpopulation. The need for economic growth is sold as a fix for unemployment although its main purpose may be to further increase the wealth of the one percent. As compassionate economics is based on sharing rather than profits there is no need for further economic growth. With a guaranteed income scheme people will not need jobs to survive and we can deal with environmental concerns. We will also no longer need to support the greatest of all make work schemes, the arms industry. Lets opt for peace and sharing with all peoples. The goal of compassionate economics is to get the population to a sustainable level and live in peace.

Compassionate economics will allow us to replace our commitment to the work ethic with a commitment to a leisure ethic. In future we should get our self identity from the leisure activities in which we engage whether they be acting in a play, writing a book or even drinking beer.It is relatively easy for me to sit here in a comfortable chair and a nice view out the window and think out solutions to economic problems. But economics involves people with emotions and special interests. A lot of people will find it difficult to see the need for changes and those with special interests will be very vocal in protecting themselves. However I believe the future of most of us is seriousl

It is a pity that so many people shut off when they hear the word “economics.” A few years ago I read a book on green economics which promoted small businesses. I laughed and cried because economic theory is based on the concept of small businesses. One of the key assumptions of economics is that no firm is large enough to influence prices by restricting production and by restricting the quantity purchased.

A key feature of a true market economy as described by economic theory is that there are no profits. If there are profits to be made in an industry new firms will enter until prices drop to the point where there are no more profits. Firms can make wages and a return on investment (maybe) but there will be no profits. Thus a perfect market economy with competition is what is needed for a compassionate economy. A lot of people need to be studying formal economics.

It is relatively easy for me to sit here in a comfortable chair and a nice view out the window and think out solutions to economic problems. But economics involves people with emotions and special interests. A lot of people will find it difficult to see the need for changes and those with special interests will be very vocal in protecting themselves. However I believe the future of most of us is seriously threatened and we must at least try for compassionate economics.

 

Good relationships and good economics

 

Economics is the most fundamental of social sciences because it is about relationships. The study of economics should be about the ways in which we can organize the exchange of goods and services. As this involves interacting with others it is largely about how we deal with family, friends and neighbors. The study of economics should include economic history, the economies of previous civilizations and economic anthropology. It also means we should be trying to organize an economy based on good relationships.

As exchange involves dealing with other people in a variety of different ways from theft to giving, economics involves the study of how we deal with each other.

A fundamental of relationships is that for a relationship to be satisfactory there must be a more or less equal two-way exchange. Sadly our current economy is based mostly on exploitation. The culture of a lot of businesses, especially large ones, is to make as much profit as possible, even if it means taking advantage of customers.

The challenge is to organize our economy so that our economic relationships qualify as being good – equal exchanges. This writer suggests two sources of inspiration; the bushmen of the Kalahari desert in Africa and the perfect completion model of economics.

lion-577104_1920There is archeological evidence that the bushmen have sustained a stable society for up to 200,000 years. Survival has been without wars and exploitation. This is an incredible accomplishment. We owe it to ourselves to examine their society to see what we can copy. Genius is 90 per cent plagiarism.

These hunters and gathers have been well-studied. My reference is Affluence without Abundance: The disappearing world of the bushmen by James Suzman published by Bloomsbury in 2017.

The Bushmen were hunters and gathers living from hand to mouth and relocating frequently. As they had to carry everything when they moved they developed a mindset that had little need or use for material things other than a few basics. Their knowledge of their environment was such that they always had sufficient food available with a minimum of “work”. They worked for survival rather than to satisfy their own or other people’s ambition.

As they always had adequate food, surpluses and savings were not part of their lives or their thinking. This was important as surpluses and saving must be controlled and this can lead to unequal relationships and exploitation.

Leadership was very low-key and social control was mostly verbal via teasing and ridicule. As they lived in small groups the size of which changed with the seasons it was easy to get away from social conflicts. (This is a major problem for Canadian native people many of whom live on reserves and cannot easily relocate.)

This blogger does not want to adopt a total hunting and gathering lifestyle especially as the size of the world’s population makes it difficult if not impossible. However I believe these people have a lot to teach us about relationships and economics and values. It could be we are the ones who are uncivilized.

We often lie to ourselves and the greatest lies are about economics. The greatest lie is that our economy is based on capitalism and markets. This is a falsehood to cover the fact our economy is based upon legislation that restricts competition. So long as we believe the lies we can continue to promote an economy that is unequal and exploitive.

I believe if we really want an economy which encourages good relationships we should use the perfect competition model as a guideline. All legislation which restricts competition should be repealed. This includes patent and copyright legislation and licensing. Subsides should be given to consumers rather than producers in the form of a guaranteed income scheme. Businesses would be mostly small-scale; so small that participants would be unable to control prices with spending and purchasing decisions. These changes would do away with huge profits and most high incomes. Economic growth would not be needed as people would not have to have jobs to survive. These changes would also cause a lot of screaming from the people who benefit from competition.

Another good feature would be better relationships as people would be able to interact without trying to exploit each other.

One of the differences between hunting and gathering societies and the “civilizations” which have dominated history is who makes decisions. When people are working for survival rather than to satisfy ambitions they make their own decisions. When they are working for ambition decisions are made be the owner of the ambition.

Force is one of the ways people get others to work for them. Other ways are psychological – the work ethic, marketing techniques, limiting free speech, limiting voting rights, making people feel guilty and using logical fallacies to influence thinking. The last two have been and are being used to great effect by feminists. My experience of this world and my observations of this world tell me feminism is mostly BS and a control issue. Feminists want to control men and their thinking. They do a lot to discourage good relationships.

A lot of us have been so indoctrinated with the “capitalist” way of thinking we do not realize the extent to which we are being exploited. Some studies of people on their death beds have found that the greatest regrets are for placing profits above relationships.

Most of us have been raised in a culture which places material things above all else. This blogger believes we should learn from the bushmen to adapt to a non-growth economy and focus on good relationships. The perfect competition model of economics provides some good guidelines as to how to get there.

 

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.

Why we need free range kids and free range education

There is an ancient wisdom saying that happiness is the result of right action. Therefore, if one wants to be happy one should be careful in chosing one’s actions. This blogger would also say we should choose our actions ourselves rather than letting others do it for us.

These thoughts were prompted by an article in The Economist about educating bright children so that they can contribute the most to society. The issue is who decides what is “the most”.

Student Character Holding Big Pencil ClipartMy concern is that The Economist is evaluating education by the incomes and the numbers of patents that people produce in their careers. This is from a magazine whose writers are dedicated to continued economic growth at a time when further growth may be difficult. It may be that in the future success will go to those capable of coping without a lot of material things.

As this post is mostly about values I should state I value highly individual thought and decision making. People should be encouraged to have different life and educational experiences. Children should be raised “free range” and education should cover a variety of topics including cross discipline. One of my concerns about educational trends as reported by The Economist is that the goal is to have every body thinking the same – with a common devotion to economic growth. If we are to cope with negative growth we must have people educated to think outside the box represented by The Economist.

How do we define success? How do we measure success? Is economic success the responsibility of schools? For some people success is living a long time, or ending life with lots of money and/or toys, or having done lots of travel, having done lots of things or having had lots of sex. Each of us should define success for ourselves rather than going with another person’s definition.

Economics is about relationships and economic success should be about good relationships rather than resource exploitation. One of the fundamentals of good relationships is that there should be a more or less equal exchange between those involved.

Sometimes it feels as if a lot of people are prepared to sacrifice ethics for profits. Corporate culture appears to encourage this. That some major Canadian corporation (banks and telecommunications) encourage their sales people to use exploitive techniques is an indication that our economy is not based on good relationships

When the economy is on a down trend education is so young people can get good marks on exams. Some people spend large sums of money hoping to give their children a slight edge. If we were not so competitive we might find a greater happiness in co-operation.

The future is going to be difficult because we do not have the energy and mineral resources to support continued economic growth and even more people. To survive we need to educate children to think outside the economic box; we need free range children and free range education. We need people who will not accept the status quo and who will think independently of Bill Gates and Mark Zuckerberg, both of whom are dedicated to conning us into buying more stuff – or voting for candidates of their choice.

 

 

 

 

 

 

 

 

Trade, foreign exchange and big hamburgers

Foreign exchange and trade is hardly a sexy subject and it is one most of us would prefer not to think about. However, when people get excited about globalization or fear their jobs are threatened by trade, then we need to take it seriously.

Foreign exchange involves the financial transactions which go with trade with other countries.  Economics is a social activity and involves relationships even if some are very fleeting.  For any relationship to be satisfactory there needs to be a more or less equal two-way exchange.  This applies to trade with people from other countries.  Trade should be a two-way.

In analysing economic issues it is important to distinguish between physical transactions and financial transactions because sometimes the physical analysis gives a clearer picture than the financial analysis.  If this world had a perfect market economy each physical trade with a foreigner would be matched by a financial transaction.   Changes in prices would reflect changes in supply and demand and would be signals to producers to increase or decrease production or to even stop producing an item. This is true for domestic trade as well as international trade.

As exchange rates are based on supply and demand for currencies, financial only transactions distort the exchange rate and therefore distort prices. Not good.

An interesting approach to foreign exchange is the Big Mac index created by The Economist. I like this because it is based on a physical item, the big mac hamburger,  sold around the world.  If we had international perfect competition and everything were equal a big mac would cost the same in each currency.  The Economist compares the costs at current exchange rates to determine if a currency is over or under valued.

Obviously the world is not equal. Different countries have different values, different resources and different access to energy and mineral resources.

What happens if money is loaned or gifted from one country to another.  If the recipient uses the money to purchase goods or services from the first country, then the money becomes a part of the foreign exchange calculations.   If it is kept in foreign currency reserves,  it is removed from the money supply of the first country until it is used. If the money is exchanged and used to purchase local goods and services, it distorts the exchange rate.  If the money is kept and used to purchase local goods and services, it adds the second country’s money supply and subtracts from that of the first country.

Another complication is that a lot of people speculate about what will happen to the price of one currency in terms of another.  These transactions will be financial only in that they do not match exchanges of goods and services.  It could be that speculation smooths out fluctuations or they could distort prices.  It is hard to know as we do not know which transactions are speculative.  We do know that the volume of foreign exchange trades is massive. This writer suspects that if all financial transactions matched physical trades there would be little fluctuations in exchange rates as changes would take time.

This blogger has spent a lot of time and effort in trying to understand the economics of money, including a degree at the University of British Columbia.  Foreign exchange and trade are difficult probably because there are problems in the way in which we create money.  For more on this please get a free copy of my e-book Funny Money: Adapting to a Down Economy.  One of the problems is that our way of creating money gives some people a lot of power and control over others.  Vested interests are difficult to deal with.

 

 

 

 

 

Truth: An impossible request

Dear Santa Clause,  For Christmas this year I ask you to give all the people around the world a sense of truthfulness to themselves and all others including young children.

There are two problems in this request: People believe in different versions of the truth and many people have an interest in distorting the truth.

There are many things about ourselves and this world that we do not and can not know from rational observation.  A lot of people fill in the gaps with differing religious knowledge but it is difficult for an observer to say which version is the truth.  A person who claims to speak or write only the truth is playing god with his/her religion and values.  Who is to say there is no Santa Clause?  A philosopher could define Santa Clause as a concept and maybe make the case that he is real.

Deliberate distortions of the truth go back to the dawn of civilisation.  I have read that ancient story tellers quickly learned to make their stories show their patrons in favourable lights.

There are a lot of distortions of the truth in our own civilization including war reporting, the courts and most politically correct issues.

Distortions of the truth in war reporting were documented in 1975 by Phillip Knightly in his book The First Casualty.  War correspondents are called upon to distort the truth for the sake of their part in their country’s war effort. The first casualty of war is he truth

I would suggest this happens where ever there is conflict.

Courts put some emphasis on  “the whole truth and nothing but the truth”.  But how much injustice has resulted from prosecutors with holding  evidence which shows a person to be innocent.  The adversarial process is a strong incentive to avoid the truth.

There are also distortions in most politically correct issues.  Feminists are mistresses of the ancient art of sophistry, North American natives are a conquered people and police do not care about the color of the people they shoot.

Politicians and business people often have a vested interest in hiding the truth.  Political leaders who say the economy is on a long-term down trend are unlikely to get many votes, or at least they think that.  Every banker in the world would lie to avoid a run on his bank.

Donald Trump challenged the media with his untruths and won.  As a former journalist I was very happy not to be working the election.  If the press had not reported his distortions he probably would not even have got the nomination.  Mostly I worked on small town newspapers where most of the politicians were basically honest.

News people like good stories and when famous people say stupid or ridiculous things, it is usually a good story.   I once quoted a school trustee because I wanted to show how stupid he was.  The next day some lady phoned the local radio talk show and said,  “Did you see what Dr. P….. said at school board.  Wasn’t that great?”

What about the responsibility of the media to report the truth?  Publishers have the right to decide what goes into their publication and some specialize in fiction. There are ethical issues in claiming fiction as fact.  It is also hard for a reporter or editor to ignore a statement because he knows it is not true. Most reporters, editors and publishers do not want to upset their friends.  In general advertisers to not much  care about the editorial content so long as their advertising brings in customers.

How do we as consumers of news know if something is true?  We have to evaluate if an item makes sense and that depends upon our values, religion and knowledge base.

As I have worked on this post I have wondered a little if untruthfulness is an essential part of surviving human relationships.  That might be best left for another reincarnation.

 

Please help promote this weblog

Please send the link to this post to your friends and social media.  Promoting a weblog can be difficult.  I get some referrals from LinkedIn.  I used to get quite a few from Reddit but I have been “shadow  banned” for linking to my own weblog.  Self promotion (and free speech?) are serious offenses on Reddit. I figure my strength is in the thinking that goes into the posts and I thank you for helping.  (r/economics   r/libertarian   r/economiccolapse  r/Degrowth )

The sophistry of feminist economics

My experience of women is that a lot of them naturally use the techniques of sophistry in their arguments with men.  A recent column on feminist economics in The Economist is a good example of this applied to economics. The column mentions the number of women teaching economics, the pay gap and mostly the unpaid work done by women.

The first thing to say in a criticism of feminism is that if your can make a person feel guilty then it is a lot easier to control them.  On this count the feminists have been very successful.  Us guys are supposed to feel guilty about our personalities, our relationships and our sexuality. Some feminists would have us believe that everything we do is to put down and control women.  Some feminists have DBS degrees. (The D stands for doctor.)  If you repeat an untruth often enough some people will come to believe it.

Most of the complaints relate to injustice of which there is a lot in this world.  The truth is that men inflict injustice upon both women and other men and women inflict injustice upon both men and other women.  We would be a lot better off fighting injustice wherever it is rather than having a competition to see who has experience the worst injustice.  The sophistry comes from focusing on a very narrow injustice and ignoring the rest.  We will not be able to deal with injustice or violence against women unless we also deal with injustice and violence against men

The column points out In 2014 only 12% of American economics professors were female, and only one woman (Elinor Ostrom) has won the Nobel prize for economics. This could be because male economists discourage women from studying the field or it could be because women are generally smarter than men and stay away from a field which is based largely on misconceptions and false motivators.  Maybe women are more reluctant to sell their souls to the almighty dollar.

The same may also be true for the pay gap.  A lot of women do not want the stress that goes with higher paying jobs.  It is a lot less stressful to encourage men to take these jobs and a lot of women put their partners under pressure.  Probably rates of pay are more a function of supply and demand for workers rather than a conspiracy of men to keep women from equal pay.

The issue of unpaid work is another case of a very narrow focus in order to promote the false premise that women are cheated because they do not get paid for the housework and child rearing that they do.  We are now talking about relationships and the fundamental of good relationships is that there must be a more or less equal two-way exchange. I believe this even though I have been accused of being selfish for saying it.  In a lot of traditional economic and marriage partnerships all or most labor was unpaid. In our industrial society some work is paid and some is unpaid. As technology has reduced the household work of the partnership and as standards of living have tightened, more women are working outside the house for pay.

Sometimes historical marriage relationships have involved a division of labour and in some cases the division of labour has been essential for survival.  This may be less so now and the division of labour should be for each couple to work out without the interference of feminists.  The important thing is that for the relationship to be satisfactory  the exchange needs to be more or less equal.  These days couples are not so dependent for survival on a relationship with a member of the opposite sex and any woman (or man) who feels cheated can easily break up.  With house work some women do it to themselves in that they decide what work should be done and how often.  It may be that asking men to help is really an attempt to power trip.

One of my concerns about feminism is that it does not encourage good relationships.  How can you hope for a good relationship when one partner is using sophistry to  make the other feel guilty so you can control him?

One of the greatest injustices against women in our society is that so many end up as lonely old ladies. It may be  this would be eased if women were to focus on building good relationships.  Statistically people in good relationships live longer than others.

The dynamics of private and public ownership

In discussions on the pros and cons of private versus public ownership one should consider competition, decision-making and the dynamics of relationships between firms and governments.

I figure the people who run firms behave in similar ways regardless of who owns the firm. Most of us most of the time think and act in our own short-term interests. This applies to most the people in government and business and makes for interesting dynamics where people do not always behave according to what they say.

Generally people in business dislike competition and try to limit it.  One way to restrict competition is to get governments to pass legislation which interferes with the operation of markets. licensing, tariffs, subsidies, patents and copyright all restrict competition and allow some firms to obtain profits they otherwise would not have.  This creates dynamics between firms (or business associations) and governments as firms want to ensure they have sympathetic governments and governments want business to support them..

The people in charge of governments generally want to remain in power and therefore most of their decision-making is to this end.  Thus the main difference between private and public ownership is in decision-making.  Private owners want to make profits while government owners want  to remain in power.  They want businesses under their control to make management decisions which will help in  a reelection (Or in the case of dictatorships to limit uprisings) and they also want to reward supporters with plum jobs.

All of this is further complicated by the fact that managers and owners (private or public)  may have different goals.  Managers may want to build empires rather than maximise profits.

Where do us consumers fit into this?  There are always people in government and industry who say they are working for our best interests but most of the time I don’t believe them.  Generally our best interest is served when there is competition.  However, as noted above governments and industry work hard to restrict competition.  When  we have competition we get the best prices and a generally efficient economy.  In a competitive economy consumers get to make decisions according to their values.

 

 

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.

The benefits and challenges of free trade

Economists are generally in favor of free trade because most of them know the law of comparative advantage but I bet they would quickly change their minds if a “free trade agreement” were to specify that all economic teaching and advice were to be provided by the partner country.

It’s easy to see the benefits of trade but the obstacles can be overwhelming.

The law of comparative advantage tells us that two countries will produce more if they specialize in what they are most efficient and trade even if one of the countries is less efficient than the other in all areas of production.

The first thing to say is that free trade agreements are not what I learned was free trade.  To me free trade should be trade without any restrictions. There should be no tariffs, no quotas and no subsidies.  A country that wants free trade could and should do it unilaterally.  A free trade agreement should be called managed or negotiated trade as negotiations tend to focus on tradeoffs between commodities.  It is my understanding that countries which have conducted unilateral free trade have done very well.

The problem with free trade is that even though the countries as a whole will be better off some people fear they will lose. It becomes an emotional issue because some people are likely to lose their occupations and their income.

The challenge then is to make a win-lose proposition into a win-win so that everyone can share the benefits.  One way to do this would be with a universal income scheme.  The benefits could be in the form of increased income or increased free time for other activities.

Another aspect of trade is that it is a social activity whether we trade with a neighbor or somebody on the other side of the planet.  It is a bit of a stretch to think we have relationships with the Asian people who make our shirts but when some of them died in a workplace fire quite a few of us felt some pain –  for a short time. For relationships to be satisfactory there needs to be a more or less equal exchange.  If we want other countries to buy from us then we need to buy from them.

With the world economy in trouble everyone sees the answer to their problems is  to export more because domestic markets are slowing.  I think there is something wrong in that.  At the same time those who feel threatened by the free trade agreements now in the works will be strongly opposed.  The best bet would be to cooperate and look for win-win trade.

Counting money

Bank tellers tend to be very fast and very accurate at counting money.  Economists have a more difficult time of it.  They can’t even agree on a definition.  This post was prompted by this article criticizing The Fed on how it measures the money supply.

Once upon a time I worked as a journalist.  I used to say there are two types of figures.  One kind we photographed and put on the front page and they help to sell newspapers.  The other kind help to put things into perspective.  When I got to university and wanted to study economics I found I didn’t have the calculus skills to do econometrics so I have stayed with my idea that statistics help with perspectives.

mystica_Coins_Money_Economics is about relationships.  It is about the relationships that go with the exchange of goods and services and since some exchanges involve the state it is also about our relationships with governments.

Not all exchanges can be recorded let alone measured therefore statistics are of limited use.

Mathematical concepts are useful in that they can simplify the analysis of relationships and help us understand what is happening.  Sometimes statistics can be useful for evaluating things we want to believe.  One should be leery of drawing conclusions from emotional accounts of events.  For example, a former professor claimed that during the industrial revolution things got worse for working people before they got better.  One of his arguments was highly emotional newspaper accounts of children dying in poverty.  I would have been more convinced it he had produced statistics of child mortality rates before, during and after the industrial revolution.

Back to money.  For economists it is difficult to count because there are so many things including cigarettes and candy have been used and there are a number of economic  definitions  depending upon what types of bank deposits are included.  I figure money should be defined as anything that represents purchasing power including and especially computer impulses.

Money is my favorite subject although I have never wanted to be a bank teller.

The economic crisis and the Nobel economics prize

Maybe today’s awarding of the Nobel prize in economics adds to my previous post about the economists not dealing with the serious issues.

Match making is a fascinating subject and I frequently ask couples how they met.  I can also accept that match making can go beyond male-female relationships.  I figure economics should be mostly about the relationships involved in the exchange of goods and services.  It appears their work focuses on the initiation of relationships.

However, I fail to see how the work of these two economists is going to help solve the current economic crisis which should be the main interest of most economists.  Probably we need to focus on the types of relationships rather than how people find each other.

Here is a quote from one of many articles reporting on the prize.

“This is very much what economics is about,” said Tore Ellingsen, a Nobel committee member and a professor at the Stockholm School of Economics. “How to allocate scarce resources as well as possible, to economize.”

Why did economists fail us in this crisis?

A number of writers have recently pointed out that economists have failed the people of the world in the current economic crisis in that they failed to predict it and appear unable to offer viable solutions.

Most of these critics, including this one, don’t appreciate the seriousness of the situation and are not themselves radical enough.  Criticizing austerity and promoting stimulus is hardly an economic intellectual revolution as this writer suggests.  Nor is forecasting necessarily the most important part of economics.

As I see it the problem with economics is that the role of economists is not to solve economic problems but to provide theological or moral legitimacy to our economic activity.    Their role is to tell us our economic activity is creating wealth even thought we are really using up scarce resources and destroying the world we value so much.

It could be that most of us are to blame for this economic weakness.  Most of us don’t want to hear that there will be no more economic growth because the implications are extremely painful.

To deal with the crisis the first thing is to recognize that economic growth has come to an end in part because we have used up the most easily accessible resources.  I would also suggest that economics is mostly about the human relationships involved in exchanging goods and services.

If economists are  going to help us cope with current problems they need to study how to cope with negative growth and the type of relationships this will involve.

 

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.

Alternate money systems: LETS and Timebank

In my essay on dealing with the current economic crisis (here) I proposed resolving some of the problems with our fractional reserve money creation process by expanding the concept of the Local Exchange Trading System (LETS)  into a national system.

Here are links to three articles about LETS or Timebank systems. (onetwo three)  These are presented as ways for local communities to cope with the breakdown of national financial systems.

In designing alternative money plans one must be careful not to repeat the problems of the existing system.

The first is to ensure that the total money supply is  flexible.  So long as the money supply is flexible and able to increase or decrease with the quantity of goods and services to be exchanged, then prices will be steady.  One of the problems of the gold standard was that it did not have flexibility.

The second is to ensure that interest is not charged or paid on the debits and credits created as goods and services are exchanged.  I am not  aware that anyone has tried to think out the problems caused by interest being charged on the loans used to create money in the fractional reserve process but I suspect it is a sort of Ponzi scheme which frequently breaks down into a financial crisis.

I found it interesting that all three of the  articles referred to the social aspects of these exchange systems because I have long believed that  economics is largely about relationships.

Women in the boardroom and real power

An article in this week’s The Economist discusses the “problem” of so few women in the boardrooms of European companies.

It may be that there are so few women in the boardroom and at higher management levels because women are smarter than men in that they don’t want the stress and responsibility.

I figure that if you look at society as a whole rather than just the business world we live in a highly matriarchal society.

Most women realize that the real power is in values and relationships and this is where they really dominate.  When little girls play with dolls they learn that they can have relationships in which they have total control over the thoughts and actions of the other  party.

It is a lot less stressful to leave business to the men and put the pressure on them.  That is smart.

Good relationships

With Valentine’s day tomorrow this would be a good time to suggest one of the fundamental rules of good relationships is that for a relationship to be satisfactory there should be a more or less equal exchange between the partners.

This rule applies to all relationships and economics is partly about relationships. Some economic relationships are close and long-term and others are with strangers and fleeting.  If the exchange is not equal it will be unsatisfactory and there will be feelings if not consequences.

It has surprised me that this rule is controversial.  On three occasions I have suggested it to women in my life.  The first two accused me of being selfish and I decided I was going to remain selfish.  The third replied “of course.”  That was 32 years ago.

One of my favorite shows is The Music Man.  The title character is an unsuccesful con man.  He sold lots of musical instruments but his cons were unsuccessful  because he gave something in return by enriching  the lives of all those he tried to con.

It is my wish that all seven billion people on this planet will have lives full of satisfactory relationships.

Initiating relationships and sexual harassment

The following was posted on The Economist website as a comment to an article on sexual harassment in issue of Nov.  12.  http://www.economist.com/node/21538157

 

Maybe the initiation of relationships may not be the way some people would have us believe.

Some years ago some sociologists did a study on this topic.

The researchers found that generally women initiated relationships.   If a woman saw a guy in whom she figured she might be interested she placed herself in a position to be noticed and get into conversation.

An interesting point of this research was that the first touch was important and it had to be made by the women. If a man made the first touch that was usually the end.

Since reading about this I have been very sensitive to being touched by women and I have been surprised at how often it has happened.

It appears that generally women like to control relationships.  Perhaps sexual harassment should be defined as a man trying to initiate a relationship by touching.  The more touching, the greater the harassment.  In our patriarchal society only women are allowed to initiate relationships.

Agricultural surpluses, relationships and Occupy Wall Street

Here is a possible explanation for the Occupy Wall Street protests which are currently happening around the world.

For a relationship to be satisfactory there has to be a more or less equal two-way exchange.

However, there is no law that says relationships have to be satisfactory,  Furthermore, some people take advantage of others by exploiting or coercing them.

How do these observations apply in economics.

Throughout history there has been exploitation of some people by others.  Mostly this has involved agriculture and force.  The surplus has been taken.  Mostly enough has been left for the producers to just subsist.

Starting with the Industrial Revolution three things changed.

First the surplus started increasing so that more could be left for the producers.  Eventually during the recent years of prosperity  the surplus was so large that many people (especially in the industrial countries) could have a nice share of it.

Second, population levels (at least in the industrial countries) have been low relative to the opportunities for employment.  As wages are a function of supply and demand wages have been good and thus the surplus has been shared.

Third, those people who do the exploiting have discovered psychological ways of getting their hands on the riches of the world without using force.  These include legislation which restricts competition,  sneaky marketing, promoting the work ethic and emotional appeals such as to our greed.

To those of us who have been able to share the wealth it has not been clear that we have been exploited.

Once again, things are changing.  There is some evidence we are now using resources at an unsustainable rate and there is now more competition for the surplus.

As the above listed psychological instruments are still working the rich are getting richer, the poor are getting poorer   and the Occupy Wall Street protests are spreading around the world.

Economics and relationships

Relationships are an important part of life but it isn’t clear that economics involves  relationships until one starts reading anthropology. As anthropology sometimes deals with small societies in which there is no money it is much clearer that relationships are very much a part of the exchange of goods and services.

Where there is no money generally people have to work together or make exchanges via gifts. In both situations ones relationship to others is a part of the cooperation or the exchange.  In some cases what appears to be items of little apparent use or value are exchanged in order to define a friendship.

The use of money allows exchanges with many more people most of whom are strangers.  Even so we can consider there to be an economic  relationship  in these exchanges.

It might be possible to analyze economic history and economic development in terms of how relationships have changed or are changing. Clearly relationships in a feudal society were different from those in our own times and probably relationships during early industrialization were different still.

It may be that our relationships are more complex than in earlier times.  We now have relationships, with the people who produce the goods and services we consume, the people we work with, the people we sell to, our neighbors, people with common interests and people who represent government.

In my experience one of the most important things about relationships is that to have a satisfactory relationship there must be an equal exchange between the people involved..  Unfortunately not all relationships are satisfactory.

Studying relationships as a part of economics may not help predict future GNP but it might encourage us to  make our economy more rewarding and satisfactory.

Money and love

Here’s an interesting video report on economics and dating.  What caught my attention was the statement that in these uncertain ecomimic times “70 per cent of singles do not consider money to be an important factor when choosing a mate.”

What is important is that both partners should come from a similar financial background. Financial problems are behind a lot of divorces.  When two people come from different financial backgrounds they have different approaches to handling money which can cause conflicts.

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