Another Amateur Economist

Oligopoly and the Economy

2012-02-01T23:33:00.001-05:00

This is a brief discussion of the effect of oligopolies on aneconomy. It is an example of the macroeconomic effects of microeconomic processes. Thederivation is based on the idea of the kinked demand curve, developed by PaulSweezy in the 1950’s.

Those not interested in the derivation may jump ahead to thediscussion at the conclusion.

Those interested may find the various derivations of kinkeddemand curve theory on You Tube helpful, and perhaps easier to follow than whatI have presented here. Here’s one:

http://www.youtube.com/watch?v=5BQPx8SL9F4.
You might also find discussions on monopoly, a simpler case of extra-normal profit, helpful. Here’s one:
http://www.youtube.com/watch?v=3NMbcfS68IQ&feature=related

And for contrast, perfect competition:

http://www.youtube.com/watch?v=7lhX78vlHSY

We discuss competitive oligopolies, where collusion is notnecessary for fixed prices.

For your convenience a little background. Oligopolies are a common marketstructure. Indeed, many markets seem toevolve, or have evolved, intooligopolies, (or its cousin, oligopsonies,) They are ubiquitous.

An oligopoly has some of the characteristics of a monopoly,in that its members can charge higher than normal prices and make higher thannormal profits. The particular characteristics ofan oligopoly are, 1 It consists of arelatively few, relatively large, sellers 2. Each firm is big enough toaffect the others. 3: The products aresimilar or identical. 4: There are barriers to entry, such as initialcapital costs.

The traditional analysis of oligopolies is that, rather thana normal straight demand curve, they face a kinked demand curve D, which for a particularfirm is also their average revenue curve AR. Diagram 1 shows this demand curve fora particular oligopolist. Theoligopolist wants to sell at the kink, which is at some price p_a,which is really determined by the market, and some quantity q_a, whichis determined by other factors, which we will discuss in the conclusion.In any event, the kink is at a price higher thanthe equilibrium price in perfect competition, and a quantity lower than theequilibrium quantity. Fewer goods are produced, and consumers are forced to pay a higher price for them.

If wewere to discuss all the members of this oligopoly, they would each have aseparate, though similar, diagram. Theprices at the kink would all be the same, but the quantities at the kink mightbe different.

Our oligopolist’s total revenue, that is, how much money hetakes in, is price times quantity sold, orp_axq_a.

Why does he want to sell at price p_a? If he raises his prices above p_a, top_bhoping to make an extra profit, none of his competitors will follow. So his prices will be above theirs, andbecause their products are similar to or identical to his, he will lose some,perhaps many of his customers to them. If his price goes up a little, the quantity of products he sells will goway down, to q_bso he will take in less money. The area

p_bx q_b, the money he takes in now, is less than the area p_ax q_a,the money he took in before. This is thecharacteristic of an elastic demand curve. As you move up the curve, thequantity sold goes down faster than the price goes up.

Suppose instead he lowers his prices, below p_a,to p_c, hoping to gain market share. Then his competitors will quickly follow suit,since they don’t want to lose their market share to him. So he won’t gain market share, he’ll just beselling at a lower price, and making less money. He may sell a few more products, at q_c justbecause his, and everybody’s, price is lower, but not enough to compensate forthe decrease in price. The area p_cx q_c , the money he takes in now, is less than the area p_ax q_a,the money he took in before. This is thecharacteristic of an inelastic demand curve. As you go down the demand curve, the price goes down faster than thequantity sold goes up.

Now for a firm to maximize profits, its marginal costs, MC, must equalits marginal revenue MR. This is always the case, but what does thismean? Marginal cost is the increase intotal cost accrued by the firm for the next unit it produces. If the firm produces 4 units for $60 and 5units for $90, then the marginal cost of the fifth unit is $30.

Marginal revenue is the increase in revenue that resultsfrom selling one more unit. Forimperfect competition, as we have in the case of oligopolies, MR is alwaysless than the average revenue, AR. This is because when you sell more units, youhave to sell them at a lower price, but you have to sell all your units at that lower price. So if you sell 4 units at $100 total revenue and 5 units at $120 totalrevenue the average revenue AR,the price you are selling them at, for 5 units is $24, but the marginal revenueMR forthe 5^th unit is only $20.

Profit is maximized when MR= MC because when MCis greater than MR,it costs more to produce the next unit than you get paid for it. With the figures we used, you would produce 4units for $60, sell them for $100, and make $40 profit. If you were maximizing profit, you wouldn’tmake 5 units for $90, having to sell them at $120, and only make $30 profit.

See Diagram2. The marginal cost MC curve is thelopsided “u.”When you produce something, costs first go down, savings of scale, then they goup, dissavings of scale. (Imagine arestaurant. The first meal is verycostly, because of all your fixed costs. As you produce more, each next meal ischeaper to produce, as you use your assets more efficiently, until you reachsome minimum. Then the costs per eachadditional meal start going back up, because you run out of stove space, peoplestart getting in each others way, etc.)

With the kinked demand or ARcurve, the MRcurve is very strange. The upper AR_U and the upper MR_U curve, the curvesabove the kink, both start at the samepoint on the axis, (in the direction where the arrows come together,) but the MR_U curve descends more steeply, twice as steep, itturns out. When they reach the kink, however, the MR_Land AR_L curves, the curvesbelow the kink, also extend from a point on the axis, (much higher on the axis)in the direction of the dotted arrows, so the MR_L curve, being twiceas steep as the AR_L curve, is much lower than the MR_U curve at the kink. In thisdiagram, in fact, it is so much lower it is negative, which means MR_Lcurve is irrelevant. What is not irrelevant is the fact that,because MR_Lis negative, the MR curve whichconnects the MR_Uand MR_L curves, (green line) crosses the Q axis at the kink. This means that the quantity of production ofmaximum revenue (which is where the MRcurve crosses the Qaxis) and profit maximization (where MR= MC)are at the same quantity, q_a.

What is important is the green line, the MR curve at thekink. Now since, when we maximizeprofit, MR= MC, when ever MCcrosses the green line, the profit maximizing quantity and price aregoing to stay the same. See Diagram 3. The firm, whether its marginal cost curve is MC₁, or MC₂ or MC₃is goingto want to produce the same amount, and charge the same price. Here this will maximize both profit andrevenue.

Conclusion:
Even in competition, oligopolists can makeextra-normal profits. Firms inoligopolistic competition tend to be locked in to price, so they must findother ways to compete, and maintain or gain market share. (We make the casual observation that one needlook no further than oligopoly pricing (and as we shall see, oligopsonypricing) to deduce a cause for Keynesian ‘price stickiness.’ In an economy rife with oligopoly we wouldexpect many points of price, and quantity, fixedness, making deflation a unevenand problematic process.) The owner of aservice station, for instance, locked in competition with 3 other servicestations at an intersection, might, to attract more customers, initiate fullservice, or add a convenience store or coffee shop. He might do this, raising his costs, untilthe marginal cost curve was something like MC₃ in Diagram 3. The oligopolist would not want toraise costs any more, because then his profit maximization would occur at aprice higher than p_a, and hewould lose market share.

However, the opposite can also happen. Since price is, with in a range, independentof costs, the oligopolist may decide to shave costs, cut corners, and soincrease his profit that way. Were anindustry to do this, we would have a situation like the American auto industryin the 60’s and 70’s, before imports began to significantly impact on theirmarket.

Oligopolies do not consist of identical or identically sizedfirms, with identical shares of the market. The quantity a particular oligopolistsells at is determined by historical factors, and his ability, or inclination,to compete in ways which do not affect the price. Historical factors, for instance, mostnotably their activities during the period their industry was more competitiveand open, determined the relative sizes of GM, Ford, Chrysler, and AmericanMotors, back when they constituted an oligopoly. Foreign Competition and decisions since havechanged their relative sizes and profitability.

Another point is that, unlike perfect competition, firms ofvarious efficiencies can co-exist in an oligopoly, operating at differingcapacities and different economies of scale, each firm collecting itsparticular degree of profit. And unlikeperfect competition, much of this profit is extra-normal, more than the profitswe would expect to see from perfect competition, which tends to drive profit toa minimum.

What other things might we expect? Well, we would expect the transfer of someconsumer surplus to the producer, in the form of his extra-normal profits. Consider that oligopolies are becomingeconomically pervasive. Each of these oligopoliesextracts its rent, transferring resources from consumers, to the oligopolists. Indeed, to simplify considerations, let usjust model the entire economy as two tiers, consisting of an oligopoly and itsmarket. Consider first perfectcompetition, where the economy was efficient and in balance, Diagram 4.

Supply equals demand and the equilibrium point is at e, and surplusis divided between consumer and producer. (Consumer’s Surplus is exaggerated a bit, to keep the lines the same. Sorry.) With oligopoly, Diagram5, there is a net transfer of surplus from the consumer to theoligopolists. (the greenish-yellow box)

In the real economy, this would be manifest as highercorporate profits, and, since most corporate stock is held by the wealthy, anincrease in income of the wealthy. Corresponding to this, we would expect a decrease in the welfare of therest of the economy, as the increase in income of the wealthy has to come fromsomewhere.

Efficiency has also declined because an oligopoly producesless than the competitive equilibrium production, at a higher price creatingdeadweight loss: The blue triangle. That is, the economy is producing less than itwould otherwise, less than consumers would be willing to buy at the lower,equilibrium, price. Indeed, the economymay perhaps be producing less than it needs to. For instance, since the public sector is also supplied by the privatesector, as the private sector becomes increasingly organized as oligopoly, wewould expect public sector costs to increase disproportionately. We would also expect, due to dead weight loss,an increasing shortage, and/or a decline of the quality, of public goods. This includes much of the infrastructure theprivate sector, the oligopolist, relies on.

Link to Michael Hudson- Democracy and Debt

2012-01-11T00:49:00.001-05:00

Nice read here:

http://michael-hudson.com/2011/12/democracy-and-debt/

All about the financial sector’s inability to restrain their economically destructive tendencies throughout history, and the social ruin attendant on their ascendancy.
We get to see it again. They get to see it again. And they still can’t restrain themselves.

On the Economics of Evil

2011-12-31T22:42:00.004-05:00

Elsewhere, http://www.truthabouttheone.com/2010.07.01_arch.html we have talked about how evil arises in the mind, and a little of how it is made manifest in the world.

One may wonder how one talks about evil in an economics blog. It is almost impolite. After all, evil is, in the end, irrational, and ignorance part of its nature. And economics is the domain of the all knowing, rational agent. One might say, economics is the study of the behavior of God, or gods, at least, anyway, under some of its more implicit assumptions. Perhaps this is one of the profession’s problems, then, when trying to explain the behavior of men.

Evil is as evil does. So what is as evil does? What is the economics of evil?

Evil sacrifices the greater good for its immediate gain. Since its own welfare is ultimately dependent upon the greater good, it thus consumes the foundation of its own wealth, and must look ever farther to feed its hungers, until it can no longer support itself, and collapses. But before it collapses, it may have consumed the substance of many. Those incapable, those inattentive, or those ineffectual in opposing it.

Eventually, good always triumphs. Good may triumph through might. But the reason, though, good always triumphs is because in the end, evil always fails. But it may succeed for a time, and the damage it may have inflicted be awful.

And when the good turns evil, it fails. Signs of turning evil are signs of failure. But not all signs of failure are signs of an internal evil. Failure may be imposed from above, inflicted.

It first seems as if we can talk about evil in terms of what are called discount rates. An individual with the lower discount rate is a person who ‘values the future more.’ He is a person more prepared to reduce consumption today so that he has more to consume tomorrow, and is held as somehow more virtuous, ‘more good,’ than someone who consumes more today, with perhaps less thought of tomorrow.

But we are living through a period where this virtue turns into exploitation, and destructive of the foundations of all wealth. An individual with a lower discount rate, exchanging with a person with a higher discount rate, will eventually come to possess all the other has, no matter how small the difference in discount rate. Even if the person with the larger discount rate is a person of relative virtue, he is not virtuous enough to retain his wealth. Is the gradual confiscation of the wealth of the less virtuous, then, itself a sign of virtue, or a sign of a lack of restraint, and of evil?

Or is instead the failure of the person with the higher discount rate a sign of his ‘evilness?’ For failure is what will result. He will lose his capital. Should he now be condemned to labor as a slave on behalf of the person with the lower discount rate, who now may consume the fruits of the labor of both, in perpetuity? Who is evil? The slave, who has become so because of his inadequate virtue, or the slaver?

The slaver, having consumed the wealth of his slave, is reduced to consuming the slave’s surplus, which it is in the slave’s interest to minimize. Having reduced the slave to subsistence, the slaver must then compel him to produce more.

So we see that commission of a lesser evil, what can be just a tiny difference in discount rates, by one, becomes, if not countered, the making of a greater evil, by the other.

Where is the happy median?

The accumulation of capital by a society is a great virtue. But so is its proper allocation. And this proper allocation is necessary, for when the wealth of a society becomes excessively concentrated, it can no longer maintain itself without the consumption of the capital of the rest of that society. Virtue pursued to excess has become Evil.

It justifies itself by its earlier successes still, yet its ends have changed. No longer is virtue seen as the pursuit of the common good. For the common man has proven himself to be without virtue, and dross, unworthy of the considerations of the powerful. What was Virtue turns to the fulfilling of its own now insatiable needs, and, at first just incidentally, the impoverishment of others. It goes too far, first blighting the lives and hopes of those less endowed, or less lucky, and then becoming corrupt and turning on itself, feeding on itself.

Evil is seldom pure. How do we recognize when virtue has turned evil, and harnessed to evil ends? How do we recognize the deterioration of our society, our nation, and our world? How do we recognize the infliction of evil, and the imposition of failure?

After all, Evil will cloak itself in virtue. Its agents may even, at first, imagine themselves virtuous. And what it imposes will not be called failure. It will be called something else. Evil deceives, doing one thing while saying it does another. And where it does what it says, its motives and goals are not what it says they are. But because Evil’s ends are irrational, as these become clear, irrational too become its justifications. Its speaking, and its actions, become increasingly detached from reality, and from each other. And its speaking and its actions become increasingly incoherent

Evil inflicts misery, whether or not it profits. And its profit is always less than the misery it inflicts. Evil provides no nourishment. What it seems to provide is never worth the price.

Evil does not create, except implements of destruction. It only manipulates, and takes. Indeed, creation is anathema to Evil, which opposes creation at every turn. It destroys what it cannot have, and pollutes, both what it does not possess, and what it does.
Evil cannot control its appetite. No amount of wealth is sufficient to its needs. And what to others are wants, mere desires, to Evil are needs, and needs that can never be satisfied.

Evil’s end is not what power can do, to the benefit of others, but power itself, and what it can do to gratify its needs. Evil considers itself to be justified in its extravagance.
_________________

We coddle the wealthy. We are told that they are the creators of jobs. Yet, there were more jobs when they were not so coddled. There was more wealth, and more creation of wealth, when the wealthy did not have so much. And now, we are told, we must give them even more. We, the people, must tighten our belts, and sacrifice of our own wealth, to feed the needs of the wealthy, the wealthy creditors who hold our debt, the debt of the people.

But ask the wealthy. Are they not virtuous? Do they not deserve the rents they extract from the people? Have the people, the debtors, through their inferior virtue, not embonded themselves to their creditors, the wealthy?

We will always have the wealthy. They will always extract their rents and fees from the people. But when are they too much? When are they more of a burden, than any benefits which the people might gain from them? Or are the rents and fees extracted from the people put to good use? Who, or what do they feed? If the wealthy would be the masters of the people, are they good to the people, or are they not? Are the extractions returned to the people, as the virtuous master would do? (But why should they be? Are not the people of inferior virtue to the wealthy, and undeserving?) Or are they not instead turned on self consumption, and the feeding of the worms of competing corruption which are now at the economic processes at the heart of the nation, and perhaps the world?

With the growth of the global economy, the reach of Evil is the ends of the earth, and, unless effectively opposed and contained, it will consume the sustenance of all else before it consumes itself.

But- perhaps we should look at the latest corruption in high places as- justice. Tolerating Evil, even perhaps, as some claim, inflicting it on others, Evil comes to us.

There are those who believe that, or say that, having achieved wealth and prominence, that this is evidence of moral superiority; that they are morally superior to those of us who have not. (Have we ourselves not said this? Have we not used our nation’s wealth and power to justify our- ‘Exceptionalism?’) Do the wealthy use this to justify their stewardship, or their extravagance? Is it become an instrument to do good, or wealth to conspicuously consume, resources denied to others, and wantonly destroyed. Do they nourish others, or deprive them of things they value, of the resources needed for the enjoyment of such liberty as they have?

The moral justification of those in high places can be rephrased: They rule for the benefit of the people, to shower them with the blessings of their making. Or, instead, they rule to inflict punishments on the people, who by their inferior virtue, come to deserve them.

The powerful cannot be merely indifferent. Then they are only self-serving, and there is no basis to their claims on wealth, and no reason for society to grant them.

Are the poor and undeserving supposed to accept these hardships, laid upon them by the demands of the wealthy, as justice served?

And what do we see, but the enforcement of this process, the reduction of debtor to slave, by our government. Are we surprised then, by reaction against the government, since it has become an instrument of compulsion, for the extraction of rent from the people, to the vast enrichment of a few. The protector of the people, having become enslaved by the wealthy, is despised by the people. Do the people, rather than seeking their government’s freedom, despair of their government, and turn on it, and seek its destruction?

Do those who tolerate evil deserve evil things to happen to them? Is it a form of justice that those who tolerate evil, though they do no evil themselves, should be punished? Is tolerating evil itself evil? Is being a bystander to a crime itself a crime? Is to allow evil to consent to evil?

Justification for government and regulation is seen by the behavior of the wealthy. Without a strong and free government, the wealthy cannot do other than they do, and that is to wreak great harm on the society that supports them, and their wealth. And we, the members of that society, may react one of two ways: We may accept the punishment, allow the destruction of our society and our wealth, and consider it just reward for our failures, or we may oppose the evil.

Finally, though man is limited in knowledge and rationality, the shape of the future is becoming increasingly clear. The earth is limited. The ends of the earth have been found, and been found to be not so very far. Consideration of and action to counter overpopulation, global warming, the depletion of resources and increasing toxicity of the environment, are all becoming more imperative. Will man pursue the course of evil, with evil consequences, or will he seek the course of rationality, and act accordingly?

European Debt Crisis: Talk by Dr. Heiner Flassbeck

2011-12-18T18:34:00.007-05:00

OK. TV Time again. Take 20 minutes to understand the cause of the European debt crisis. http://www.youtube.com/watch?v=TFKzAAd_1W8&feature=player_embedded

Back in the 1990’s , just before the initiation of the euro, the Germans tried to institute a full employment policy by holding down wages for an extended period of time. That failed. They did succeed in beggaring their neighbors, however.

Or you can get it, where I first got it, at: http://www.nakedcapitalism.com/2011/12/class-war-low-wages-and-beggar-thy-neighbor.html

Where I was pointed by: http://yanisvaroufakis.eu/2011/12/15/never-bailed-out-europes-ants-and-grasshoppers-revisited/ (Although I visit nakedcapitalism.com regularly.)

Dr. Flassbeck concludes with a few words about the US, worth noting also.

Still like the idea of Import Certificates, since they force the balance of trade, and each country's policy is independent of any other country's policy, even if with a currency union.
http://anamecon.blogspot.com/2011/10/import-certificates-problem-and.html

Debt, Total Debt and by Sector as Ratios to GDP

2011-12-14T21:41:00.005-05:00

Well, I am stung by “reason’s” criticism of my ‘misleading’ graphs. Yes, they were in nominal terms, but nominal terms are what you have to repay. But here are the same data as graphs plotted as ratios to GDP. They are all ratios of the nominal figures, so the ‘nominality’ cancels out. Not as good as ratios to income, as reason further suggests, especially the likely to be interesting ratios to the income of the various sectors. Which we shall see.

In any case the picture is no prettier, although noisier, ratios being what they are. See: http://anamecon.blogspot.com/2011/10/today-were-just-going-on-little-about_09.html

for the original graphs.

Here is total debt to GDP:

This is the sum of these figures:

GFDEBTN/1000 Total debt of the US federal governemt, divided by 1000because the original graph is presented in millions, and for some reason just doesn’t convert if you naively add graphs together.
HSTCMDODNS Total Household debt of all kinds, I think.
SLGSDODNS Total debt of State and Local Governments.
TBSDODNS Total debt for non-financial businesses.
DODFS Total debt for financial sector.

Pretty much still exponential, with a bulge during the Reagan years. Reagan's good years financed by deficit spending? What would Keynes say?

Here is the graph for the various sectors, separated. Still clear, or even more clear, actually, is the point I was trying to make, in my comment, with the original graph, that deleveraging, and it is mostly deleveraging in the financial sector, seems to correlate with the federal government going into debt at an ever faster rate. That is, our government seems to be borrowing from the banks, to rescue the banks. And the debt that is still increasing, is the debt of the people.

One thing that is interesting is that the debt of the financial sector has gone from the lowest to the highest. Who do they owe? Check out: http://www.youtube.com/watch?v=1eSVIXQzsFs

Looks like the banks are just a front.

Advertising is (Mostly) a Waste of Resources

2011-12-10T00:58:00.005-05:00

Advertising is (Mostly) a Waste of Resources

In 2008, the year for which I have figures (Outsell July 14, 2008 Third Annual Outsell, Inc. Study Forecasts $412.4 Billion in 2008 Advertising and Marketing Spending, of which $250 Billion or so was directly for advertising) That works out to some $830 for every man, woman and child.

Advertising and Marketing work out to about 3% GDP. But what is produced?

Advertising and conservation of money: People can only spend so much. They can only spend as much as they earn. Less taxes, of course. Oh, sure, they can go into debt, and spend more now. But that means, in the not so long run, they end up spending less than they earn, since they cannot spend what they lose in interest and charges on the loans they take out. Or they can save and spend a little less than they earn now, and in the not so long run, have a little more to spend than they would otherwise, assuming they gain a little extra in interest. But that’s it. That’s the most people can spend, and it doesn’t matter how much is spent on advertising. So advertising is at best a zero sum game. Advertising cannot make people spend more. In fact, if it encourages people to go into debt, it causes people to have less to spend, in the not so long run.

So spending on advertising is at best competing for a fixed quantity of dollars. But in the real sense the more resources are spent on advertising, the fewer resources are available for production of useful goods, and services, and the poorer society is. The poorer the consumer is. And the poorer the producer is.

Advertising is an example of what’s called a failure of composition: One business, if it advertises, gains a benefit in increased sales. But if all businesses advertise, then they all lose, because the market can only be so large. In fact, the market is actually smaller due to the fact that the more advertising, the more society’s resources are diverted from productive activities to paying for that advertising. The less money is available to produce other, perhaps more desirable, goods and services for society, so the poorer society is. Unless you consider money spent on advertising as a net contribution to society, like, say, art. But what kind of art does it qualify as?

Now what is true in general is true specifically for the holidays: The holiday shopping season does not increase consumer spending. Advertisers spend more, and yes, consumers do spend more during the holidays. But, they simply have only so much to spend each year, so the existence of a holiday season makes no difference in the total that would be spent each year, and thus the total that is spent.

Consider Black Friday. Where one store opens early, it has an advantage. Where all stores open early, there is no advantage, but all stores incur additional expense.

This brings us to a clear case where regulation makes an economy more efficient, and that case involves what used to be the so called Blue Laws. These were laws which banned most retail stores from being open one day a week, usually Sunday. (Pharmacies were a notable exception, but even they could only sell medical related merchandise.) Now as we argue, annual personal expenditures are conserved. That is, having seven days a week or six days a week of shopping makes no difference to the amount of money available to be spent. No more is spent in seven days than would be spent in six. Or looking at it the other way, no less would be spent in six than is spent in seven. But with stores open seven days, what we have is the increased expense of keeping those stores open the extra day. Since retail trade represents about 7% GDP, a reduction of 1/7^th of its (real) expenses would result in a 1% increase in the efficiency of the economy. About $130 billion, or about $430 would be made available for every man, woman and child in the economy. ( We say ‘real’ because we’re talking actual resource usage, electricity and wages, not nominal expenses like rent. Rent isn’t going to change, but paying rent isn’t consuming resources. It is merely a transfer of demand (for resources) from the retailer to the landlord. Also, the actual ‘real’ savings is probably going to be somewhat less, since heating, and cooling, of the store must be done seven days a week, to some extent, whether the store is open or not.)

This is another example of the failure of composition. Clearly, if just one store is open on Sunday, that store will have more business. It will take business from its competition. But with all the stores open on Sunday, we have seen that there can’t be more business for all the stores, and there is instead the added expense of the stores being open seven days instead of six. Having his store open seven days instead of six is, for a retailer, a very significant expense, an expense he passes on to his customers. His customers, paying more for each item, are not able to buy as much stuff, and so are less well off. Consumers pay, in real goods and services, real resources, for the convenience of shopping on Sunday.

Now something similar to the increase in efficiency which would be obtained by closing stores one day a week is being driven by increased retail selling over the Internet, which is reducing the number of brick and mortar stores, and thus the expense involved in operating them. On the other hand, Internet competition is forcing those stores which remain open to be as convenient as possible, thus inducing them to be open on Sunday.

Some advertising is desirable, bringing the buyer to the seller, and informing the buyer of his choices. But more than that is, from a social point of view, harmful, not because it influences buyers into making sub-optimal choices, (which it may,) but because it consumes resources to no one’s benefit.

The irony, of course, is that the billions of dollars per year spent on advertising have not lead to an increase in corporate profits, but rather an increase in expenses, and a decrease in profits. Though not in percentage of profit. Advertising simply does not increase the amount of money available for the consumer to spend, but its expense must be borne by all producers and consumers. The result is higher prices, and a reduction in the quantities produced and consumed. The more advertising, the greater the expense.

A technical note: The degree to which the producer or the consumer bears the cost of advertising depends on the relative elasticity of the supply and the demand, just as with taxes: Elasticity of demand is the ratio of the change in quantity demanded to the change of price. Elasticity of supply is the ratio of the change in quantity supplied to the change of price. A large elasticity implies a large change in quantity leads to a small change in price. A small elasticity implies a small change in quantity leads to a large change in price.

Now if demand is less elastic than supply, consumers bear the greater burden of the cost of advertising. If supply is less elastic than demand, producers bear the greater burden of the cost. From this, we would expect producers to spend more money on advertising relative necessities, such as food, than discretionary goods, such as automobiles, or jewelry.

But there is significant advertising in many discretionary goods, where the producer would seem to bear most of the costs.

Now in today’s global economy, where supply is often world wide, supply tends to be very elastic, and so for most goods, the burden of advertising is borne by the consumer. In the case of jewelry, and articles geared for the wealthy, for whom price would seem to be no object, it would appear that demand is relatively inelastic. Thus a disproportionate amount of money would be spent on the advertising of luxury goods. On the other hand, there does not seem to be so much advertising for interchangeable necessities, such as different brands of gasoline.

Morality and Debt

2011-11-27T18:13:00.007-05:00

We have presented the producer-consumer problem as the basic problem in economics. (See: http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html )

However much money the consumer starts with, the consumer must spend his money until the producer has it all, and then the system collapses, (or the consumer runs into debt, and then it collapses.) When the market for the producer’s surplus collapses, the system then implodes. How then to maintain demand in the consuming sector, so it never runs out of money (demand) and will always provide a market for the producing sector?

We have used producing and consuming sectors in the original analysis, and as a kind of shorthand. We could generalize the problem and instead say the powerful and the weak sectors, where the real value of goods exchanged between sectors is equal, or even slanted so that the weak sector produces more than the powerful sector, and thus it is the powerful sector that is the ‘consuming’ sector. But the powerful sector is able to secure a greater proportionate revenue than the weak sector. (It uses its power to do this. We can define the powerful sector as that which is able to secure a higher proportionate revenue than the weak sector, defined as that sector unable to do so.) The powerful sector has a higher profit margin. And so it accumulates the money of the weak sector, and eventually acquires it all. Then it runs the weak sector increasingly into debt.

The moral implications of the terms producer and consumer, are, here, absent. In the reality, where the weak sector produces more than the powerful sector, they are inverted to appearances: The powerful creditor sector has not earned its wealth, but gained it through manipulation and force and fraud, that is, what ever instruments it has at its disposal that make it the more powerful, and the weak debtor sector has not become debtor through sloth. The weak sector is the producing sector, but its wealth is taken through the greater power of the creditor sector.

Does the creditor sector produce or consume? Well, the whole point of extending credit in the present is to, in the future, consume more than one produces. It is a matter of ordering. First, one produces more than one consumes, extending credit. Then one consumes more than one produces, collecting on the debt. However, this initial production by the creditor sector of surplus, to ‘hook’ the weak sector, is not necessary, but only the least unjust.

Whoever controls the flow of money controls the economy. The creditor sector need only start with a portion of the money. Then by collecting more in interest from the producing sector than the creditor pays the producing sector for what it consumes, the creditor sector will accumulate the money of the weak sector. This is the money of the producing/debtor sector. See:

http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

And the video http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

Especially from about 32 minutes on, but watch the whole thing.

The consuming/creditor sector need not ever have produced anything.

Now the creditor sector seeks to loan to producers, because only producers can pay them back. Only those who produce more than they consume, who are net producers, can pay back loans, in any real sense. So either the creditor sector starts as a consuming sector, or it becomes one. The creditor sector must be a consuming sector, since in order to be paid back, it must allow the producing/debtor sector to produce a real surplus, and make the producing/debtor sector hand that surplus over. It consumes an ever greater portion of that surplus, as the producing /debtor sector becomes more in debt. The producing/debtor sector must become ever more in debt because there is never enough money in circulation to pay back the principal and the interest on the loans the creditor sector extends. This proceeds until the producing/debtor sector owes more in interest than it can produce, and must consume its capital to maintain payments. The creditor/consumer takes some of the production the weak producing/debtor sector needs to maintain itself and its production.

Thus we come to an inversion of the original problem. The consuming/creditor sector has the surplus of money, and the producing/debtor sector is starved of the money needed to support itself. It contracts. But it is leveraged against itself. That is, its nominal net income is negative, because the burden of what it owes, the interest burden, nominal interest times money owed, is greater than its profit margin times how much it produces. (The situation is even worse where a portion of the principal must be repaid.) So it is perpetually in the state of losing money That is, rolling over ever more debt.

Now the question arises: Why are corporations flush with cash? First, they are not. See: http://anamecon.blogspot.com/2011/10/today-were-just-going-on-little-about_09.html

Second, labor also constitutes part of the producing sector, and labor is losing money.

Why are the banks in debt? The banks are just a front. They owe also. Who do they owe? They owe themselves. That is, they are front corporations which, when they fail, will have no assets, but the assets will have been transferred to another corporation with the same owners. The one percent.

As the producing/debtor sector contracts, it is ever less able to repay its debts to the consumer/creditor sector, which debts increase even as the producer/debtor sector’s ability to repay decreases. Austerity cripples the producer/debtor sector, effectively making its debts larger and more difficult to pay back. More and more of its assets are transferred to the consuming/creditor sector, until the producing/debtor sector is stripped of its assets.

The details of this process are interesting in themselves. The consumer/creditor sector controls the quantity of money available to the producer/debtor sector. (But there is only money to pay the principal, never enough to pay the principal and the interest.) When it extends more credit, there is more money, and the price of things goes up. The members of the producer/debtor sector must borrow to keep up. (It is a failure of the commons. If no one borrows, no one has to borrow. If some borrow, the others have to, to keep up. Note also, the creditor/consumer sector can drive up prices by increasing its own demand, thus forcing increased levels of debt on the producer/debtor sector.) Then when the consumer/creditor withholds credit, there is less money, and the price of things, particularly assets, goes down. Not only that, when there is less money, there is greater unemployment, businesses contract, and, because money is needed to repay debts, more debts that cannot be repaid. Consider housing. By withholding credit, the price of houses is driven down. And there are more foreclosures.

Now it is argued that assuming a debt is purely voluntary, and that therefore the resulting indenture is essentially freely entered into. Assuming this excuses a process and result that is to many people intrinsically repellant, the assuming of debt may, under some circumstances, itself be compelled. Indeed, purely voluntary situations are rare. There is almost always some degree of force of circumstance, and often circumstance where one’s choices may be limited to a choice of evils. When the cost of living exceeds income, one is left with the choice of starving, or dieing of exposure, or assuming debt, and at least postponing the day of reckoning. Or, in the absence of universal health insurance, many are vulnerable to the choice of assuming debt or dieing of their malady. Similarly, where education is necessary to advancement in society, yet its results uncertain, one is left with the unhappy choice of almost certain poverty or a chance at either prosperity, if as a result of the education one secures adequate employment, or debt peonage if one does not. In either case, the debt must still be repaid, but in one case one is able to pay it off, and in the other one may not be.

Another instance where one assumes debt without choice is through agency, eg the government. Then there is the businessman seeking to preserve his business, or the farmer seeking to pay for planting his crop.

Then there is fraud.

And as ownership is concentrated, monopoly can be expected to be more and more of a feature of economic processes. It is the nature of monopoly to provide to less than the market needs, and people need to borrow to pay the rents collected by- those who extend credit.

In an environment where others assume debt, the resulting increase in the money supply drives up the cost of living, making it more difficult to sustain one’s life style without borrowing. Further, this life style may be deserved, that is a reasonable proportion of a person’s contribution to society. It is essentially unfair that someone who makes a considerable contribution to society be yet forced to live a life of penury. Yet those who blame him for the assumption of debt effectively condone this.

We have shown that being in debt need not imply a moral obligation to repay: The debtor, far from being lazy, may produce for society more than his fair share. Indeed, the lazy and indolent are not extended credit. Only the producers are sought out by creditors, who effectively seek to indenture them.

The debt may have been forced on the debtor, often by circumstance induced by the creditor. Even if not, the perpetual obligation often resulting from overbearing interest amounts to a form of slavery, and this is reprehensible.

The creditor has no implicit claim to moral superiority. Neither should the debtor berate himself as morally inferior, and as deserving of indenturship.

The true immoral behavior may thus be on the part of the creditor.

Links to Mansoor Khan

2011-11-07T00:56:00.009-05:00

Here are active links to the articles Mansoor Khan refers to in his comment to Debt, Total Debt and by Sector. I encourage the reader to check them out. First:

http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way

In Modern Monetary Theory, (as far as I understand it.) the government creates money by printing it, politically easy, once established, preventing inflation, and destroys it through taxation, countering inflation, politically hard. A government of reasonable virtue and principle would be required. A certain amount of inflation is more likely. Indeed, since debtors tend to be numerous, and creditors relatively few, a certain amount of inflation, which favors debtors, might counter natural tendencies toward the concentration of wealth. Compare this to what we see: Creditors have seized control of the government, and seeking to retain what are essentially ill gotten gains, are directing the government toward our common ruin.

(For a nice exposition of the problems with the current system, see:

Money as Debt:

http://www.youtube.com/watch?v=Dc3sKwwAaCU&feature=related

Or:

http://video.google.com/videoplay?docid=-2550156453790090544

And:

Money as Debt II:

http://www.youtube.com/watch?v=rCu3fpg83TY )

Next from Mansoor Khan:

http://aquinums-razor.blogspot.com/2011/08/what-is-relationship-of-money-to.html

And:
http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html

http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset

Good. Helicopter money to every citizen. Give citizenship a tangible benefit, rather than the burden implied by the national debt. Negative taxation, which is precisely what the government should do when demand is depressed. And/Or it could guarantee employment, which would work as an automatic stabilizer.

http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift

http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system

An orderly bankruptcy of the financial system, with the government as receiver.

http://seekingalpha.com/article/-great-banking-confusion-is-there-a-better-way

Mansoor's proposal for 100% non-lendable equity accounts seems doable. They would carry essentially negative nominal interest. The magnitude of this interest would be minimized by interbank competition for deposits.

Import Certificates: Another Problem and its Solution

2011-10-20T23:55:00.008-04:00

Previously, we discussed problems with trade certificates and their use as a solution to the European debt crisis. Another problem with import certificates is that a country may require the importation of certain goods. It would not want to deprive itself of these goods by failing to issue certificates allowing their import. This might happen say, if Country A imported oil from Country B, but Country B didn’t import so much of the production of Country A. Country A would not want Country B to have to scramble around looking for import certificates so it could export to Country A a good Country A found necessary. Why should Country B bother? The issue is how to incentivize Country B to export to Country A the good Country A found critical.

The main incentive here of course is prices. The idea is that the money Country A gives to Country B for goods from Country B Country B can spend on Country A’s production. If Country B does this, spends this money, on Country A's production, trade is balanced. The problem is if Country B doesn’t want to spend Country A’s money. If Country B wishes to trade the Country A’s money with Country C for Country C’s production, and Country C then spend Country A‘s money on Country A’s production, all well and good. Trade is balanced. It’s when Country A’s money is hoarded that a problem arises. Indeed, Country A’s cumulative balance of payments is proportional to the quantity of its money that is hoarded by other countries, (minus the quantity of other countries’ money Country A hoards.) So the problem for Country A is to discourage the hoarding of its money. (Of course, Country A also wants to discourage the buying up of its assets.) Having its ‘trade’ money expire is one solution. This would motivate its quick expenditure. But Country A can’t just have ‘trade’ money, or money in foreign countries only, expire. All its money has to expire. But now we’re talking about inflation, the slow expiration of all its money. If Country A allows modest (moderate?) inflation, Country B is motivated to spend whatever of Country A’s money it has with reasonable speed, unless country A borrows it back at positive real interest, in which case Country B is again motivated to run up a surplus with Country A.

A balance must be maintained. Too fast inflation will discourage imports, ie cause a nation to be charged higher prices by one’s partners. Too slow will encourage hoarding of its money.

We note in the Greek problem, Greece is unable to inflate its currency, which would force other countries to buy from it, but is stuck with the common currency, the euro which, no matter how it inflates, will not encourage others to buy from Greece in particular.

Also, this seems to be an intrinsic problem with a country’s having its currency as the reserve currency, as other countries are naturally going to want to hoard that currency, thus, maintain a trade surplus with that country. Thus, that country will naturally tend to a trade deficit, and the economic ills attendant on that deficit.

Barring inflation, and returning to import certificates, another possible solution would be for some goods to be exempted. Exempted goods would generally be basic commodities, since exempting value added goods, unless they were capital goods, would not result in net real benefit to the importing country. This is an important point, which we will discuss eventually.

The importing country’s eventual goal of course, would be not to require the import of so great a quantity of critical goods, or at least to manage the exchange of export for import so the quantity of goods exempted would gradually be reduced, and eventually eliminated. This would result in a certain sort of self-sufficiency.

One could argue that a country requires all the goods it imports, or it wouldn’t be importing them, but for most value added goods there exists, internationally, a surplus of production, and therefore competition for that country’s markets. Indeed, there may be a surplus of factors in that country itself, idled by trade. There will, in fact, always exist a surplus of supply, because labor produces a surplus, which is not distributed down the labor chain, to the unemployed, who have no demand, (having no money) but only up.

The consumer of exempted goods would have to issue certificates at a less than 1-1 ratio, export to import, to other countries, or more specifically, for all non-exempted goods, if it were to balance its trade. Thus, if exempted goods constituted 10% of imports, its other certificates would have to be in the ratio 1 to .9, export to allowed imports, in order for that country to balance trade. Thus, it would face its other trading partners with a mercantilist appearance, unless it could assure these other countries trade with its suppliers of exempted goods. That is, it could give to these other countries the rights, the certificates, it earned from importing the exempted goods. Country A, importing oil from country B, gives to country C rights to export to country B, along with rights to its own market. Country B gives rights, certificates, because it has no desire to be exploited either. These rights, together with Country A’s own rights, would combine to a one to one ratio to Country C. Country A would experience a deficit with Country B, a surplus with Country C. Country C would experience a deficit with Country A, and a surplus with Country B. Country B would experience a deficit with Country C, and a surplus with Country A. But each country’s total trade would balance.

For a country such as the US, balancing its trade in just other than exempted goods, ie oil, would be an improvement. However, the certificates it issues can be phased in independently of the exchanges of certificates from the importation of exempted goods.

Each country, then would be in the position of merely exempting any goods it found critical. It would scale back exchange rates in other goods to a less than 1 to 1 ratio, and fill in the difference with the certificates it had earned in importing the exempted good.

Debt, Total Debt and by Sector

2011-10-09T00:11:00.008-04:00

Today we're just going on a little about debt, so you get the picture(s). These are all taken from FRED graphs, the St. Louis Federal Reserve's data manipulation and display feature, which apparently anybody can register for and log on to. And with a little practice you can get the graphs I have here. They are a little small, but at FRED http://research.stlouisfed.org/fred2/
you can make them into PDF files and any size you want. The first is total debt for everyone in the US, everyone being, roughly:

GFDEBTN/1000 Total debt of the US federal government, divided by 1000 because the original graph is presented in millions, and for some reason just doesn't convert if you naively add graphs together.
HSTCMDODNS Total Household debt of all kinds, I think.
SLGSDODNS Total debt for State and Local Governments.
TBSDODNS Total debt for non-financial businesses.
DODFS Total debt for financial sector.

It's at roughly $55 Trillion and holding steady, more or less, these past three years. For the 45 previous years it was pretty much growing at an exponential rate. Interesting. See my previous discussions on money and debt eg:
http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html

Here is the debt decomposed into the five sectors: First, state and local government debt is seen to be relatively small potatoes. After that everybody else is pretty much still in the race. These last three years, financial has deleveraged a lot, households a little, and business has held steady. Federal govt. debt, however, has accelerated, which seems to imply that, (as others have noticed) the government is going further faster into debt to pay for the financial sector's deleveraging.

Now $55 Trillion is about $180,000 per person, which is also about the per capita capitalization of the United States. That is all the assets in the United states add up to about $55 trillion dollars or so. Maybe slighty less. Anyway, that person at the mean, asset, or wealth, speaking, who is further up the totem pole than the median, (who is half way up the totem pole,) owns nothing. And anybody below him owns less than nothing. Objectively speaking. That is, anybody below that line pays interest, and anybody above that line collects it. Now that mean asset holder is somewhere in the top 5% as far as I can figure, (somewhere between a guess and a calculation.) That is more than 95% of the population each own less than $180,000.
Cf: http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html

Look at the total debt line. It was going exponential. Is still going exponential, if you discount the financial sector and its deleveraging. You're probably wondering how you did it, since, on the average, your own total debt line looks just the same a that one. Because you pay the debt. All of it. Businesses pass on debt to their customers in higher prices. Government, federal state and local pass on debt in the form of higher taxes. The financial sector passes on debt in higher fees, and higher interest rates. So the bottom line is not just your bottom line. All sector's debt weighs on the consumer, and that is you. And it takes many forms, not just higher prices and taxes. It's also higher unemployment, higher underemployment, and fewer government services, and less services from businesses. More foreclosures and decaying infrastructure. All so that a few percent can collect their unjust profits, and live in the style to which they are becoming accustomed to.

Import (Trade) Certificates: Some Problems and Solutions

2011-10-04T17:08:00.006-04:00

Import (Trade) Certificates: Some Problems and Solutions

In our previous post, we suggested import certificates as a solution to the European debt problem.

While the idea of import certificates seems attractive, there are details that may have to be worked out. Here are several possible problems, with some solutions.

Consider the market, say, for 1-1 import certificates, certificates giving the right to import $1 worth of goods or services for every $1 worth exported. although it could be any ratio. Suppose the markets for goods were such that anything imported by the issuing country could be sold. If the certificates were perpetual, holders would tend to hold on to them, waiting for the highest price a foreign producer would be willing to pay, which could be quite high. Imports, then, would be below a level which was advantageous to the importing country. Certificates might tend to accumulate, until there was a sell off, leading to a boom-bust cycle of importation.

Suppose instead they had expiration dates, like options. 90 days, 6 months, 1 year. Then there might be a chronic shortage of imports. Or, instead of expiring, they could revert to the government, which could auction them off.

Or the certificates, instead of going to the exporter, could simply be retained by the government, which then sold them at auction. Howard Richman in

http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

recommends this, as well as targeting the certificates at those countries which exhibit mercantilist practices against the US. If they were targeted at any country which persisted in having a surplus with the US, they would be just as effective as untargeted ones. Attempts to route trade trough other countries would bring these countries to surplus, and then trade certificates could be issued against those countries, too.

Richman, in his article, also discusses the legal implications with respect to WTO agreements. The fact is, the adoption of import certificates would spread, and render those agreements redundant. (We should also expect resistance from the WTO, since they would be rendered redundant.) Since the universal adoption of import certificates would result in all nations having a balanced trade budget, discussions instead would revolve around bilateral differences in allocation, if temporary imbalances were seen as beneficial to one country or another, eg, to capitalize an export industry in one of the countries.

They might constitute a barrier to growth of trade, since any country with an increase in imports, need not be assured a corresponding increase in market. But under these circumstances, exporters to a particular country could be issued import certificates targeted to that country. That country would then be assured an increase in market, and so would not be discouraged from increasing its imports. It could exchange these rights with other countries, for import certificates from them. And this brings us to another option. The import certificates could be sold along side the exports of goods or services. Thus the foreign importer would acquire the right to export to that country, to sell as he chose. There would thus be no barrier to expanding trade, since each country, on expanding imports, would be assured of the rights to a market for its own exports. It would not be assured of the market itself, of course, as there might not be one there for what it produces. However, the country is better off than before, because it has rights to a market that someone might produce for, and it can exchange these rights to a market for what it produces.

At the level of producers, this might get very complicated. So, the import certificates follow the exports to the importing country, whose government acquires the rights. Then the problem of the allocation of rights to producers becomes a domestic one for each country. (This would in fact be the default situation, since any government could just tax the certificates away from its importers.) Each country’s own government would be the clear cause of any woes resulting from trade.

The whole thing seems to take on an aspect of barter. Countries have rights to markets they might not want, looking for someone with rights to markets they do want, who might not want the rights to the markets they do have. But in fact there is already a market for much the same thing, and that is the currency exchange market.

What could go wrong? Well, a country with substantial debt is eventually going to want to issue import certificates to a value less than its exports. In this way it can pay off its debt. That means its going to have to trade with countries which issue it certificates to value more than its exports. Its debt holding partners have to allow themselves to be repaid. See the example below.

A country wanting to indulge in mercantilist practice is also going to want to value the certificates it issues at less than a dollar for each dollar exported. Were all countries to engage in this practice, or even enough countries to engage in this practice, world trade, and the world economy, would contract. What would be good for one, would be bad for all. But how would one discourage individual perpetrators? The desire to expand one’s economy, at the expense of others, should not be rewarded, nor allowed to wreak havoc with the world’s economy. Now a valuation of its import certificates at less than the value of its exports, would be a clear signal of mercantilism. It would be anti-social behavior, though not aimed at anyone. But of course, it would be aimed at each country in its particular, since it is to each country that it is issuing its certificates to. That is, it would be saying to each country that it wishes to take advantage of it, to exploit its trade to grow at that country’s expense, by forcing a trade deficit on that country in particular.

Each country would be taking it ‘personally,’ and have the individual choice: To allow itself to be exploited, or to retaliate against the mercantilist country, say by issuing trade certificates against that country which were similarly valued at less than the value of the export.

Actually, retaliation would not be necessary. Suppose country A is issuing import certificates at a 1 to 1 value, one dollar of import certificates with each dollar of exports. Then any country B which issued certificates against country A of, say, $.90 per dollar exported to country A, would automatically see its trade with country A contract. That is because at the next round of trade, country A would only be able to export $.90 worth of goods to country B, and thus country B would only receive certificates to export $.90 worth of goods to country A. The next round country A would only be able to export $.81 worth of goods to country B, and that is all the certificates country B would receive. And so on.

In order for trade to maintain at the same level, country A would have to issue certificates to the value of $1.11 per dollar worth of goods exported. Then when country A exported $1 worth of goods to country B, Country B would return with $1.11 worth of goods, and the right for country A to export another $1 (90% of $1.11) worth of goods. So the situation would remain stable. Country A would actively have to allow itself to be exploited. It would have to cooperate in going into debt.

So, what is the import certificate that we are now talking about?

It is issued by each government. It is a right to import a specific quantity of goods or services into the country of that government. It is issued. for one of that country’s exporters, (perhaps to that exporter,) and it goes along with the export to the government of the country of destination. That government, depending on its domestic policies, may do with the certificate as it wishes. It may be allocated. It may be auctioned. It may be bought, sold, or exchanged.

It is 1 to 1, the right to $1 of import for each dollar of export, (eventually, in the case of debtor and creditor nations.)

We have discussed some of the alternatives, and the problems attendant on each. Some country A may issue them domestically. But that does not give any incentive to country B to import from country A. Not only does country A giving the certificate to country B give country B the right to trade with country A, but the incentive to do so, since it assures the rights to a market for its own producers. This type of import certificate constitutes a reward from country A to county B for buying from country A. How could country B complain?

Trade Certificates: Solution to the European Debt Crisis

2011-10-01T03:05:00.010-04:00

Trade Certificates: Solution to European Debt Crisis

Here’s a nice discussion of the European debt crisis:

http://streetlightblog.blogspot.com/2011/09/estimating-cost-of-eurozone-crisis.html

It’s the third of three articles on the thing, so click on the blog title to access the rest.

We reduce it to the producer-consumer problem. See:http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html

But Kash describes the crisis per se is a result of the sudden cessation of capital flows from the center of the Eurozone to the periphery. These flows had to cease, and probably suddenly, some time, as the debt imbalance inevitably piled up. Kash also notes a fair percentage of those flows were for investment. The periphery countries weren’t exactly squandering the money, but that really doesn't matter, except to make the tragedy more poignant. He suggests shared responsibility for the crisis. Yes, the central countries have to pay. Actually, have already paid, they just have to swallow their losses. Making the peripherals pay is just going to make them less able to consume German surplus production. In fact, the peripherals have to achieve a trade surplus. Germany will have to find other markets for its surplus. Inflicting pain on the periphery, except to the point where they have to live within their means, is graceless. Of course, the entire process of- inflicting surplus production on them has reduced their ability to do this. The same thing has happened to the US with its trade deficit. Its ability to live within its means, actually the means itself, its industry, has been compromised.

Now Greece borrowed a lot of foreign money. That money had to be, eventually, spent on foreign goods. Or else they would still have it, in cash, and be able to give it back. We observe that debt, if you don't have the cash, must be ultimately be payed with goods, services, or assets. Nothing else will do.

So what is to be done? Austerity works for households. For nations? You might think. But the problem is deflating a nation's economy destroys productive components while it is reducing consuming elements. Indeed, the productive elements need the consuming elements to continue consuming unless they have compensating export opportunities. For it is only by exporting that the deficit country can pay back the debt, but will the surplus countries allow this to happen? Or instead is the deficit country is forced to sell assets, which worsens its ability to pay in the future?

In fact, the entire process, in the absence of any debt forgiveness, has a dubious- morality. The surplus country lowers prices, drives businesses in the deficit country out of business. See:

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

Runs up the debt in the deficit country, then buys up the deficit country's assets. Moral? Or a form of war?

Greece, for instance, had a significantly deteriorating trade balance since about 1990. It seems to be a self-reinforcing thing. And now its assets are being sold. Germany's trade surplus has been increasing steadily since 1990. Is it buying Greek assets?

We recommend the introduction of import certificates, to force a balance of trade, and pay off reasonable debt. See: http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

Or for a brief description on import certificates, see: http://en.wikipedia.org/wiki/Import_Certificates

Rather than the targeted certificates, we merely encourage all deficit countries to phase in general certificates, not aimed at any country. Indeed, once the process starts, certificate trading will quickly become the norm, since deficits will be forced and focused on those deficit countries which do not practice it, and trade wars will ensue between surplus countries.

Better than selling the farm. Certificates could be phased in, to prevent economic trauma. The goal would be exporters would be issued 1 euro worth of import certificates for each euro they exported. This certificate would allow the importation of 1 euro worth of goods or services. These certificates could be bought and sold. For the deficit country, these could be phased in, starting near the percentage of deficit. Thus, for a country with a 30% trade deficit, they could be originally issued at 1.25 euro worth of imports allowed, say, for each euro worth of export, and then reduced in periodic increments until one euro of import per euro worth of export, at which point trade would be balanced. In fact, if this were practiced by Greece, eventually their trade and capital flows would each be balanced. Problem solved. To pay back what is already owed, eventually Greece must have a trade surplus, so it would, for a while be issuing certificates allowing say .9 euros of imports for every euro worth of exports. This would force it to have a 10% trade surplus, with which to pay back its debts. It also implies that they willl be consuming at less than their production, which is the point of the austerity process. Of course, the process would take longer than any interest on the loans Greece presently owes to compound to unpayable heights. Do the Germans have any intention of allowing Greece to pay them back, since this would damage their own economy? Or are they instead after Greek assets?

But Greece can be the master of its own fate, if it so chooses. With a little help. And so can the US.

And the peoples of the Germanys and Chinas of the world will have to consume to their ability to produce.

Meanwhile, with each country issuing trading certificates, international trade wold be balanced on a nation by nation basis. No country could be claimed to exploit its surplus to cripple the economy of another, and expand its own economy at the other country's expense. All countries would have to live with in their means. And the benefits of otherwise free trade could be enjoyed at a maximum sustainable amount.

Links 9-19-11: Corporate Salaries; Health Care

2011-09-19T01:11:00.008-04:00

Some links: First: http://blogs.reuters.com/david-cay-johnston/2011/09/16/shrinking-corporate-officer-pay/

“Since 1994, business receipts have grown about 50 percent faster than profits, tax data show. Since corporate officers are supposed to run companies efficiently, the narrowing margin on sales is an indicator of poorer performance and thus may partially explain why overall their pay is smaller than in the 1990s, a fact nobody knew until just now.”

These would seem to be the top 5% minus the top 1% guys. We would also expect this as a result of increased foreign competition that is, though indirectly for most corporations, the equalization of factor prices brought about by that foreign competition.

Not so much health care and education, (defense?) though, as these are most insulated from direct foreign competition. So we would expect these to become relatively more expensive, but see also: Baumol’s cost disease, at eg: http://prescriptions.blogs.nytimes.com/2010/01/17/an-economist-who-sees-no-way-to-slow-rising-costs/ for another explanation. But that doesn’t explain the difference between US and Europe.

So next: http://economix.blogs.nytimes.com/2011/09/16/the-role-of-prices-in-health-care-spending/

Seems on of the reasons healthcare in the US is more expensive is because the prices are higher than elsewhere! Everything costs more! Well, yeah, that’s what cartels and monopolists do: drive up prices by restricting access to goods and services. An aside on the government role in all of this: http://www.boston.com/Boston/whitecoatnotes/2011/09/journalist-groups-decry-removal-online-doctor-discipline-data/mRYBMGSUQYNyJb5vChPJsO/index.html

See: http://anamecon.blogspot.com/2010/03/real-problem-with-health-care-in-us.html
for my description and prescription.

An Ice Age in Our Future?

2011-09-13T02:06:00.006-04:00

Well, the subject of climate change has comes up from time to time. Often in denial.
A recent cite of evidence (Shrinking Artic summer ice.) has come up at:
http://economistsview.typepad.com/economistsview/2011/09/the-lack-of-ice-age.html#comments. Follow the comments for more references. I think I’ll also give some references in a later entry.

Climate change may seem to be a little off the path for an economics blog, but the economics of winter is very different from that of summer. So also the economics of a changed climate as well.

Now I’m not one of those climate change deniers. But neither am I quite in the camp of the global warmers, either. Global heat retention, yes, but that’s not quite the same thing.
The main problem is that we are dealing with a non-linear system, here, and non-linear systems are, well, non-linear, full of curves and unexpected changes. And reversals.

Most particularly, from the point of view of climate change, for the past million years or so, whenever it has warmed up- enough, we have an ice age: God turns on the air conditioner, to cool things down. NOTE: Ice ages work the reverse of how you might think they do. They do not start cold, and then warm up until all the ice melts. They start warm, and cool down until they stop, because... well, the air conditioner shuts down: Evaporation in the Pacific is no longer sufficient to drop more snow in Canada than melts in the summer.

Now some theorize that this is driven by external forces: changes in the orbital parameters of the earth. My own idea is that it is strictly internal, brought about by the peculiar nature of the ocean circulation of the earth, these days. (It may be phase locked by orbital parameters, but that is much different from saying the change in orbital parameters is the cause.)

Ice ages have only been happening for the last million and a half years or so. What about the ocean circulation could have changed?

Drake Passage 41 mil yrs ago: This created the Antarctic current, which just goes around Antarctica, and which basically cut off Antarctica from the rest of the oceanic circulation.

Isthmus of panama 3mil yrs This cut off direct flow from the Pacific to the North Atlantic, which would help cool the Pacific.

Bering straits got narrow about 1.5 million years ago, when they were probably in the neighborhood of 200km wide. A pretty gradual transition, admittedly, but there is a definite critical point in the transition, when the straits were narrow, and shallow, enough to block sufficient flow to the Artic from the Pacific to keep the North Pacific from overheating.

The theory runs like this: Because the earth is warmer, but the pole is still cold, there is increased heat transport from the equator to the North pole. The main transporter of heat is the circulation of the ocean. But because of the peculiarities of modern geography, for the Pacific, the North Pacific, to cool off this way , water must circulate through the Indian ocean and up the South and North Atlantic to the North pole. It can’t just go to the South pole to cool, as this is blocked by the Antarctic Current. Neither can it just go through the Bering Straits, which is too narrow and shallow to support a sufficient rate of flow. Because this current is so long, it is not strong enough in itself to equalize the temperatures in the ocean, in particular, to keep the North Pacific cool, and the Arctic relatively warm.

Meanwhile, what comes down must first go up. For snow to accumulate in Canada, it first has to evaporate, off the North Pacific Ocean. Ordinarily, evaporation in winter is less than the melting rate in summer, so the snow melts each year. But evaporation increases exponentially with temperature, while melting only increases linearly, (I got this from an old Dover book on glaciers.) so there is a crossing point, when the evaporation rate off the ocean goes above the melting rate for snow in Canada. See Diagram.
Note the Temperature and Quantity scales are rather qualitative. (Quantity is quantity of water.) The point is just to suggest that with increasing temperature, an exponential curve will eventually rise above any straight line.

And then you have to figure in the wind, which increases during ice ages, to an average 30km/hr or so. But that increases both melting and evaporation rate, so it would give an upward curve to both lines.

However, there is another feature about increased wind velocity, which we might dub “Quantum Earth.” What we mean by heat retention is that the average energy content of the atmosphere will increase. As the energy content of the atmosphere increases, so will the average wind velocity. As the wind velocity increases, so will the Coriolis force, which will cause more cyclones and such. This will happen. But if wind velocity increases enough, it might also cause an increase in the bandedness of the atmosphere. (This is a speculative thought: So instead of two, there would be three jet streams in each hemisphere, and four climatic zones. Basically a new one would appear at the equator, as the others migrated north. But, this would render the climatic gradient from North to South steeper, so the present temperate zone would take on qualities of artic air.

But of course, this bandedness idea is not necessary to the rest of the theory, as it is so far developed.

So ice ages are caused by warm ocean, particularly the Pacific. During ice ages, oceans start warm, and slowly cool, about 10 degrees C. And during the interglacial periods they increase that same 10 degrees C., much quicker than they cool, by the way. And indeed, since the end of the last ice age, oceans have warmed by about 10 degrees C. Check out, eg, “Vostok core data images.” Note CO2 levels also peak, prior to ice ages.

So the issue becomes, or the question is, are we headed for an ice age, or are we going to blow right by the conditions necessary for one by having such a massive quantity of greenhouse gases in the atmosphere, if that makes the difference.

And which ever one, how fast?

Unemployment, Average Wage and the Distribution of Income

2011-09-09T22:24:00.009-04:00

Employment and the Average wage.

Consider an economy where one person collected the entire national income in wages. Everyone else would be unemployed, or at least would be paid nothing.

We look at a model economy: The economy is static, that is, one whose size is some constant Y. There is only labor and labor is all paid the same, W: See: Diagram. GDI (Y) is Gross Domestic Income. Then the income of that economy is the box, any box actually, equal to Y = W x N, N the number of workers. But, this is also the production
of the economy (GDP), since everything produced will be consumed. (From the assumption of constant size, there is no change in capitalization. Capitalization changes the size of the economy. Capitalization is only a temporary expedient for consumption, since any increase in production brought about by capitalization must still eventually be consumed.)

Now, given the economy is static, what would happen if we raised (real) wages, to W’. Then the number of workers would have to decrease, to N’ where the area of the box would remain the same: W’ x N’ = Y = W x N. Unemployment would thus increase. Conversely, if we were to decrease wages to W’’, then in a static economy, the number of workers would increase, to N”, W” x N” = W x N, and unemployment decrease. (The curve of constant GDI, or Y, is a hyperbola, by the way.)
Now we can consider W to be just an average wage, the mean wage, of those actually employed, (but not including those not employed,) and the arguments are the same. If we increase the mean wage, employment will decrease, if we decrease the mean wage, employment will increase. We will assign a constant: c = mean wage at full employment..

We wish to find this mean wage, (actually in general the mean of the sum of all forms of compensation,) at full employment. Given: Present total wage; Number employed at full employment. Find c.

We now go to the real world, although we treat it just like our model.

So: Total Compensation of employees received = (BEA Table 2.1) $8264T;
Total number of workers at full employment (http://www.bls.gov/news.release/empsit.nr0.htm) =153.6M.

Then: c = $8264T/153.6M = $53,802, mean wage at full employment.

So we have c x N(total) = W x N, for all W and N.
Our formula for this model then would be c/W = n, where n = N/N(total) is the share of employed.

Since we are looking for unemployment rate as a function of mean wage, the variable n is equal to n = 1 - %u/100; %u equals the percentage unemployed So we substitute that expression for n: So:

w = c/(1 - %u/100)
c/w = 1- %u/100
%u = (1 - c/w) x 100

However, as a prescription, w as a function of %u is more useful. For instance, with c as defined above, = $53,802 per capita, for a 5% unemployment rate, we would want a mean wage of $56,634. This would be our target. Compare this to the mean wage of $59,188 for a 9.1% unemployment rate. Some suggest that the true unemployment rate is much higher, especially if we include underemployment. An unemployment rate of 15% suggests the mean wage is at $63,296, or nearly 12% too high for a tolerable 5% unemployment rate.

Of course this is not correct, as a higher unemployment rate than measured suggests a higher total labor force, and thus a lower c. Consider instead a total labor force of 160 Million. Then for the same values of total compensation paid employees, $8264T, we have c = $51,650. If we estimate 20M unemployed, for an unemployment rate of 12.5%, we have a mean wage of $59,029, or about 9% higher than the $54,368 mean wage required for 5% unemployment.

So the prescription is to lower the mean wage to c/.95, which will result in an unemployment rate of 5%. Since this is just an average, it can be done in a number of ways, depending on the inclination of policy makers. One way would just be counting the unemployed as employed. This of course would have no real effect. A real way would be to lower every employed person’s wage by the difference. This would provide money to employ the unemployed at the same average wage. Another way we might consider would be to lower the minimum wage. Assume 20% of the labor force works at or near minimum wage. Then by lowering their wages ah, $25,000 or so, unemployment could be reduced from 12.5 % to 5%.

Well, minimum wage is about half $25,000. So that method is infeasible. But the same could be accomplished by lowering say the top k% in income by 100/k times the difference. Thus transferring about $500,000 per person, on average, in the top 1%, would compensate for the difference between 12.5% unemployment and 5%unemployment. On average, since the top 1% consists of all those making more than $400,000. But it also consists of those making much more.

The existence of this solution implies that, where there is a great disparity of income, a consequence of that disparity is a high unemployment rate.

Indeed, the calculation could be modeled on percentages: A transfer of 7.5% of national personal income from the top 1% of the income earners to the rest of the labor force would decrease the unemployment rate about the same amount, from 12.5% to 5%

The philosophy is if the boss pays himself too much, he can’t hire as many workers. Those he hires he can’t pay as well, and he can’t train them as well. Jobs that need to get done don’t, or get done badly. In today’s society, there are many jobs that need to be done, but the bosses pay themselves too much.

Note the figure we have used: Total compensation of employees received. However, we can use other figures of personal compensation: eg: $12,091T (BEA Table 1.10 lines 2+11 Compensation of employees, paid + Net Operating Surplus, figuring the bosses also pay themselves out of corporate profits.) This merely affects c, and the absolute scale of the differences, but not the percentages.

(More) Homage to Karl Marx

2011-09-07T00:28:00.002-04:00

(More) Homage to Karl Marx

Ah, we have from the excellent Charles Smith, over at:

http://www.oftwominds.com/blogaug11/crisis-of-capitalism-8-11.html

that Karl Marx did indeed predict the financialization of the capitalist crisis.
So, the problems with using secondary sources...
Mr Smith's blog should be read, btw.

Link to The Authoritarians, by Bob Altemeyer

2011-08-31T01:37:00.009-04:00

Here’s a link to the home page for

The Authoritarians, a book by Bob Altemeyer
http://home.cc.umanitoba.ca/~altemey/ It’s a look at the psychology of Authoritarian followers and their leaders. Recommended as Authoritarians pose a danger to the liberty of the rest of us.

A quote:
“...Psychologically these followers have personalities featuring:
1) a high degree of submission to the established, legitimate authorities in their society;
2) high levels of aggression in the name of their authorities; and
3) a high level of conventionalism.
Because the submission occurs to traditional authority, I call these followers rightwing
authoritarians.”

It’s available as a (free) downloadable PDF. Haven’t read it all yet. So far well worth the read. Also available as a PDF is Comment on the Tea Party Movement. Which I have read, and also recommend.

I’d like to thank ScottS for his August 29, 2011 at 12:54 pm comment and link at "Naked Capitalism" on the Sunday, August 28, 2011 article:

"Matt Stoller: Power Politics – What Eric Schneiderman Reveals About Obama."
http://www.nakedcapitalism.com/2011/08/matt-stoller-power-politics-%e2%80%93-what-eric-schneiderman-reveals-about-obama.html

But See also attempter’s reply, for a view on Altemeyer’s own inclinations. As always, one is reminded that this kind of writing stands or falls on its own merits, that is, how closely it describes reality, what ever that is.

Change of Template

2011-08-18T23:16:00.002-04:00

I decided to change the template to something which allows a wider column, and hopefully more room so I can post bigger graphs, on the occaision. Hope you find the color scheme acceptable. Any complaints or encouragement please make in the comments section to this post.

Unfortunately, as a result of my change of email address, all my followers got disconnected. My apologies to you all. I will try to talk to Google. But please reconnect if you are one of them. Or if you would like to join them...

Thank you.

(Some) Homage to Karl Marx

2011-08-14T23:30:00.005-04:00

(Some) Homage to Karl Marx

Let us offer some praise to a famous man, much in disregard these days: Karl Marx. Not because we’re a Communist, or anything. European Socialism has worked much better.(Can it continue to do so?) We offer it because he predicted this, our present predicament. He didn’t get the initial cause quite right, because his theory of surplus value was off. And he missed some delaying factors. But once he gets rolling…!

To Marx capitalism was a dynamic process, and its destruction an inexorable result of the forces implicit in its structure. He did not predict the action of some other implicit forces in society, which delayed and altered the process. But we see these forces are eventually overwhelmed, and their existence apparently in no way alters the final conclusion.

So what did he predict? Increasing substitution of capital for labor. Resulting in increasing unemployment. Increasing concentration of economic power. Decline of the middle class. Crises and depressions, as supply increases while demand decreases. Increasing misery among the masses. Who eventually react badly. Pretty good for 130 or more years. Of course, he didn’t think it would take that long…But, hey, in good company with Thomas Malthus, who also made predictions that, while also delayed, still seem pretty inexorable.

What he did not predict: The period of increasing well-being for labor, prior to the beginning of the collapse he does predict. Rise of debt and the rise of finance. The rise and role of government as a temporary buffering factor, providing a balance of power between labor and the capitalist. Indeed, he apparently missed the role of government altogether.

However, these factors only change the timing, but not the final direction. Neither did Marx predict advances in technology, but this is not necessary to his theory. It’s covered under the increasing substitution of capital for labor. And as for the end result, well, who can say?

It is not necessary to demand, as Marx did, that the value of a good is determined by the amount of labor that went into making it. (He might have had this backwards. It seems more meaningful to say the value of a good determines the amount of labor that goes into producing it. Clearly, you’re not going to labor to put more value into a good than you’re going to be able to sell a good for. There does seem to be the scarcity factor, also.) It is only necessary to observe that the Capitalist must take his profit from the worker. The worker must be ‘exploited.’ The worker must produce more than he consumes. He must produce surplus value. This is necessary. Otherwise the capitalist goes out of business. So, in fact, does society.
Now if this surplus were consumed in other ways, say by the Capitalist in high living, or the government in taxes and the production of public goods, all would be well and good. But the capitalist faces competition, and so must either drive down wages to subsistence, (and/or expand the work day and/or speed the pace of work(!)) or further invest in capital. Either way, he increases the surplus produced, either by decreasing the size of the market, or by expanding the amount produced. But all capitalists have to do this, so this merely increases the competitive pressure, leading to a crisis and driving the less efficient (smaller) producers out of business. This leads to unemployment, the concentration of wealth, etc., until the system recovers and the cycle repeats itself.

Marx apparently missed this next part: Where wages increase at the rate of the increase of production, so the market expands, there is no increase in competitive pressure, and so no crisis. Of course this is only temporary, as long as a balance of power exists between labor and capitalists, so that labor can share in the surplus value they produce. As long as the buying power of labor expands at the same rate as businesses expand, the surplus is consumed. (We previously mentioned the possible use of inflation for doing this: http://anamecon.blogspot.com/2010/07/producer-consumer-problem-again.html )

This, of course, is only a temporary situation, depending of the ability of labor to force the capitalists to keep increasing their wages, And note this balance of power works to the benefit of the capitalists, by mitigating competitive pressures. But labor must eventually fail in this, because the supply of labor continuously increases, weakening labor’s bargaining power. Note also the role of government: Government provides the legal framework for labor to exercise its power. It also acts to effectively increase wages through redistribution and regulation.

The inability of labor to prevent the taking over control of government by capital contributed to labor’s downfall. This helped permit the capitalists to hold down the wages paid labor, while at the same time increasing capitalization. Marx got this, but here Marx misses the onset of the debt bubble. Because, by borrowing, labor, despite is static income, is able to increase its buying power, its ability to absorb surplus value and so mitigate the competitive forces which bring about crisis. But debt can only carry the economy so far, and when labor reaches the limits of its ability to absorb debt, Marxian dynamics takes over, now with a vengeance.

The Marxian crisis is precipitated as the market suddenly collapses due to the tightening of credit, as the banks perceive that labor has reached the limits of its ability to pay. (Here it was as a result of the Mortgage crisis.) There is a surplus of production. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. (And the tax base erodes. This weakens the power of government.) Wealth becomes increasingly concentrated.

Now the government tries to intervene. It has always served as a buffer, augmenting demand, but now its efforts increase dramatically, maintaining demand by increasing spending. But this project is doomed, because with the increased concentration of wealth, the capitalists have taken over the government, and have arranged so that they do not pay their necessary share of taxes. (Indeed, the situation is aggravated by the increased demands that the wealthy, with their influence, place on government. That is, they are involved in increasingly extracting wealth from government. Thus the government, once captured by capitalists, works to destroy the capitalist’s own market, the buying power of labor, by pumping out money and giving it to the capitalists, rather than preserving the market the capitalists need.) At the same time, the income of the government has decreased, due to increased unemployment. So the government, already under increased debt loads due to the increased strenuousness of its efforts to augment demand during the period that labor was also taking on debt, must increase its debt burden dramatically. (Actually the government does not have to take on any debt at all. It can always print money. See: http://anamecon.blogspot.com/2010/11/banks-are-forcing-debt-on-rest-of-us.html Increasing taxes on labor would not have helped, as this would have left total demand unchanged. Only politically infeasible increased taxes on the wealthy would have provided an increase in demand, as well as a mitigation of supply.)

But government can only do this so far, when the wealthy, who have now committed much of their savings to government bonds, since they are unwilling to lend to others, (and indeed labor, that is the market, is still overextended,) use their influence to put a stop to this process.

It should be mentioned that much government intervention is misplaced, due to the disproportionate influence of finance. By trying to maintain the debt bubble, that is financial institutions of disproportionaate size, the real economy is sacrificed. And since it all depends on the real economy, of course, the government must eventually fail in this project, as well.

So the government ceases its intervention, and now its own demand contracts, as it seeks to reduce its debt. There is an increased surplus of production as demand decreases. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. The tax base further erodes. Wealth becomes increasingly concentrated.

So we have a two step crisis. Assuming this crisis eventually resolves itself, (this is uncertain) the cycle merely repeats itself, and more quickly, because of the increased weaknesses of labor and government.

The crisis may not resolve itself, however, because of the debt bubble. The debt bubble cannot deflate, except by default, and this will be resisted at all stages by those whose wealth depends on it being maintained. Since these will have control of government, this means debt will be forced on labor, (and the smaller business owner, and the middle class, who thus will be swept into the proletariat,) as government seeks to reduce its deficit, as asset prices and wages decline, and the prices of commodities increase. Labor and the middle class will take on more debt to survive, but this can only be a temporary expedient. When it reaches its limits, the workers will then be reduced to subsistence and charity.

So we see that the capitalist, by pursuing power, acquires too much! He then must act to create the misery among the lower classes that propels the proletarian revolution.

So we have filled in some of the details Karl Marx might have missed. I say might have, because I haven’t actually read his stuff, (except for the Communist Manifesto) just reductions of it. We have also skipped the role of trade, and globalization, and the fact that the interests of the industrial capitalist and the financial capitalist increasingly diverge.

And in out analysis, we haven’t reached Marx’s ‘happy’ conclusion, the liberation of the worker from the yoke of capitalism, either. That is a matter of discussion all itself. Indeed, the matter reaches to the very survival of our civilization.

What is a life worth?

2011-07-27T22:44:00.005-04:00

Well, on the one hand, it is priceless. But from an economic point of view, a life is only worth about $4,000,000. Of that, $2,000,000 is the person’s worth to himself, and any others he provides for. The other $2,000,000 is the person’s worth to the rest of the economy. How much the rest of the economy benefits from his life’s labor. These figures are very rough, the mean, and of course vary greatly from person to person.

But how do we figure? First, we figure a person is only worth to an economy what he contributes to society. So we figure from a labor force of 150 Million we have a GDP of 14 Trillion. Round that to make the annual contribution to the economy per worker an even $100,000. Times say 40 years labor, about the number of years we suppose the average worker to work in a lifetime. $4,000,000. About half of that goes to the worker, about half to the rest of the economy. That’s the mean. The median worker only gets about$1.4M, but the median worker also probably contributes less than $4M. But what about the people who don’t contribute to the GDP? Well, here we’re counting them the same. Perhaps we shouldn’t. After all, someone who is compensated more than he contributes to society has a negative value to society. But we can also figure not all contributions to an economy show up in the GDP.

This has important ramifications. Such a heartless calculation actually suggests important ways individuals, and society, benefit. It means, for instance, that it is beneficial to individuals if we don’t spend too much saving a life. For instance, we wouldn’t want to spend $1 Trillion to save one life. Everyone else would be that much poorer. The economy would be out $999,996,000,000. That’s just dollars, but the equivalent in lives (valued at $4,000,000) is 249,999. It is 499,999 lives if we take the value a life is worth to the rest of the economy. We would be trading that many lives for one life. This is a bad deal for an economy. If it did this too much, it would literally kill itself.

What about pain and suffering? People are not just economic mechanisms. They have feelings. They feel pain. Can we put a dollar value on that? Sure. Let’s say $1 Trillion on a person’s feelings. Would we want to spend $1 Trillion on a person’s life? We just went through that calculation, and the point is the same. It would overvalue that life, and be a bad deal for the rest of the economy, which is to say, everyone else. It wouldn’t be fair. You can spend $1 Trillion to save one life, but you can’t spend $1 Trillion per person on everybody else, to save their lives. In fact, it works out you can only spend less than $100,000 per year per person. On average.

We can look at it this way: The economy exists to save, and is essentially saving, everybody’s lives, all the time. We’re all on life support. And since the average each worker contributes is less than $100,000 per year, that is all we can spend, on average, per person, per year.

This shows that it is important not to overvalue life. A society which takes excess precautions against the loss of life is the poorer for it. In a sense, it is literally killing more people to prevent the loss of fewer.

Hospitals already often use a rule of thumb. Their guideline is, (often) for spending up to $100,000 per year of life extension. This is equal to our total annual contribution to the economy per worker. For instance, consider extending the life of an elderly person. On the one hand, society typically does not gain any benefit. On the other, the elderly person has already contributed his share to society, and in a sense has earned this consideration, as a kind of savings. And it provides an incentive for people to keep working. But the figure of $100,000 per year is probably too high, considering the limits of the current health care system’s ability to supply health care, and the high rents already collected from it, and contributes to the high costs of medicine today. The rents imply that the benefits to the patient are far less than the $100,000 expended, so the actual value of life is lower than the nominal one. Indeed, if we consider the rent to be 40% of the system, that is, 40% is ‘wasted’ compared to the health care systems of other advanced economies, then the actual value of a person-year is $60,000. This suggests an economic value of $2.4M for a life, lower than our calculated value of $4M.

One interesting, if perverse, example of the extreme is the California death penalty, reinstituted in 1978, which has cost $308M per person (13) executed. Indeed, its total cost $4B, is a substantial share of the California deficit. We can make this calculation: $308M divided by $4M is the total destruction of the lifetime production of 77 people. In this case, the state is effectively killing (the productive capacity of) more people than the criminal ever did. From another perspective, the annual cost of $184M is equal to the total annual contribution of 1840 workers to the economy, almost twice as many as are actually on death row. The work of 1840 workers, wasted.

The EPA, now, gives a figure of $7.9 Million for the value of one life, almost twice the total economic value we calculated, or 4 times the net value of a life to the economy. http://thenewamerican.com/tech-mainmenu-30/environment/6013-epa-reevaluates-the-value-of-human-life

Not a very good trade off. Of course, there is also quality of life. Clean air is better than polluted air, even if the polluted air doesn’t kill you.

Regulations impose costs on producers. By not permitting the externalization of costs, (pollution of one sort or another for the EPA) which by the EPA’s calculations, would cause an increase in death (and disease,) things cost more to produce, and these costs are passed on to consumers. But it also results in less of those things being produced, and since resources are consumed in all production, less being consumed. So in the case of environmental regulations, other benefits accrue than just the saving of lives. Resources are conserved, other things which might be expensive to remedy are reduced. Such things might be considered to be included when the value of a life is overestimated.

Undervaluing life has its own costs. Negative externalities, excess pollution, is encouraged. Overproduction of stuff is encouraged. (This could be an argument for undervaluing life, where increasing the amount of stuff is equated to economic progress!) There are more accidents, as insufficient precautions are taken. There is loss of life and quality of life.

Note, when an economy is poorer, the capitalization per person, and what depends on it, the individual’s ability to contribute to society, thus the value of life, is less. Kenya for instance has a GDP per capita of $1600, $66B/41M but a labor force of 18M, so the average economic contribution per worker is about $3700, times 40 years or about $150K over a lifetime, (average life expectancy about 60, but do they have retirement?) so that is the mean economic value of a life, there.

Back to the US:
A child, on the other hand, has the potential to contribute $4,000,000 to society. But society has not yet invested in him. In fact, (our) society, on the average will invest somewhere around $350,000 in raising a child to adulthood, not counting the opportunity cost of parenting. Most of this cost is born by the family, so does not subtract from the $2,000,000 net contribution. A six year old, for instance, has about $70,000 invested in him, by his family: $60,000 direct costs, and $10,000 or so for his first year of schooling, which one way or another is borne by taxes. Now families are not the only ones to pay these taxes, so there is some subsidy of education by the rest of society. This omits cost- the opportunity cost to the self for his education, when, instead of capitalizing in himself, he could be doing something else.

In fact, it could be argued that the only real loss to society is this investment, and not the inferred profits society takes from his labor. And this investment is all society should be insured against. (This argument is also carried out in: http://en.wikipedia.org/wiki/Value_of_life )

Of course, the actual capitalization may be more or less than that figure, depending on the efficiency of parenting and the educational system, and the social system of the community. Much of the cost of the educational system now seems to be going to rent, judging from the reported decline in results. So the actual capitalization is less.

Further consideration indicates that the health care system may be considered part of the capitalization of individuals. Consider a child who needs a $50,000 surgery to survive and be productive. He is capitalized, by age 20, to $400,000, and so similarly for all medicine. Currently about $2.4T total health care expenditure per year, or $8K per person per year. This ups the capitalization for our six year old to about $120K. (There seems to be some double counting here, unless the family is fully covered from other, social, sources. One might also consider the fact that, except for young children, the expenditure on health up to middle age is probably less than $8K per year, and higher than $8K afterward.) Anyway, the capital investment per person would be $600K ($8K x 75years) + $350K or essentially $1M invested by society in each person, over their lifetime. On an annual basis about $13 K per year per person..

Other considerations enter in. For instance the average life is that of a 38 year old, round off to 40 year old. He has cost $670K capitalization by society, and produced about $2M. Net contribution $1.33M to society. Should we make this the average economic value of a life?

Suppose we were to nuke a city of 1M people. Which would be the loss to society?
Well, the fixed assets would be $180B ($54T/300M x 1M.) But the total loss of human capital would be about $670K x 1M = $670B. So the total is $850B (Compare this calculation with: http://anamecon.blogspot.com/2010/03/nuclear-equivalent-to-war-on-terror.html)
Here we are just counting what we have invested in the city, rather than the loss of any potential gains we had hoped to obtain from it. Just by the way, The wars in Afghanistan and Iraq have cost $1.2T since 2001, the equivalent, in terms of capital investment, of a city of 1.4M people, or larger than San Antonio, the 7th largest city in the US. Estimates of the total costs of the War on Terror run to $4T, but a figure of $2.4T (http://www.homelandsecurityresearch.com/2008/05/cost-of-war-on-terror/) places the cost at slightly more than Chicago, 3rd largest city in US. (If we were just counting physical structure, no loss of life, it would be almost 5 times the city of Chicago, more than the entire state of Illinois, leveled. This is equivalent to the 28 million houses of my earlier post.) Annualized, we are nuking the equivalent, inhabitants included, of Newark, NJ (pop 277K), or Greensboro, NC, (pop 270K) every year. 40 Years of the War on Drugs has cost about $1T, or by this calculation a city almost 1.2M population, or about the size of Dallas, the 9th largest city in the US. (If it helps with the imagination, you can imagine slightly larger cities just depopulated, since the actual physical destruction of buildings, homes and factories just adds on about a quarter of the value of destruction.)

One thing we see is that the value of a life depends on the calculation we are performing with it.

There is an implied social/moral choice in undervaluing or overvaluing a life. When you overvalue a life, you are sacrificing society for the individual. When you undervalue a life, you are sacrificing the individual for society. But sometimes society pays, anyway, when many individuals are sacrificed.

But of course, society is just made up of individuals. Or, individuals make up society.

Zero Interest and the Greek Problem

2011-06-28T23:23:00.003-04:00

One way of looking at the problem of zero interest rate is that lenders have a lot of money to lend, but no one to lend it to, as borrowers have a lot of debt, on which they are already paying a high interest. Big supply, low demand. This is the expected end state of the lend-borrow cycle. It is a stable state, which can only be changed by sufficient disturbance. Even the massive borrowing of the government is not enough to disturb it, so the amount of money lenders are holding must be even larger. The only way to get off this state is to eliminate the debt, so the lenders can go back to lending the money to the borrowers. Note, this does not require the lenders to give up their actual money, just their claims on the borrowers.

If we suppose the borrower has nothing, then the only actual loss to the lender is the claim on the future income stream of the borrower.

If we look at Greece under austerity, its income stream will be negative for the foreseeable future. Thus, the Germans, unless they propose to buy up Greece, will do themselves a favor by forgiving the Greek debt. Lending more will only result in larger default down the road. So they will also do themselves a favor by refusing to lend the Greeks any more money, but here the problem is the producer-consumer problem: The Greeks are a net consumer of German production, and thus stimulate the German economy (at the expense of their own. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html ) Without the borrowed money, the Greeks won't be able to continue consuming German production.

However, because of fractional reserve banking, Greek debt is collateral for other money. People borrowed to lend. And others borrowed to lend. That is, Greek debt is money, to its holders, and acts like money. If it disappears, those who borrowed to lend to Greece will have no collateral. The bottom line is forgiving the debt would result in a contraction of the money supply. Because the loans are highly leveraged, that is capital requirements are low, the contraction is likely to be disproportionate to the actual default. This would put additional deflationary pressures on other countries of the Euro periphery, and would also make it more difficult for these countries to pay their debts.

Refusing to lend the Greeks any more money will force the Greeks to pay their taxes, which they seem to be unwilling to do, and/or contract their public sector.

Of course, this does not address the other basic problem, which is there is too much money at the top of the economic pyramid. Since this leads to a contraction of demand in the rest of the economy for real production, there are no profitable real investments for this money to make. The financial sectors of the various nations are simply too big to be supported by the real economies. For US, see: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html )

Thus a large contraction of money at the top might be economically therapeutic. (And with less money to lend, interest rates might well go up, though this itself might stimulate inflation. Hmm...) However, the government should just guarantee the money of the depositors, (ie taxpayers and consumers,) rather than the banks, which need a shaking out anyway. Indeed, guaranteeing the banks just aggravates the problem.

Needs of Society

2011-05-31T20:59:00.003-04:00

Society has its needs. Indeed, a society must meet these needs, before it can do things like protect itself and its members. In a viable society, its institutions must each produce more that they cost society. That is they each must produce more than they consume.

If the worker costs more than the value of what he produces, there is no point for the capitalist to hire him. Only if he is worth more to the capitalist than his cost, is it worth the capitalist employing him. It can be said that a worker must produce more than he consumes.

Just as the capitalist must take his profit from the worker, so must society take its profit from the capitalist. Only when the capitalist allows society to take its profit from him, is it worthwhile for the society to have him around. That is the capitalist entity must produce more than it consumes.

The capitalist may do this two ways. He may pay his employees enough that they can contribute to the tax base, that is, that society may take its profits off the employees, or he may allow society to take the taxes directly out of his own profits.

Society must take these profits, since otherwise it will fail. One way society does this is to have a strong enough government to take its profit from its producers. That is the government must be able to collect enough in taxes to sustain itself. If its government fails to do this, that society will fail.

Now one can say that since what a capitalist does is make and build, taxes, and a government, are unnecessary. But what is necessary is the commons, those goods and services which government secures, and often provides. The common welfare, the common capital, is what taxes support. A wealthy society seems to need a large commons, and seems to need a large and strong government to maintain it.

We think we have a strong government. It is not. It is weak. It cannot collect enough in taxes to support itself, and maintain the services and infrastructure(capital) it provides. It cannot convince its people, or its wealthy, that they should pay their taxes. It must borrow, a sign of weakness. Also, it is corrupt. It is captive to many special interests. This is a sign of weakness. It wastes its resources on things that are not needed, that may of themselves be wasteful. And it fails to do needed things. It fails to protect and preserve its commons. It fails to preserve and protect its tax base.

The people borrow to purchase things from foreign countries, things the producers of the country do not make for its people. Society cannot produce enough to exchange for the goods and services it imports. Also a sign of weakness, and of either sloth or misapplied effort.

There are those who do not want a strong government, or at least do not want to pay for one. They think that they will be able to wage war with a weak government. They think they will be able to defend their country with a weak government. They think they will be able to defend their industry with a weak government. They think they will be able to secure and maintain their wealth with a weak government, and a small commons.

They of course do not think of it these terms They merely resent the fact that society must take its profit from them, and therefore they take steps to avoid this. They try to minimize the amount they pay labor, so the government cannot collect sufficient tax from labor to maintain itself, and having corrupted the government, they manipulate the system so that they do not have to pay the necessary taxes out of their own profits. Since these taxes are both inevitable and essential to the maintenance of any society, and a fair amount of taxes for a modern society, they work the destruction of their own society.

From the point of view of society, of course, those who demand more than they contribute, and at no matter what scale, who refuse to let society take its profit off of themselves, are worse than useless.

This is all according to the principle that it is better to produce than consume. A society whose members produce and give to society more than they consume will become unimaginably wealthy, while a society whose members consume more than they produce will consume its capital, and become poor.

The wealthy set the pace. They lead both by deed and example. A society whose wealthy elevate consumption over production, who refuse to let society take its profit off of them and instead insist of taking their profits off of society, is not viable, and will destroy itself. It will consume its capital and become poor, its institutions collapsing.

Leaders are leaders not because of what they take, but because of what they give.

Links on the rich, taxes, education 11-04-26

2011-04-26T01:46:00.005-04:00

Here are some links:

http://www.altweeklies.com/aan/9-things-the-rich-dont-want-you-to-know-about-taxes/Story?oid=3971382

Progressive taxes are unfair?

http://crookedtimber.org/2011/04/25/the-flip-side-of-noble-lie-side-economics/#more-19786

James Kroeger's comments offer an interesting argument: The rich are no richer even though they're richer. Because they're richer they drive the price of everything rich people like up, so there's no real gain in it for them. He argues therefore, that a (proper) progressive system, without loopholes, doesn't change the actual purchasing power of anybody. I don't think it is quite true, because the flip side of the argument is the poor are no poorer even though they're poorer. Because they're poorer the price of everything they need goes down, so there's no real loss to them. Mmm... Something else is going on... Still, worth the read.

This is a review of Hacker and Pierson’s book “Winner-Take-All Politics”

http://www.economist.com/blogs/democracyinamerica/2010/09/hacker_and_pierson_inequality

Here’s a fun little tax toy, but not to be taken too seriously, as nobody who makes $10 Million pays 36.3% of his income on taxes. (As we have shown elsewhere, http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html the rich pay on average about 17%.)

http://www.wheredidmytaxdollarsgo.com/

This is a piece on the financial problems besetting the nation’s public universities, particularly discussing the University of California.

http://realignmentproject.wordpress.com/2009/07/23/the-balance-wheel-of-social-machinery-universal-public-higher-education/

Part of the problem here, which I mentioned somewhere else, is the equalization of factor prices due to free trade, which eventually propagates throughout an entire economy. However, those sectors of an economy more exposed to international competition ‘equalize’ faster, most labor in particular. This implies that those sectors more insulated from international competition rise relative to the exposed sectors. (The exposed sectors are, in real terms, declining. Since this does not appear so much nominally to be the case, a great deal must be accounted for by hidden inflation. We should not be surprised then, at the steady increase in gasoline prices.) This accounts for part of the relative rise in costs of public education in particular, and government in general, as the tax base is eroded by declining wages, which are converging to the wages of developing countries, like China.

How economists can consider this a good thing entirely escapes me. Well, not entirely. This also accounts for part of the relative rise in health care costs. It also helps account for some of the housing bubble, the price collapse due to lack of demand due to decreased earnings by labor.

Who Really Pays Taxes

2011-04-23T02:53:00.005-04:00

Steven Landsburg, at "thebigquestions.com" considers the issue of Mr. Robert Kendrick, who, though wealthy, does nothing but drive and park his four cars. Can Mr. Kendrick be taxed? Steven Landsburg says no. Many others say yes.
____________

Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't use any, so nobody is really any better off. Good.

More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.

Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.

Above xposted to:
http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/#more-5896

To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.

From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.

So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.

Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.

--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.

A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---

What is your citizenship worth?

2011-04-04T00:42:00.006-04:00

What is your citizenship worth? A monetary value can be put on it. Is it still positive? Is it still worth something positive? Or has it become a burden? It is supposed to be a blessing.

Consider the negative value added to it by the national debt. At about $10Trillion or so, or about $33,000 for every man, woman and child, about $60,000 for every worker. And climbing. Taxes also take away from the value of citizenship, but with taxes, we buy things, and the value of these things adds to the value of citizenship. So add to that the benefits provided by society. Schools, highways, rule of law, etc. What should be a very significant net positive. Hard to put exact figures on them. Perhaps willingness to pay. Plus a premium. When you think about it, schools, law enforcenment, and many other public goods supported by our taxes, really are a bargain.

But in any case, citizenship is worth less than it was before, for most of us:

http://prospect.org/cs/articles?article=the_impunity_of_the_roberts_court

http://prospect.org/cs/articles?article=signing_away_our_rights

But not for some:

http://www.nakedcapitalism.com/2011/04/wachovia-paid-trivial-fine-for-nearly-400-billion-of-drug-related-money-laundering.html

Not exactly the 'shining city on a hill' mentioned by Ronald Reagan. Not exactly an example for others to follow, either. With increasing debt, budget cuts to education and so forth, loss of rights in the workplace, etc, the value of citizenship seems to be decreasing. What will happen if, or when, the value turns negative, the bribes for obedience are no longer enough, and propaganda can no longer hide the fact that citizenship in the United States has, for many, becomes an increasingly onerous burden? Will they sell their citizenship to the highest bidder, by which I mean the rights citizenship confers? Piecemeal, perhaps? Or will the people organize, and reestablish a new citizenship, under new terms?

Free Trade, Welfare and Debt

2011-03-26T00:17:00.005-04:00

We revisit the issue of free trade, using the more traditional diagram. Compare to:

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

See the first diagram, “Welfare Under Autarky.”
Regard the diagram first as a single good. Later we can consider it a sort of average of all goods traded by that country. Look first at the basic axes, Price and Quantity. The price of a good goes up as you go up the Price axis. The quantity of a good goes up as you go from left to right on the quantity axis. Any point X is the number of goods at that particular price. We put point X as that little bump on the S curve. Nothing happens here, because with that many of our particular good around, and at that price, nobody wants to buy that particular good. There’s more than people want, so they don’t have to pay that price, because there is someone around who will want to get rid of what they have for less.

To begin with, we have just the traditional Supply S and Demand D curves. The Supply curve goes up from left to right, because as price rises, producers are willing to produce and supply more. The Demand curve goes down, because as the price goes up, consumers are willing to buy less. Where they meet is the equilibrium point e. That is where price and quantity of goods offered for sale equals the price and quantity of goods demanded. Note that all goods are sold at the same price, P, irregardless of the cost of producing them. The cost is a point on the Supply curve. Naturally, when it costs more to produce goods than that price P, as at point X, they are not produced in the first place. Well, except when they are subsidized.

The pink triangle is what is known as the producer’s surplus. A producer at point Y along the Supply curve is willing to produce at that price. That is his break even point. But the equilibrium price is P, at which all goods like his sell, so the pink above is all gravy to him. His surplus. To a person at Y’ further up the curve, the break even price is higher, he has more expenses, but the price he gets is still the equilibrium price P, so he has a smaller surplus. He make less profit. Less gravy.
The pink triangle is the surplus of all producers along the S curve. Their profits, if you will.

The green triangle is called the consumer’s surplus. It is the difference between what the buyer at Z, say, is willing to pay, and the price P he has to pay. So that green below is his gravy. His surplus. The person at Z’ further down the D curve, is willing to pay is less, but he still only has to pay P. But his benefit is less. So the green triangle is the surplus of all consumers along the D curve.

It is just your basic supply and demand diagram. But, this diagram also describes the situation of a country isolated from other countries and without trade of any sort. That is why it is labeled “Welfare under Autarky,”. Its supply and demand are entirely contained in the country itself. It is called a Welfare diagram because the green and pink triangles describe the benefits that consumers and producers receive when buying and selling goods.

Now while the triangles are important what is really important is the box P x Q, outlined by the yellow hatching. The price of all the goods sold P, times the quantity of all those goods Q, is the total money spent by all the consumers, the total expenditures. That is the total cost to consumers. But that box P x Q, is also the total revenue received by the producers for those goods, price times the number of all the goods sold. They are equal, which is as it should be, because, in an isolated country, all the producers are the consumers, and all the consumers are the producers. They are the same people. Now some consume more and produce less, and others produce more and consume less, but on the average, everybody produces and consumes the same amount. Which is one way of looking at the situation. The other way is to say that the total consumption and the total production are equal. Everything consumed must first be produced. Everything produced must eventually be consumed. By the same people, the population of the country under discussion. This is the condition under autarky.

We will come back to those boxes later.

Now we open up the country to trade. Free trade. We start with the next diagram, “Welfare under Free Trade World Price Less than under Autarky,”
with equilibrium point where the supply and demand curve come together, at the point e. Under free trade, the country is exposed to the world supply of goods, which is much larger than the country’s supply on its own. In fact the world supply is such that, at price P’, any amount of goods can be bought. We can by 1 at price P’, we can buy 1000 at price P’, we can buy a million. On the world market. So the quantity we can buy is independent of P’, so the line, the world Supply curve big S, is horizontal at P’. This is called an infinitely elastic supply curve. So here the world price is less than the equilibrium price under autarky. Now, because consumers can buy goods cheaper, at the world price P’, they buy more, quantity Q’, so a new equilibrium point e’ is established where the world supply curve big S and the Demand curve D intersect. (The demand curve does not change. Demand does not change when the price goes down. The quantity demanded does.)

Because consumers can buy goods cheaper, at the world price, their surplus, their benefits, increase, to the larger triangle consisting of the regions A,C,D, and E. They may or may not be expending more, but they are certainly buying more goods, because they are cheaper. The producer surplus, however has shrunk to the new smaller, region B. This is because they no longer can sell goods at more than the world price, that is more than P’. Also, because of this, those producers which can no longer break even at P’ are driven out of business, so domestic producers can only produce Q” of goods, and still make money.

Now the good news is that total welfare, the total covered in color, is increased. The consumer surplus increased by C+D+E, while the producer surplus only decreased by B Total welfare has increased by the quantity D + E. This is the benefit of free trade.

Unfortunately, remember those boxes we talked about? They are now different. Total expenditures by consumers is now the new price P’ times the total quantity consumed, Q’, ( green and green and red hatched edges)while total revenue earned by the producers is only P’ times Q”, (red and green and red hatched edges)the total price times the quantity produced. But remember, producers and consumers, they are the same. Producers are consumers, on the average, and in total. That is, they are now spending more than they are earning, and the difference, (Q’-Q”) x P’, now goes to the trading partner. That is, their welfare increased, but they are buying more, and producing less. They are dis-saving. They are running a deficit.

There is a moral to this: Free trade can be used as an excuse for sloth.

Running a deficit is unsustainable. What is the remedy? Well, first, let’s look at the other situation: See the next diagram: “Welfare under Free Trade World Price Greater than under Autarky.”

Well, when the world price is greater than the price under autarky, the price is driven up for domestic consumers, too. They have to pay the world price, too, P' or domestic producers will just produce and sell to the foreign market. It also means that domestic producers produce more, so a new equilibrium price is established at e’. Once again we see that net welfare has increased over the autarky case. This time it’s the producer surplus that is increased C + D + E, while the consumer surplus is only decreased by C, for a net gain of welfare D + E.

Now lets look at the boxes: (They’re not hatched. You’ll have to follow them yourself.): The expense of consumption has gone from P x Q to P’ x Q” This may or may not be a reduction in expenditures, but certainly the quantity consumed has decreased. Meanwhile, the income, the revenue from production has gone up from P x Q to P’ x Q’. The difference, P’ x (Q’ – Q”), outlined in red, is income greater than expenditures. It is net income. And note that entire difference is what is earned from trade, from foreigners. Of course, the area below the Supply curve is basically expenses, so what is saved is only the triangle above it. Which seems to be a different, and lesser quantity, from what is dis-saved in the other figure, but this merits further analysis. Elsewhere.

Anyway, compare the two figures. One diagram describes the importer, the other the exporter, in the same trades. In both figures welfare is enhanced. In one, it is consumer surplus, in the other producer surplus. So total welfare is enhanced. But it is enhanced at the expense of one party going into debt to the other! But this is no difference than exchange between households. In fact, the diagrams can describe the exchange between two households. It doesn't have to be countries. It can be any two economic entities. But this is a bad joke, because the situation is unsustainable. The first party must pay off the other eventually, and then the diagrams reverse. Of course, that requires behavioral changes on the part of both parties. The consumer must become the producer, but the producer must also become the consumer, if he ever allows himself to be paid back. Or he can just buy up the other's capital and become rich. At the expense of his fellow man. There is more to this. There is a very real moral issue to one man working harder so as to make the other his slave. But note we have returned to the producer-consumer problem.

http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html

To be continued.

Fun and Games in Wisconsin

2011-02-23T22:54:00.000-05:00

Ah, things are not always what they seem. Check this out:

http://www.dailykos.com/story/2011/02/21/947947/-The-Koch-Brothers-End-Game-in-Wisconsin

So much for any principals they, the Koch brothers, might promote.

Don't forget to place your vote. I voted the first alternative, but hey, if the Democrats do connect the dots...

A Letter to the President

2011-02-17T00:42:00.000-05:00

Yesterday I sent this letter to President Obama:

The President of the United States
The White House
1600 Pennsylvania Avenue
Washington, DC 20500

Dear Mr. President,

My name is_____________.

I will not vote for you.

I voted for you in 2008. I will not vote for you. Neither will I vote for any Democrat, whom I have loyally supported in the past.

You can raise a trillion dollars for your reelection, Mr. President, and I will not vote for you.

Sincerely,

x_____________

I have sent similar letters to my Democratic Representative, and my Democratic Senator

Granted it’s a little short on explanation.

The explanation is basically here

I had hoped that Mr. Obama’s election would provide a remedy to what I see as happening to this country. I know now that it did not. I believe now that in fact there is no real opportunity, through the democratic process as it is now, to change things. I, and those like me, simply do not have the attention of our rulers.

I am not wealthy. I am not one of them.

As long as I continue vote, they will ignore me, and what I have to say. They may nod, but they will not act. As long as I continue to vote, I am playing the game by their rules. They are winning, and I am losing. And my country deteriorates, its heritage mocked and its future squandered.

Only if I, and millions of others like me, refuse to continue to participate in this charade of a democracy, will they pay attention. To us. And to the law.

The choice is yours. You can continue to vote, and have your voice ignored, or you can send them a letter, and refuse to vote for them. Any of them. And tell your friends, that you have done this. That you have sent the President a letter, and that you will refuse to vote for him, or any of them. That you refuse to consent to what has become essentially a kleptocracy, a nation governed by theft, where the poor and middle class, the worker, the people, are essentially being robbed, even of what they still have. Where you are essentially being robbed, of both rights and wealth, even of what you still have.

Even if they have not come for you yet, they will. They cannot help it. They cannot stop themselves. Even if you do not yet bear the burden of debt, you will. Only the very few, will have anything left for themselves. You already have less than you know, for the debt of your government is your debt. And who do you owe?

If you are satisfied with the occasional bone they may throw you, be satisfied. Play your part in their game, if you think thereby to prosper. Vote.

If not, then do what I am doing, and what I have done, and what I will do. Refuse to vote for any of them.

Send the President a letter. And tell your friends, your fellow citizens, who are also being robbed, of both rights and wealth, even of what they still have.

Only in this way can we recapture the government for the people. For ourselves.

Refuse to vote for any of them.

Send the President a letter.

And tell your friends, your fellow citizens.

Why No One on Wall Street Goes to Jail

2011-02-16T23:35:00.000-05:00

If you doubt my assertions
here

Read this:

http://www.nakedcapitalism.com/2011/02/taibbi-on-why-no-one-on-wall-street-goes-to-jail.html

This should make you mad.

An Observation on Marginal Revenue and Elasticity

2011-02-13T02:36:00.000-05:00

In the linear case: The slope of the Marginal Revenue MR curve (for a firm in imperfect competition) is twice as steep as the Average Revenue AR curve, (which is equal to the Demand curve.) This means the intersect of the MR curve with the Quantity axis is at the midpoint of the intersect of the AR curve with that axis. But this is the coordinate Q on the Quantity axis of the unit price elasticity on the Demand curve, which always lies on the midpoint of a straight line Demand curve. And this is the point where total revenue = P x Q is maximized. Thus the point of unit elasticity ( e = 1 ) is the point where total revenue is maximized. I probably read this somewhere.

Things are Worse than they Look

2011-02-10T23:52:00.000-05:00

Here are a couple of neat pointers: The first goes to a article at a good blog, which points to an interactive feature at the EPI (Economic Policy Institute) website.

http://crookedtimber.org/2011/02/10/income-growth-shares-over-time/

A commenter at CT links to:

http://www.youtube.com/watch?v=akVL7QY0S8A

a lecture by Elizabeth Warren titled: “The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net.” This is a good and informative lecture. Well worth the time.

Upside Down: Who the Government Really Gives To

2011-02-03T01:24:00.000-05:00

Here's a nice little paper that ties in with my recent post "Our
Government is Captive of the Wealthy"

http://cfed.org/assets/pdfs/UpsideDown_final.pdf

Here's the little blurb on the CFED site pointing to the paper:

"Among the most compelling findings included in the report is that of the nearly $400 billion spend by the federal government in 2009, most funds went toward tax breaks. However, more than half of these breaks went to the wealthiest five percent of taxpayers, who averaged a net benefit of $95,000 each. On the other hand, less than 5% of the federal expenditures benefitted the Americans earning the least. The bottom 60% of taxpayers averaged just $5 each.

This finding and a series of others likely evoke immediate frustration, pointing to yet another barrier keeping low- and moderate-income Americans from getting ahead and achieving the American dream. Yet, with this information comes unprecedented opportunity. As CFED Founder and Board Chair Robert Friedman elucidates, “Taken together, this suggests we have a monumental opportunity not only to save by curbing existing ineffective tax incentives, but to increase net savings significantly by extending effective incentives to the asset-poor majority.”"

The government taketh away. The government giveth.

Equal Opportunity

2011-01-31T23:53:00.000-05:00

The Right says it favors equality of opportunity rather than equality of outcomes. But equality of opportunity requires equality of capitalization, which the Right is not really in favor of. Opportunity requires the availability of resources.

Equal opportunity is impossible with a mal-distribution of wealth. The OECD notes “:…lack of equal opportunity may affect the motivation, effort and, ultimately, the productivity of citizens, with adverse effects on the overall efficiency and the growth potential of the economy."

Opportunity is (statistically) proportionate to wealth. Therefore, a greater equality in distribution of opportunity requires a greater equality in distribution of wealth.

Indeed, the distribution of resources producing equality of opportunity and that producing equality of outcomes are the same distribution, and is not particularly desirable: All outcomes are equal, and there is no opportunity.

So what we are looking for is that distribution of physical and social resources and opportunities, which most enables society to take advantage of its human resources. This is also the one that allows the greatest opportunity for individual advancement.

Individuals with superior abilities are born at all levels of society. For a society to prosper and compete, it must take advantage of these individuals. To do this, society must invest in these individuals. It must capitalize them. This requires different capital inputs at different stages in individual development.

The most important investment in human capital is in childhood, when the individual must be convinced of the desirability to capitalize himself: To invest time and effort into his own future, as a valuable and valued individual and citizen. First he must have the example of parents and neighbors, which means they themselves must receive adequate reward for effort and initiative. They must have opportunity for, and there must be examples of, advancement. Opportunity, to be taken advantage of, must first be perceived. This depends on the wealth of the community in which the individual is raised. A poor community will have few examples of success, many examples of failure.

The quality of the schools depends on the wealth of the community. In general, poor communities have poor schools: Undercapitalized institutions trying to instruct under-acculturated children. This is especially the case where there is no mixing of funds from other, wealthier communities, as through state wide tax support for education. Many superior individuals in inferior schools will be discouraged.

If the slope of wealth and opportunity is too steep, only the very best will be able to navigate it. And they likely will not get to the most suitable places for themselves. And even these will require some opportunity. Since opportunity is distributed, many of the best with inferior opportunity will not succeed within the parameters of their society, but will find themselves trapped at the bottom. This happens in the best of circumstances, but is aggravated with a mal-distribution of wealth and opportunity. Where there are inadequate avenues of advancement, the management of society will be left to the children of the previous generation of the successful, who will tend to have regressed to the mean. Thus, the society will begin to be managed increasingly by the average and mediocre. This will put it at a disadvantage with respect to other societies. The alternative is to find superior agents, who will then be expected to labor without commensurate reward, on behalf of an aristocracy they cannot join, and who thus will have their own motives for mismanagement. They will also increasingly be opposed by superior individuals from the bottom. Many will be criminals, who will have found paths to legitimate power blocked.

The Right considers redistributive taxes as redistribution of rightful gain, whereas the Left should consider it redistribution of capital. The right would then claim that those with the income have shown they know where to invest capital, since they have received the gains from it. The left would maintain that much of those gains come from the common capital, and must be reinvested in common capital for the common welfare of society, of which the individual is a part.

The whole point of the wealthy sequestering their wealth, isolating it from redistribution, is to secure opportunity for themselves and secure for themselves and their children the effective hereditary privileges of an Aristocracy. This necessarily reduces opportunity available to the non- wealthy. From their point of view, this is reasonable, since opportunity is necessarily also the opportunity to compete with the wealthy. Indeed, the inheritance tax could be called an opportunity tax., since it’s purpose is to prevent the perpetuation of a Plutocracy, and to open up the paths of power to others.

The Right is not really interested in the survival of their society as a society. They pursue the interests of persons as individuals, in particular the wealthy.
So society for its survival, must find the proper gradient of wealth and power, that those individuals all along the power spectrum are continually replaced by those of appropriate ability.

Our Government is the Captive of the Wealthy

2010-12-21T00:45:00.000-05:00

We no longer live in a democracy.
Our government is the captive of the wealthy. Such is their power, so complete the government’s servitude, that it is by many not even seen for the prisoner it is. The people are blinded to the evidence, though this captivity is the cause of their distress.
The elections, as they have proceeded, did not change this. Hidden money has flowed into the coffers of the candidates, cementing the hold the wealthy and influential have over them. The candidates did not speak to it. Our elected officials do not speak of it. The Congress is now seeded with the lackeys of the wealthy, who do as they are told. It will get worse for the people. Our government, no longer a government of the people, will remain the captive of the wealthy.

As their captive, our government does their bidding:
It allows the manipulation and degradation of its money, forcing the people into debt, and servitude to the wealthy.
It lowers the taxes of the wealthy, and the taxes of their corporations. At the same time, it borrows from them, and accumulates a ruinous debt, an unseen burden on the people, to the great gain of the wealthy.
It reduces its regulation of the activities of the wealthy, allowing them to exploit the people.
It rescues the corporations of the wealthy when they squander their assets. It places the burden of these debts upon the backs of the people.
It subsidizes their corporations when they cannot compete on their own, and guarantees their profits.
It defends and subsidizes an inefficient and inadequate system of healthcare, one increasingly ruinous to the people, and immensely profitable to the wealthy.
It neglects the assets of the people, and allows them to crumble. It refuses to capitalize and invest in the people's future.
It allows its educational system to deteriorate, that the people may be more easily manipulated and restrained.
It refuses to effectively defend the nation’s borders against unfair trade, and illegal immigration, driving down the wages of the people, and for the profit of the wealthy.
It sells the property of the people to the wealthy, at less than its true value.
It buys things from the wealthy at exorbitant prices.
It allows and encourages the destruction of the nation’s natural resources, to the profit of the wealthy.
It prosecutes an undeclared war in a distant country, squandering the people’s assets, and thousands of the people’s lives, as well as the lives of innocents. A war from which the wealthy derive unjust profit.
It raises the specter of Terror against the people, where little is seen. It makes enemies in distant places, to the profit of the wealthy.
It enforces laws that are harsh against the people, yet excuses the wealthy.
It compromises the people’s right to due process.
It placates the people with the people’s own money, and deflects the people’s anger away from the wealthy.
It allows the press to also become the captive of the wealthy, to speak with their voice, and to distract the people with the inconsequential.
It obfuscates the nature of its actions, and the actions of the wealthy, to the confusion of the people.
It silences the discourse of the people, with insinuations of unpatriotism.
It enacts laws which perpetuate and rationalize its captivity
It enacts laws which increase its powers to do these things, to the greater harm of the people.

The government does all this in servitude to the wealthy, to the harm of the people, and the nation.
And finally, the wealthy cause this to their own harm. The wealthy gild their plumbing with their plunder, with what they gnaw from the true foundation of their wealth, which is the people, for it is by the people’s toil and sweat, and forbearance, that the wealthy live their lives of privilege.
The recent elections have strengthened the grip of the wealthy on our government: The government will enact policies that further aggravate the disparity of wealth and income between the wealthy and the people. It will inflict hardship on the people, and further insulate the wealthy from the consequences of their misrule.
Make no mistake, this land is ruled by the wealthy, and they rule for their own pleasure, and at the expense of the people. They become an ever greater burden on the people, and treat the people with ever greater contempt.
But the people are pillar on the top of which they prance.

Links 12-11-10

2010-12-12T00:52:00.000-05:00

Here's some data on total debt:

http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html

Who is all this money owed to, hmm?

And this guy's a trip:

1. YouTube - Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The ...
Dec 2, 2010 ... Explaining the last 200 years of 200 countries in 4 minutes.
http://www.youtube.com/watch?v=kTSxo3175ec

1. Hans Rosling shows the best stats you've ever seen | Video on TED.com
TED Talks You've never seen data presented like this. With the drama and urgency of a sportscaster, statistics guru Hans Rosling debunks myths about the ...
http://www.ted.com/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen.html

Links On American Jobs of the Future

2010-11-30T01:23:00.000-05:00

I was just going to post this link:

http://econfuture.wordpress.com/2010/11/22/will-a-college-education-be-worth-the-investment-in-the-future/

But it merits further discussion: One consequence that he does not discuss, is that as the American college costs escalate, and returns to individuals stagnate, those seeking entry level management positions will be squeezed out by the cheaper foreign educated. The process is a little more complicated: More and more individuals will decline the expense of a college education as its returns decline, and thus fail to qualify for management positions. It will be cheaper to import foreign educated managers for the entry level positions, (who will then get promoted, etc…) and also to export other management functions, such as design and development. Thus American labor will increasingly consist of the underemployed and over qualified, and be increasingly managed by foreign nationals.

Advice for the college bound: Learn Hindi and get a passport.

This link too:

http://econfuture.wordpress.com/2010/08/27/outsourcing-jobs-that-cant-be-outsourced/

In fact, the entire blog is worth following. Scary though, considering who we are governed by.

The Banks are Forcing Debt on the Rest of US

2010-11-18T00:37:00.000-05:00

(Check out the videos in the previous entry.)

Government issues about 5% of the money that is in circulation. The rest of it is created by banks, when they make a loan.

When a bank makes a loan, it creates the money to loan out of nothing, just adding numbers on their computer. So the total money supply is the principal of all the loans outstanding, P, plus the amount issued by the government, G. This does not include money the government borrows, which, after all, is still just created by the banks.

The banks then charge interest on the loan, on money which they have created out of nothing.

Because of interest, the total money needed to pay off all loans will be greater than all the money loaned, ie greater than the money supply in ratio (P + G + I - E)/(P + G), where I is all the interest, (not the interest rate,) and E is all the expenditures of the financial industry, if I > E. (If I < E, the opposite will be true.) This implies (I - E)/(P + G + I - E) share of borrowers will always be unable to pay off their loans. Only when I = E is the system stable, and all borrowers able to pay off their loans. Where E is less than I, this leads to an exponential growth of both the money supply and debt. Only with an exponential growth in real consumption, and thus necessarily production, can this be maintained. Since this is ultimately impossible, this spiral has no (nice) ending.

What can the government do? From the equation, it would seem not much, since G appears in both numerator and denominator, and is only a small portion of the total money supply. However, if we consider that the interest comes due at the end of the time period we are considering, it would seem that if G were to increase by I-E over that period, the money supply would remain in balance. That is, the government, if it wishes to keep the economy from going bad, would ‘print‘ the quantity I-E, that is spend that quantity in excess of revenue, but not by borrowing it.

However, for the government to borrow that money it would also add to I. While this might be useful counter-cyclically, it would be less efficient than printing it. Further, it would add to the total debt burden, and thus fail to address the long range problem: It would still contribute to a debt spiral.

So, barring government ‘printing’ at least the quantity I-E, the financial industry, by holding expenditures, E, less than the interest, I, on all loans outstanding, creates a shortage of money. There is simply not enough money to pay off all the debt and the interest. So they force the rest of the system into increasing indebtedness to them, in order to pay off the debts they already owe.. They force individuals, companies, and governments to take out more loans or default. They have simply created a shortage of money needed to repay the loans and the interest, in the real economy, while hoarding the rest of that money to themselves.

The financial industry has been doing this for years. That is why individuals, companies, governments and their countries' real economies, are gradually being ruined. That is why, in the US, for instance, total indebtedness has been climbing to over $50 Trillion, now about equal to all the US real assets. Great Britain, and many other countries are in worse shape.

http://www.comstockfunds.com/default.aspx?act=newsletter.aspx&category=SpecialReport&newsletterid=1504
(Check out the charts. The links are at the top of the page.)

The figures are incredible when you think that it’s most everybody that’s in debt. Indeed, is so called deleveraging (paying off debt) even possible, with so much debt? After all, annual interest on $50 Trillion, is about $2.5 Trillion, at 5%, which is more than the entire revenue of the federal government.
http://en.wikipedia.org/wiki/2010_United_States_federal_budget

Government austerity, by forcing all future increases in debt into the private sector, will inflict tremendous hardship and damage to the real economy.

This 'crisis' is just another step down the road, where the financial industry, in their eagerness to own it all, kill the goose that lays their golden eggs.

Links for 11-04-10

2010-11-05T00:47:00.000-04:00

It's TV time: "Money as Debt"

http://www.youtube.com/watch?v=vVkFb26u9g8&feature=related

If you only ever follow one link, follow this one.
Here's a cleaner version:

http://video.google.com/videoplay?docid=-2550156453790090544#

The YouTube version has more and better followups.

Links for 10-29-10

2010-10-29T23:17:00.000-04:00

Well, now that I've acquired a following, I feel obligated to keep you entertained and informed. Since I'm too much of a klutzy writer to do it all myself, at least at a regular and reasonably rapid rate, I will instead provide you, pretty regularly, with pointers to what I consider informative and formative.

Some will be for fun. It won't be a complete record of where I've been, but it will feature a few of the highlights. I hope you enjoy.

"The Stealth Coup D'Etat: U.S.A. 2008-2010"
http://www.oftwominds.com/blogoct10/stealth-coup10-10.html

"Capitalism Uber Alles: How the American Working Class Got Brainwashed"
http://xrl.in/6kv6

"What Does Greece Mean to You? - John Mauldin's Weekly E-Letter"
http://stocktrendsreporter.blogspot.com/
This article is really about complexity and catastrophe, especially as it has to do with economics. One important sentence: "In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes."

"The Normalization of Sociopathology in America"
http://www.oftwominds.com/blogoct10/normalized-pathologies10-10.html: Yeah, This guy is really good. His blog isn't that easy to navigate, but it's worth the time.

So, I hope you keep coming back for more. Also, feel free to provide links of your own, in the comments. If you can't make the link active, I'll copy it to the blog.

What the income of the top 1% means to the rest of us

2010-10-17T00:19:00.000-04:00

The top 1% of the population now get 24% of the personal income of the nation. They used to get, in the 1970’s, 9% or so. Let’s say the difference is 15%.

What is that 15%? Well, that 15% is 15% of all personal income. (All personal income is about $10 Trillion.) So it is $1.5 Trillion. Now if this $1.5 Trillion was distributed to the other 99% of the population, they would be 15% better off. That is, on the average, they would each be 15% better off. That works out to $7500 for somebody earning $50,000. $1500 for someone making $10,000, etc.

Most of the money would be spent, since most of the rest of the people are living closer to the edge. Figure $1 Trillion spent. That makes for 10 million or so jobs. (Well, figure less. The rich do spend some of their excess money.) And figure $50 Billion or so per year to social security.

Millions would be lifted above the poverty line. It would reduce the need for government expenditures on the poor, and other social programs, by $60 billion or so. ($10K x .15 x 40 Mil people.)

Over $300 Billion per year would go to people who owed mortgages. Millions of these would be able to pay their mortgages. Not all would need it. But for millions it would make a difference. It would put a boost to housing prices, and put a big dent in the bubble collapse.

Now let's compare the income of the top 1% to that of the Federal government. 24% of the personal income of the nation works out to about $2.4 Trillion. The income of the Federal government for 2010 is $2.4 Trillion. The income of the top 1% is equal to the income of the entire Federal government. Federal government expenditures are going to be$3.6 Trillion dollars. The deficit is $1.2 Trillion, or half the income of the top 1%.

Of course we already have that the top 1% pay over 40% of all income taxes. Thanks FOX. All income taxes are $1.06 Trillion. So the top 1% pay $410 Billion or so, or just over 1/6th of their income, or 17%. This tells us where FOX is coming from. Since the government’s share of the GDP consumption is 25% or so, we would expect that percent, 25%, of income paid as tax, even under a flat tax. We may conclude that the top 1% pay a smaller share of their income than the rest of society. (Well, to be accurate, the tax end of the government share of GDP is only 17%. But since almost half of the poplulation pays little or no income tax, the tax paying half, minus the top 1%, pay a higher percentage of their incomes.) Now if the wealthy paid 25% of their income, that extra 8% works out to $200 Billion, or 1/6th of the current deficit. If they paid 40% of their income, as they easily can afford to do, (they would still be far better off than they were in the 70's,) the additional amount would pay about 1/2 the deficit.

But, as we have pointed out before, or elsewhere, they are largely the ones the government borrows from. Clearly it pays them not to pay taxes. And since they are largely in control of government....

See:

http://www.philstockworld.com/2010/08/21/who-rules-america/

Now to say they rule America is somewhat of a misstatement. A proper ruler rules for the benefit of all, if only out of enlightened self-interest. The more correct title is: “Who exploits America.” That they act according to unenlightened self-interest is to all our sorrow. For they have made themselves enemies of the rest of us. In fact, they have made themselves enemies to each other, and to themselves.

They wealthy have the power to save the government. But not the..inclination.
Justice Oliver Wendell Holmes Jr. observed that, "taxes are what we pay for civilized society." (See the link.) Evidently, the wealthy do not want a civilized society.

Do the rest of us?

Who we are governed by

2010-09-30T13:19:00.000-04:00

We are governed by incompetents. They are so incompetent they do not even know what competency looks like.

Suppose the economy grows at 3%. Then just by controlling where that 3% is spent, the government can control the direction of the growth of the economy.

Of course, that is just the first approximation. The economy also undergoes change, which does not show up as growth, but investment compensating for depreciation and other asset consumption. This percentage must also be controlled. Further, what is destroyed must also be controlled. It can tax what it wants to destroy, and it can then spend the money to direct investment. This will cause the money to be spent in the direction the government deems desirable. The economy will then grow in the direction the government desires.

And it does this already. A government which is 20% GDP can’t help but direct the economy. That it does so inefficiently, and without much direction, merely means both it doesn’t understand what it is doing, and that some, or a lot, of the ‘growth’ is directed to waste.

What we are talking about is Gross private domestic investment, nonresidential. (Although the government could control the residential as well. It can tax larger mortgages, a graduated mortgage tax. It can tax the building of some houses, and subsidize the building of others.) Nonresidential gross private investment works out to be just under 10 percent of GDP. So by directing that 10 percent of the economy, the government can make it grow any way it desired, and provide any services desired. Well, any way desired that was sustainable. It could do this simply by subsidizing desired services, and taxing the crap out of any other investment.

Of course, it wouldn’t have to be so crude. It could be more measured, taxing according to degree of undesirability, subsidizing according to degree of desirability. If they wanted more health care, they would subsidize its production. Pay for more doctors, more nurses, more hospitals. If they wanted less concentration of wealth, they could tax it. More windmills, subsidize; fewer automobiles, tax. Less financial, tax. More manufacturing, subsudize.

Think this is heavy handed? Look at the ham handed government we have now. Look at the effects of its policy. It is 20% of the GDP, controls more, and what direction do we get from it? Instead of planning, we have special interests, pulling government investment this way and that. Financial has increased to 6%, with more profits than manufacturing. Manufacturing gets little support, and has been in decline for decades. Just 1% of our GDP goes to industrial equipment. That’s the stuff that goes into factories. In agriculture, unsustainable factory farms are subsidized, while family farmers are not. Health care has increased to 17% GDP. (This is not in contradiction to what was said above. This is demand (subsidized) driven inflation as a result of inadequate supply (taxed). The government should do the opposite. Subsidize production, and tax demand.) Infrastructure deteriorates, at the same time demand for it is subsidized. Unemployment is subsidized, employment is taxed.

All this and more is the result of government policy, of its spending, taxation and subsidy, Either that, or the government, spending 20% of GDP, and controlling more, has no effect on the economy. That is, it is essentially impotent. Of course, the government can still be essentially impotent, spending 20% of GDP, if it is locked into its commitments, the captive of special interests, and cannot change the way it spends its money. Like the government we have now.

Thrift and its Virtues

2010-08-03T23:44:00.000-04:00

Earlier we got into the “paradox of thrift,” how if everybody tries to save more, everybody ends up saving less, because there is less demand so the economy ends up producing less. Money in the bank, maybe, but fewer goods in the store. This is held up as an example of a fallacy of composition: What is true for each individual on his own need not be true for all individuals acting together.

Lets look at Diagram 1. Savings and Investment are on the vertical axis, national income, or expenditures, on the horizontal. You can think of them both as in billions of dollars/year. This isn’t necessarily our economy. It’s just a toy economy, to help us think about real economies, our own included
Look first at the savings (S) curve. It goes up with the national income, which means the greater the national income, and the bigger the economy, the people want to save more. Note the red arrow: When national income is at that level, and the savings curve crosses the 0 (dollars) line, people are not saving at all. They don’t want to. They are saving $0. To the left of that arrow, national income, the economy, is too small for people to save, at this desired savings level, on the average, and people are dissaving, spending more than they earn. The investment curve (I) plots how much investors want to invest, depending on the size of the economy. Here the investment curve is relatively flat, which means that investors don’t care too much about the present size of the economy to decide how much they want to invest. This deserves a little explanation. Basically, what we’re saying is that return on investment does not change much, so neither does investor’s behavior. We’ll get into this later.

Now the size of the economy, the total national income is actually at (y), where the savings curve (S) and the Investment curve (I) intersect, at equilibrium point (e). This is also where the aggregate expenditure curve equals national income. (Desired Investment plus desired Consumption equals Aggregate Expenditure. See previous post. We’re still ignoring taxes, government spending, exports and imports.) This e is the point of Keynesian equilibrium. (The argument is in the previous post Diagram 4 and below it.) To recap the Keynesian argument roughly: Suppose the economy is a little bigger than at y, instead let it be to the right of where the S and I lines intersect. Then Aggregate Expenditure, people spending how much they want to spend, is less than income, or production.. So there is leftover stuff. (The difference is excess savings.) So producers cut back, there is less investment, which shrinks the size of the economy, (so there is less saving, too,) back to where savings and investment are equal, at e. When the economy is smaller than y, more stuff is being consumed than being produced. (People desire to consume more than is being produced.) Inventories shrink, so producers make more stuff, invest more to mak more stuff, which causes the economy to grow, (there is more savings,) back to where savings and investment are equal, at e.

The paradox of thrift arises when people try to save more, what ever the size of the economy.. In the diagram, this means the savings curve S moves up to S’. (This means in Diagram 3 of the last post that the C curve, desired consumption, goes down.) They’re trying to save a greater proportion of their income. But saving more means consuming less, which eventually causes firms to cut back on production, so the economy becomes smaller. So the economy now stabilizes where the new S’ curve intersects the investment I curve , at e’, which is at a smaller income, y’ (and consumption level.) The economy contracts, as does the quantity actually saved. (This means it is harder to save, and if people are paying off debts, instead of actually saving, then these debts become more difficult to pay off. The harder they try and save, the worse off they are. They have, on the average, less money to pay with. Now with an expansion due to accumulating debts, it is inevitable that the economy enters contractions when people start the paying off those debts. From this diagram, it is no wonder that Americans are such lousy savers, or even that they dissave, because according to this diagram,* it is, at least in the short term, the economically sensible thing to do.)

We notice a peculiarity of this diagram, and why it can only apply to a limited range of discourse: Suppose the desire for savings goes down. Then the economy grows to a new and larger size, because the desire to consume goes up. And the more the desire for savings decreases, the larger the economy grows. Indeed, the faster the desire for savings decreases, the faster the economy grows. Or we can put it the other way: The more the economy grows, the more the desire for savings decreases. There is another peculiarity: Since investment is always positive, the economy can never enter a region of dissavings. So perhaps this model is too simple to describe reality. We have to remember first that the diagram is a simplification of things, and so only applies to a small region about the equilibrium point. If we wish to talk about a larger region, a more realistic discussion, things get more complicated, and we have to use a more complicated diagram. And second, the diagram is only a guide to our thinking.

Something about the equilibrium point. As we described above, it is an attractive equilibrium point. An economy at any one such point tends to be stuck there, unless either the desire to invest, or how much people try to save, or both, changes. The economy doesn’t grow. And it doesn’t shrink, unless people’s behavior changes.

Something else the diagram does not explain. The Chinese save like crazy. Why doesn’t the paradox of thrift apply to them? Instead we see their economy growing enormously fast, almost as fast as physically able. How can this be?
.
So, consider Diagram 2. Here the investment curve is much steeper, steeper than the savings curve. That is investors are very sensitive to the economy’s income, or output, its size, even more than savers are. And here we see, instead of the paradox of thrift, the virtue of thrift. We see here that, as people desire to save more, (that is the S curve moves to the S’ curve) the equilibrium point e, which tells us the size of the real economy, where the savings curve and the investment curve intersect, moves up the investment curve to e’, and the income of the economy, its size, grows from y to y’. And here, where people desire to save less, and so consume more, on S’’, the economy shrinks, to e’’. So where investors are sensitive to the size of the economy, we see a much different effect.
But how does the Keynesian argument for stability about the equilibrium point hold up with the investment line steeper than the savings line. Well, it turns that upside down. Greater investment leads to reduction of inventories, so investors are encouraged to produce more, which means they want to invest more. The economy is going to ‘want’ to grow. The equilibrium point e is going to ‘want’ to move to the right, and up. (This would also imply inflation, if we were talking with money.) Savers are also going to save more, since the economy is growing. The economy is in disequilibrium (The thing doesn’t seem to have a limit, but we must realize this is a ‘linearization’ of a non-linear, complicated, phenomenon, and purely physical constraints would seem to set a limit as to how fast an economy can grow After all, you can only build so fast.) Lower investment, on the other hand, leads to surpluses, because savings is greater than investment, so more is being produced than consumed, so this leads to even lower investment, etc. The economy is going to ‘want’ to contract. The equilibrium point e is going to ‘want’ to move to the left, and down. (Again there seems, in this linear example, to be no limit as to how low investment, or rather how large disinvestment, can go, unless other, perhaps physical factors intervene. Note, too, that disinvestment equals dissavings. This raises an interesting question in a real economy: If people are dissaving, and businesses are still (positively) investing, where’s the disinvesting? There’s got to be a lot of it somewhere.) So our equilibrium point is an unstable one. The direction an economy proceeds would seem to depend on the way it was already heading. What ever direction it’s heading in, it continues heading in that direction until other factors intervene.

But what are we looking at?. Let’s suppose investment is 10% of the economy. Then investment makes the difference! If investment goes down by half, the economy’s going to contract, so less will be invested so the economy’s going to contract some more so… Instead suppose we increases investment by half. Then the economy’s going to grow, so more will be invested so the economy will grow some more so...

It isn’t savings that makes the difference at all. It’s the sensitivity of investors to investing. If investors are investing a lot, they are going to produce into shortages. Their inventories will go down, and they will want to produce more. They will invest more. If they are investing a little, they are going to accumulate surpluses, and they will want to produce less. They will invest less.

It’s purely the amount of investment that determines whether the economy is growing or contracting. It becomes a self-fulfilling prophecy: Low investment leads to a contracting economy leads to lower investment. High investment leads to a growing economy leads to higher investment. So what are the factors that affect investment?

Now if we consider the investment curve as a straight line we’re sort of stuck. How does an economy get from flat in Diagram 1 to steep in Diagram 2. Well, there is no reason to consider the investment curve straight. Look at Diagram 3. Here the Investment Curve is curved. Let’s interpret this. At some low rate of desire for saving, we have here also small investment, in equilibrium at income, or expenditure, level (y). (We can’t have savings any lower. It won’t touch the curve. That’s a problem.) As people try to save more, (the S curve goes up,) one of two things can happen: Investment can go up, and enter a virtuous cycle of thrift (y’), and the economy grows, or investment can go down, and we have the paradox of thrift, and this can even become disinvestment, and dissaving (y’’). The economy contracts. (Where we have drawn the curve, which is actually pretty arbitrary. The curve could be higher, or lower, left or right, could be tighter or looser.)

And this depends only on the behavior of investors! Attitude. But: We suppose other, external, factors figure into the economy. After all, whether the donkey pursues the carrot is a matter of attitude. But the carrot is an external factor. And the behaviors of investors don’t occur in a vacuum. Suppose, for instance, the economy had accumulated a lot of debt. Then consumers might want to save more, ie pay off more debt, and then consumers will have less to spend. So demand will shrink and so will the desire of investors to invest. And we enter the region of the paradox of thrift. Where we have drawn the curve, in the diagram, this is below the 0 line, so not only is less being saved, as a result of the paradox, but there is dissavings. And disinvestment. But, with greater savings, the economy could still grow, IF investors invested more to compensate.

There is something else peculiar about the curve. Below and to the left of where the savings line touches the invetment curve at just one point, at e, all points are stable equilibrium points. So if the economiy is somewhere here it will tend to stay put, unless behavior changes. But above the point e, all the equilibium points are unstable. Suppose, then, the economy enters this region. We would expect it to grow and grow, until something else turned it around, and changed the behavior of investors, and the economy came back down to the point e. (In this simple model, the behavior of savers would have to change, also.) Then we would expect it to grow again, until, say, something else happened to turn it around, and it fell back down to e. What we would seem to have would be a bubble up economy, where bubbles formed, grew, popped for one reason or another, and collapsed back to the semi-stable point e.

And consider e’’, again. It’s a little hard to imagine circumstances where an increased desire to save could result in dissavings, and disinvestments. Stagflation, perhaps? Remember, we’ve really simplified our economy, so much so that when we change investment, we have to change savings. In a real economy, other things can happen. Here we don’t have government spending or taxes or imports or exports. We’ve hardly mentioned money. Government deficits?

But:
Why should the curve be upward? Why not downward as the Diagram 4?

Then for some maximum desire for savings S there will be one equilibrium point e, but as desire for savings decreases to S’ one of two things may happen Above and to the right of e, on the I curve, we have stable equilibrium points, so the economy will tend to become fixed, depending on the desired rate of savings. The paradox of thrift applies, so lower desire for savings (the S curve moves to the right) will lead to a larger economy. But below the point e, we have unstable equilibrium points, so it will tend to bubble down. That is we might expect it will contract, until something causes it to change direction and expand to e, then it will contract again, until something else turns it around and causes it to expand back to e, and so forth. This is also the region of the virtue of thrift, where greater desire to saving leads to a larger economy.

So, we have 4 diagrams. Each has its virtues, and each has its problems. Which is it? Well, that probably depends on the circumstances, and it’s probably another diagram. Stay tuned.

*The introductory text book "Principles of Economics 4th Edition," by Ruffin and Gregory has the Investment curve perfectly flat, independent of relative size of the economy. On that diagram, while the size of the economy is inversely dependent on how hard people try to save, the amount saved is always the same. I think it is more realistic that investment should somehow be increase with the size of the economy. But then, we’re arguing that the diagram isn’t very realistic anyway.

A Brief Keynesian Digression

2010-07-21T23:34:00.000-04:00

This will help with the next posting. Its not necessary, but if you don’t understand it you will have to take some things on faith.

Over the long run, Consumption and Income (or production) are equal, for economies of all sizes. Everything that is consumed must first be produced. Everything that is produced is pretty quickly consumed. Yes, there are inventories, but they are seldom for more than a few months, and they usually stay more or less stay the same. (Every economy, especially modern ones, is at most, only a few months from disaster) Let’s draw a picture, Diagram 1, with Consumption on the vertical axis and Income on the horizontal axis. Then the line where they are equal, for economies of all sizes, is the 45 degree diagonal. If we draw a point above this 45 degree diagonal, the economy it represents will have Consumption greater than Income. Below this line, Income is greater than Consumption. So any economy we talk about, is in the long run, going to be a point on this 45 degree diagonal. If we talk about a 100 billion economy a, it will lie on this line, where its Income and its Consumption are equal. The same for a 200 billion economy b, or a 500 billion economy c.

Now think about Consumption. If our economy is really little, we are going to want to consume more than we produce. If our economy is bigger, we are going to produce more than we want to consume. (Then we are also going to want to save, or more properly accumulate.) We represent what we want to consume by a line C. Diagram 2. This line is called a curve, by economists, lest they forget, as they sometimes do, that it really doesn’t have to be straight. The distance between this line, and the bottom of the graph, is how much we want to consume, at each level of income y. It slopes upward because the greater people’s income (y), the more they want to

Consume. Now this line C, this curve, crosses our 45 degree diagonal, at point e. Below, to the left of this at point e’’ for instance, our economy is little, and people are going to want to consume more than they produce. (In this simple model they can’t, of course. They have to starve) So the Consumption line is above the 45 degree diagonal, more desire to consume than income. To the right of e, at e’ say, our economy is larger, and people are going to have leftovers from what they want to consume, which they will want to save. As our economy grows bigger, and moves further to the right of e, people will want to save more and more. This is shown by the vertical distance between the 45 degree line, and the Consumption line C. Note they are also consuming more and more.

Now this Consumption line is sort of a matter of attitude. (And other things. In fact, this whole argument, is a matter of attitude. As is the diagram, except for the fact that the economy is on the 45 degree diagonal. Notice we’re also ignoring little things like taxes and government and exports and imports.) If people feel like consuming a greater proportion of their income, for a given size of their income, the Consumption line would be higher. This is shown by curve C’ in Diagram 3. At the size of income marked by y, though people are neither saving or dissaving at C, at C’ they want to consume so much they would be dissaving.

Back to the C curve, and Diagram 4. At income y, C is below the 45 degree diagonal, and the difference is how much the people in the economy want to save. (Want to consume + want to save = what is produced.) Now, where can this savings go? It has to go somewhere, because in the long run, economies cannot accumulate stuff. Economies do not save. (This is particularly true of market economies. A company that ‘saves’ too much of its product ends up going under. Well, maybe except for banks. But saving money is not saving stuff.) Nobody is going to make 50 million dishwashers, or 50 million cars, so that 5 or 10 years down the road, they will have them to sell. (Inventories that are accumulated are for at most a few months, and we’re talking about longer than that. Also, note that services cannot be saved.) No. They’re going to want to build a factory to make these things. They’re going to want to invest in a factory. That’s where all the savings goes, investment, and so savings is equal to Investment. (Remember, we’re talking about real savings. Right now, people are money savings like crazy, or trying to. But it is not being invested. So really, they are not saving anything. THey are redistributing demand, both in the present, and the future.)

Now Investment uses resources and is therefore like Consumption. Desired Investment also depends on the Income of the economy, so it can also be represented by a curve, and if we take this curve for desired Investment and add it to the (desired) Consumption curve, we end up with a total, the sum of Consumption and Investment, which economists call Aggregate Expenditures, or AE curve. Actually, what we have here is Aggregate desired Expenditures. Now where wishes, that is the AE curve, meet with reality, that is with income, or production,(y) on the 45 degree line, at e, we have the size of the real economy. This is also where desired savings is equal to desired investment. (We cheated and used a different argument, that real investment and real savings really have to be the same. The Keynesian argument with desired savings and desired investment is more complicated: Suppose the economy produced more than at e, at e’ say. Then the economy would be really producing more than people wanted to expend (at the AE curve.) So with all this extra production, inventories will expand, producers will want to cut back, they will invest less, and the economy will fall back to e. Suppose instead, the economy produced less than at e, at e’’, say. Then the economy will really be producing less than what people want to expend. Inventories will shrink, producers will see this and want to produce more, so they will invest more, and the economy will grow, back to e.)

Now this diagram doesn’t explain very well how economies grow, and move up the 45 degree line as both income, that is production, and consumption grow. Apparently, the AE curve has to keep shifting upward, which means either desire to Consume, or desire to Investment, or both must also keep shifting upward.

In the diagram, though, the economy is kind of stuck at e, because we can’t save more than we invest, and we can’t invest more than we save.

From this diagram, we can draw a simpler diagram of just the relationship between desired Savings and desired Investment. We do this by simply subtracting the Consumption curve in the diagram. If we subtract the C curve, that is shift the C curve down to the horizontal axis (down the orange arrow) and keep the other lines in the same relationship to each other, we have a diagram of the relation between desired savings and desired investment. Diagram 5.

As in Diagram 4, the economy we are talking about is really where the lines cross, at e, where desired Savings equals desired Investment. This is the diagram we will be discussing in the next posting.

Who do you owe - An answer.

2010-07-14T23:34:00.000-04:00

Well, look what we came across:

http://www.oftwominds.com/blogjuly10/con-of-decade07-10.html

Not easy to navigate to Part II: Go to bottom of page, click on 'blog,'
then down that page to the list of entries for July.

The Producer-Consumer Problem, Again

2010-07-03T23:56:00.000-04:00

In a earlier post we talked about how a net-producer (Germany) ended up with all the money, and the net consumer (Greece) ended up with lots of debt. Apparently the same thing is happening in the US. US corporations seem to have an extra $1.84 Trillion in cash lying around. And consumers…well.

You will remember the producer-consumer problem: No matter how much cash the consumer starts with, the consumer has to keep spending it, and eventually the producer ends up with all the money. Then the system crashes. The problem is more general, since any difference in relative gains results in one party ending up with all the money. For instance, if we imagine a system of company and labor in balance, and then, say, labor is given a slight cut in pay, eventually the company is going to end up with all the money. And then it’s the company store. 16 tons. That’s because the equilibrium between company and labor is an unstable one: The slightest disturbance and it heads, one way or another, for a crash. (It could head the other way, labor ending up with all the money, the company in bankruptcy. But it hasn’t.)

Now an enlightened government, (we don’t have one,) would either take steps before things got out of hand, (like say around 1990,) or arrange things so that the equilibrium between company and labor was, locally, a stable one. Graduated asset, or property taxes might by one way. Graduated income taxes, one for the corporation, one for labor, though trickier, would be more efficient.

The idea is actually tax and subsidy: Suppose the system of company and labor in balance. Then there would be no net transfer of money, and no taxation or subsidy by the government.. Suppose the company got a little ahead. Then there would be a slightly greater tax on its earnings than this increase, which would, directly or indirectly, go to labor, to bring it back down to equilibrium. If labor got ahead, there would be a tax on labor, which would go to subsidize the company, to bring the system back to equilibrium.

This oversimplifies things. Of course, you want the system to grow. That means business has to make a profit. It has to have the extra money to invest in itself. But this profit would have to be shared, since you want labor, (demand) to grow apace. One way to do this would be to induce inflation. Suppose with a 3% inflation rate, the company has a nominal 6% profit. The government spends the extra, inflation inducing deficit on labor, effectively sharing the profits. Hmm. Interesting. Another motive for moderate inflation. In fact, the whole thing could be managed through the rate of inflation: Set inflation to over half the nominal profit rate of business to transfer resources to labor, so demand would grow faster, or to under half, to transfer resources from labor to business, so supply would grow faster.

Another Hmm. We’ve been at very low inflation for along time now. We should not be surprised, then, that corporations have a lot of extra cash. There’s been a lot of transference of money from labor to business in recent years. So not only do we have grounds for policy, but we have an explanation, in part, anyway, for what is now happening.

As grounds for policy, though, it has problems, most noticeably the delay between the time the money is actually pumped into the system and the inflationary effect. Perhaps business profits could be anticipated…

But what is to be done with the current corporate cash glut. Well things are way ($6000 per capita) out of balance. The problem, of course, is that the corporations have no motive to spend the money on increased production: Consumers (labor) don’t have any money to spend! So corporations have to be induced to give it up, or it has to be taken from them, or government can print more money to give to labor, to compensate.

So we have a financial asset tax on corporations. And a tax holiday for labor.
But, our government has neither the guts, nor the sense. And, of course, there’s all those bonds.

By the way, if corporations have been taking money out of the system in equal amounts over the last 10 years, about $184 Billion per year, then that contributes about 1.3% per year deflationary pressure, that is inflation would be 1.3% more without their hoarding all that money.

Savings and Investment

2010-06-30T23:53:00.000-04:00

There is some illusion about people saving, for retirement, for example. People do not save for retirement. They may think they do. But the reality is society invests to support its people, of whom the retired are (will be) a part.

What do we mean? We mean that it is only in the present that society supports its members. It doesn’t ‘save up’ present production to support them in the future. It doesn’t take past production to support them in the present. In terms of what is being produced, it only has what is currently being produced, to support its economy. Yes it has inventories, but usually these are at most a few months. Society doesn’t accumulate (save) a 20 year supply of dishwashers, so it will have them when they are needed ‘down the road.’ Society doesn’t do this with anything.

The closest society does to this is invest in its productive structure. Roads, structures and machinery last a fair length of time. It builds these things in the present, so it will have their productive capacity in the future. It has built these things in the past, so that we have them now. This is physical capital. A society builds capital in the present, so it will have the productive facilities to support its people in the future. In order to do this, it takes away some of its current production from direct consumption, and invests it.

Now the more society builds these things in the present, the more productive capacity we will have in the future. The more productive capacity we will have in the future, the better off, materially, we will be. Assuming, of course, we have the energy to power it. And the labor to direct it.

In particular, the greater comfort we will be able to support our retirees, and the rest of the idle class. And of course, everyone else. And everything else. Because production must also be supported.

Now the way we decide how to divvy up this production is with money. Those who spend the most money get the most goods and services. Those who spend the most, in the long run, are those who have the most. So if you save money in the present, in the future you will have more money to spend.

Now the theory is that the banks will take this money and loan it to someone who will invest it. That is, take current production, and use it to build more productive capacity, so there will be more goods and services to divvy up in the future. This isn’t the only money that does this. Corporations make profits, which they may spend to increase their productive capacity. Some of government spending may go to increase productive capacity, as with some of the ’stimulus.‘

So what happens instead when the banks take your money and squirrel it away?
Well, you’re still saving, but society is not investing in its future. Its capital is not expanding. So the pie is not growing any bigger. So down the road, when you retire and spend your savings, you may have a bigger share of the pie. But since the pie will not be any bigger, everyone else will, on the average, have a smaller share. This includes other retirees, say those on social security, and those who still work, who are supporting you with their labor. It also includes those other things, the productive facilities which must be supported to maintain present production and expand production in the future. So your individual savings, when you spend it in the future, takes away from everything else, including supporting the production on which it depends.

Now, if this were just you, this would not be very significant. But if there is a substantial share of savers, and the banks are not investing the money, (or investing it badly, say in housing or commercial real estate) then all the other people will have a significantly smaller share. And so will production.

What does this mean? Well, under these circumstances, savings is deflationary in the present, and inflationary in the future. In the present, money is being taken out of the economy, and since it is not being invested, (spent on capital) and put back in the economy, there is continually less money, chasing a constant supply of goods. And since the money was not invested, but merely saved, productive capacity is not expanded, so the quantity of goods will not increase.

So when in the future the money is taken out of savings and spent, along with the money that was there before, we will have inflation. Over time, these two effects could be expected to cancel out. What won’t cancel out is a big increase in money supply caused by deficit spending. If this is invested to expand the pie, well and good. If squandered, so the pie still does not expand, much the worse for inflation. What also won’t cancel out is the contraction caused by the deflation, which is that the decreasing amount of money chases a quantity of goods which is also decreasing., though not as fast., which does tend to mitigate the deflation, at the expense of the destruction of productive capacity. The pie actually shrinks.

So this is what is caused by the financial industry doing its retrenchment thing. Now we have already pointed out that the financial ‘industry’ is much too big, so its hoarding of money (rather than investing it in real industry) can be expected to go on for a while. To the detriment of the rest of the economy, since it means that the money supply in the rest of the economy can be expected to decrease, thus robbing productive industries of their nominal profits. Since these industries are losing money, they are not investing, they are cutting back. Still. (Add to this the contraction brought about by the trade imbalance! See: April 2010 The Effects of Unbalanced Trade)

The problem, of course, is that as long as these banks are in business, they’re going to be sucking the money out of the economy, so destroying the economy on which they depend. The government with its stimulus tried to counteract this action. It didn’t, much. It can’t. The banks are sucking too much, too fast.

So. In Economics, savings and investment are equal. At equilibrium. But not in the economy we are experiencing, where savings and investment are not equal.

Just by the way, elementary Keynesian theory predicts a reduction in a nation’s income with an increase in its ‘thrift.’ It assumes savings increases with income, but investment is relatively independent of income, or flat. How to explain the Chinese, though, eh? Next time.

What is valuable?

2010-06-24T23:37:00.000-04:00

What is valuable? There seems to be some confusion here. This is because what is valuable to an individual need not be valuable to a society. For instance, money is wealth to an individual, but to a society, it is…. well, nothing. To an individual, it is demand over the production of an economy. For a society, its only use is as a means of allocating… real wealth.

How does it do this? Well, it does it in a most peculiar way: Money values most what is least valuable to an economy. And this is necessarily so.

Consider, for instance, which is more valuable, a dollar’s worth of gasoline, or a dollar’s worth of greeting cards. Well, as far as money, or the market, goes, they are the same value. But from the economy’s point of view, the dollar’s worth of gasoline is more valuable, because you can do more with it. For instance, you can have a modern economy without greeting cards, but you cannot have one with out gasoline. We’ll call this a real valuation, as opposed to the monetary one. The monetary valuation undervalues the real value of the gasoline, and overvalues the real value of the greeting cards.

Consider the resources that go into a car: the energy, the materials, the labor. In money terms, these things together add up to less than the price of the car. That is why we build the car. Because the maker of the car sells the car for more than the price of the resources .that go into the car. But in real terms the combined value of the energy, the materials, the labor, is greater than the car.

In particular, energy is, in monetary terms, undervalued. Its less now, but it used to be that 10 times the amount of energy came out of a gallon of oil than went into producing it. It is this real profit, this 10 to 1 ratio, that allows us, drives us, to use (burn) the oil. Suppose instead, there were no real profit: That the ratio was 1 to 1, that as much energy went in to producing the oil as was gotten out of it. Then, from an economic point of view there would be no point in producing the oil in the first place. (In particular, if we used the energy from the oil to produce the oil, nothing would be produced. Except waste.) Nothing is gained. (Of course, with subsidy, an uneconomic process may still go forward. Witness ethanol production from corn)

Allowing for profit, and neglecting things like taxes, that means that the monetary value of the oil was about 1/10 its real value. Suppose instead that it sold at its real value. Suppose your gallon of deisel sold at $30, or 10 times its current valuation. Then there would be no point for you to buy it, because you couldn’t make money off it. (at least using it for energy.) Its real cost to you, monetarily valued at $30, would be equal to the benefit you expected from it. (We’re not allowing for the induced inflation. With the price of oil going up, the real price, the price of everything will go up. More on that in a later post.)

Similarly, commodities are undervalued. Undervalued energy went into making and extracting them. But it is this monetary undervaluing that makes them more valuable in reality. Because they are undervalued, they can go into making things. For instance, you wouldn’t use gold to wire a house. Monetarily, it’s too valuable. You would use copper. Copper is more valuable here than gold, because if you used gold, you couldn’t sell the house for a profit. In fact, the less valuable it is, the more useful it is. If the price of copper were to double, you might still use it to wire the house, but you might not use it for the plumbing.. If the real price of copper were to halve, you would not only use it for the wiring and the plumbing, you might use it for the roof as well. So the lower its monetary valuation, the greater its real valuation.

Suppose now that copper was as rare as gold. Those who owned copper would be much richer, but society would be much poorer. They wouldn’t be able to use copper to wire houses. Indeed, the uses of copper would be few. It would have little real value. Just like gold. It would be too precious to be useful.*

Now if some things are undervalued, other things must be overvalued. That is the monetary value is more than the real value. Or, these things are worth less to society than they are to the individual. So what is overvalued? That is what is overpriced?

If we look at production, at each step, resources are destroyed. Energy and labor are destroyed at all steps. Now the irony is, that the more resources are destroyed in making something, the more (monetarily) valuable it becomes. (This is in a well functioning economy. Under subsidy, resources can go into making something that is less monetarily valuable. For instance, the subsidy of corn production makes possible the production of hamburgers at less than would be their monetary cost.) But as those resources are destroyed, the real cost of the thing goes up. So its real value goes down. The more resources are destroyed making a thing, the less valuable it is. To society. Suppose 10 times the resources as now go into making an automobile are used. Automobiles would cost 10 times as much. There would be many fewer of them. They would be less useful to society. Conversely, if automobiles cost one tenth the resources to make, there might not be more of them, but the resources freed up which would otherwise go to their production could be destroyed to other use. In that sense, they would still have a greater value to society.

But, at each step in the destruction of resources, that is, the destruction of real value, “value is added.” Monetarily. The thing becomes monetarily more valuable, and can be sold at a profit. So in general, resources, which are undervalued, are converted to finished goods, which are overvalued, and it is this twist in valuation which drives economic process. (We can even go a little further, and say that those goods which are most overvalued will be preferentially produced. They will have the highest profit margins in the conversion process. Goods under subsidy will be preferentially produced, for instance.)

Now the economy does need finished goods. Indeed, that is the whole point of an economy: To create goods and services to the benefit of the individual. But economically speaking, most finished goods are useless to an economy. A dishwasher, for instance is economically useless. (It may benefit the individual. It does free up leisure. Depending on how much one valued that, one can calculate the benefits one would get from buying a dishwasher.) The end result of economic process, the conversion of resources, in particular the destruction of energy, is a finished good or service. (Actually, since energy can neither be created of destroyed, we really mean the conversion of energy from useful forms to useless forms. So for instance, one could say the dishwasher was worse than economically useless, since the power it consumes when operating increases the conversion of energy to useless forms.)

So where does money fit into this? Well, in real terms it is worthless, so we can say it is most overvalued. If government printed up a room full of money, society would be no better off. More on this later. Energy, which drives the modern economy, is most undervalued. Some labor is also undervalued. (Some is overvalued.) Some has to be exploited, for the manufacturer to make his profit. This is not a bad thing. But because labor is also the ultimate market, (all economic processes are ultimately for the benefit of individuals,) it does create a problem. So does overvalued labor. For a later post.

So what is valuable? To a society, the resources, and the means to convert those resources to goods and services desired by individuals. To an individual, these desired goods and services. It is the difference between these two valuations that drives an economy.
__________________________________________
*There is an ironic phrase which refers to extraction of minerals: ‘The riches of the earth.’ However, it is the poverty of the earth, the scarcity of what is extracted, which makes it monetarily valuable, and reduces the real value to society. But, it is this relative scarcity that makes extracting the minerals profitable to the individual in the first place.

That Bloated Financial Sector

2010-06-13T18:52:00.001-04:00

Suppose the auto industry was twice the size it was now. That means it would have to sell twice as many cars, AT THE SAME PRICE, to stay in business. Naturally, it couldn’t do this by itself. It would either be forced to contract, or it would require government support to stay in business. It would have to do sneaky and unethical things, like sell fraudulent products. Its companies would have to collude, to hold prices high. It would have to hold its customers hostage, one way or another, to stay in business. And the fact is, we should expect this. It would merely be doing what it had to do to survive, in the bloated and destructive form, it had become.

Consider now the financial sector. Historically, even during times of prosperity, it had ‘produced’ under 3% of GDP. But as of 2006, it has ‘produced’ 8% GDP. I put ‘produced’ in quotes, because the financial sector produces nothing. It is merely there to allocate resources. It does not make things. It is overhead to the economy. It rearranges money. And instead of arranging money to encourage productive industries, it seems to be allocating much of these resources to itself: Its profits, in recent years, have been over 40% of the total profits of all US businesses, despite the fact that it ‘produces’ only 8% of the GDP.

How does it do this? How does it ‘sell’ almost 3 times as much ‘services’ as in the past, and make more money than ever doing it? After all, we would expect that if it had more services to sell, their price, and their profits,would go down.

Well, it has government support. It has its bailouts, and the government has gone through agonizing contortions to see that the banks' mortgage income and value are maintained. The Fed also supports the industry with low interest loans. And the government throws business its way by selling bonds at a higher interest rate.

It does sneaky and unethical things: It sells fraudulent products, CDO’s and CDS’s and dubious mortgages with teaser rates that balloon into unpayable amounts after a few years. The whole real estate bubble was an effort by the banks to generate profit, in fees and interest, sufficient to keep themselves in business. Now the bubble is gone, and the only way the banks can support themselves is to eat into the real economy, It withholds credit from the real economy until its bloated balance sheets will be 'repaired,' inflicting deflation on the economy. And where is the next bubble going to be? Perhaps we are looking at it: the debt bubble.

It colludes, with the combination of algorithmic trading and ‘front running,’ to effectively defraud legitimate traders of their just profits. In these it is explicitly self-serving, and not to the benefit of the rest of the economy.

It holds its customers hostage. With too big to fail banks that the government thinks it is obligated to maintain and foster. With fees and usurious interest rates on credit cards and payday loans.

Meanwhile, the financial sector uses its power to deflect the efforts of government to effectively regulate it. In fact, should the regulation the government is considering prove effective, it would cut into the financial sector’s profits, would tend to its ruin, and force the government, as it now conceives its duty, into even greater efforts to rescue and maintain it.

It siphons off from legitimate industry, and corrupts, some of the best minds of society with its disproportionate remuneration, and contributes to the country’s increasingly inequitable distribution of wealth and income.

And we should expect this. We should expect it to act, not to be benefit of society, but to its harm. It is merely doing what it has to do to survive, in its bloated and destructive form.

That this should lead to the destruction of the economy which supports it, it does not care. The people involved are either indifferent or oblivious to the damage they inflict.

I have painted all banks with the same brush. I'm mainly aiming at Wall Street, though many other banks were a party to the real estate bubble. To those that don’t deserve such a paint job, I apologize. I’m sure there are good banks out there. I hope mine, that is the bank I use, is one. But these banks are at a competitive disadvantage to the bad banks. And the absence of effective regulation reinforces this.

Yet I don’t hear the officers of good banks decrying the malfeasances of the officers of the bad banks. Is it because I just don’t hear, of is it because they do not. Perhaps they feel more a sense of community with those who work at the destruction of their society, than those of the communities they ostensibly serve.

Who do you owe?

2010-05-29T01:01:00.000-04:00

There is much ado about debt, these days. The debt. Like it is owed to space aliens or something. It's not. It's some people 'owing' to other people. Lots of 'owing,' these days, which is why it is a 'problem.' This owing is kept track of in something called money, so it's some people owing lots of money to other people. The probelm is made worse by soemthing called 'interest,' which is the arrangement where, if you owe money for any length of time, then you owe more money. So if you owe money, and you don't pay it back, you owe more money, and MORE money, and MORE MONEY and, and...

Well, we'll get into that some other time. First, we ask the questions. And the first question we ask is, who owes what to whom? Which is really three questions, so let's first ask who is the money owed to. There are numerous possibilities. We can eliminate space aliens. We can also eliminate the poor. If they were owed the money, they would be rich. How about the middle class? No, they seem to be drowning in debt. How about our government. But we all know it's up to its ears in debt. Of course, there are also rich governments, who seem to be owed a lot of money. But that much? No.

So who does that leave us? Hmm? The rich. But we've got to be talking the really rich. Even the median of the top quintile, for which I have data (2004) owes $167K, though net worth of $318K. The really rich seem to be owed all that money.

And we've also answered the question of who owes. The poor, the middle class, and the government.

But what do they owe? Lots of money. Debt to GDP is at about 380%, of which 290% is
privately owed. So GDP ~$14T x 3.8 = $53T/300M people = $177K per capita, as of 2008. $354K per worker. Now $42K per capita of that is the public debt, so $354K - $84K = $270K per worker is the private debt. Now the interest on the public debt is (now) 0%, sort of, and let's figure the interest on the private debt to average out to 6%, which is probably low, since AAA bonds are yielding a little over 5% interest. So $16.2K in interest. $16,200. Interest per worker. That's all going where? The company store? Sixteen tons?

Take a step back: 6% on 290% of the GDP means $2.44T or 17% of the GDP goes to interest payments, aka debt service. Non wonder demand is somewhat contracted. And the interest on the US debt is not really 0%, so we probably should add a percent or two.

Just by the way $53T is slightly more than the value of all the assets in the US.

Now of course, this isn't owed one person to another, this is all owed to banks. $16.2K to the banks. But apparently many banks aren't doing all that well, so who do the banks owe? Well, they 'owe' their owners, they owe their bondholders, and they owe their depositors. Now their depositors aren't getting much in the way of interest. So all the interest must be going to the bondholders, and the owners. But if the banks are still in trouble, that means it must be the bondholeres who are getting all the money. Owners are just making up their losses, recapitalizing their balance sheets. (Are they? And who does own the banks?) Bondholders must just love this deflation we're having.

Well, we've spun our wheels a little bit here, and it's hard to find out who owns what. But if you own a lot, you're probably owed a lot. And you're rich.

So if you owe, you owe probably owe the rich. Or maybe some pension fund. Another possibility, among others.

The Interests of the Wealthy

2010-05-22T19:43:00.000-04:00

When the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them.

In the short term, it is in the separate interests of the wealthy to corrupt the system to their benefit. That is, they will seek their own benefits ahead of the people's, first by becoming the instruments of government policy, then by bending government policy to their interests. They will cooperate with each other to do this, and secure advantage over the people. Securing advantage, they will plunder the wealth of the people. This is what (most of) the national debt is. It is what the people 'owe' the rich. Instead of paying taxes, wealthy 'loan' the money to the government, which it then has to pay back. The wealthy have used their power to cause this.

In securing their separate interests, they will cooperate in gaining favors. They will trade for votes. This is not 'zero sum' as regular trade is, but each party gains, and both their influence on, and burden on, government and the people, will expand. That is, through the instrument of government, they each acquire disproportionate wealth. And since all resources are competed for, others, the people, are at a disadvantage. The system becomes rigged.

But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. The government becomes an instrument of their competition, as they compete for its favors. Those who do not compete will be at a competitive disadvantage.

So all the wealthy are forced to compete against each other. They will compete to cause the government to pursue purposes to their own separate ends,which is the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth f the people is exhausted. We are seeing this happening in the present 'recession.'

But the welfare of the people is essential to the welfare of the wealthy, and where it is destroyed, so is their own welfare. If the destroy the income flow of the people, they destroy their own income flow as well.

A poor society has few rich people. Neither has it much power to project, or even protect its interests.

In the long term, an uncorrupted government serves the interests of the wealthy better. A government can only remain uncorrupted to such degree as the influence of the wealthy is limited.

The people have been losing the competition for their government. They have persistently elected the servants of the rich to office. Now the system is rigged in the favor of the wealthy. Not good.

Cross posted as comment to angrybearblog.com: Maule and Pappas on progressive taxation and the decreasing burden on the rich

The Greek Problem Again

2010-05-21T10:08:00.000-04:00

Well, it's 12 days since my post on the Greek Debt. Euro 440B from the eurozone, euro 60B from the European Commission, and euro 250B from the International Monetary Fund. Never let it be said the IMF doesn't take care of its own. Plus the US and other countries are going to guarantee dollars. Couldn't find out how much.

So that's a lot of money. But it is all loans, and the fans are not impressed. A The markets seem to think that this is just pushing the problem down the road. And it is. Germany doesn't want to bite the bullet and let Greece, and the other countries it has a current accounts surplus with, off the hook. But it will let the bankers and other speculators off, and put the European taxpayers on instead. We are talking about a massive transfer of wealth here. And the problem: Still the producer-consumer problem. The only way out is to give the Greeks, and the other PIIGS for that matter, back their money, so they can spend it on German goods again, and keep those factories in the Ruhr humming. So, with the people of the European Union somewhat poorer from the experience, they can all go back to work. Will they be wiser?

Meanwhile, a trillion dollar contribution to sovereign debt. The wise banker should be shaking in his shoes, because bankers the world over are going to succeed beyond their wildest dreams. If things play out.. wrong, and this is a giant step in that direction, they're going to end up with all the money! What a happy day that will be for them!

All our banker has to do is give it away. But, like the monkey with his hand in the jar, he won't let go of the banana. And if the monkey won't let go of the banana, he can't get his hand out of the jar. So he's stuck there.

Clues you in to how smart our masters are. Unfortunately running a monetary system requires a little more intellect, and a lot more balls, and pandering to the powers isn't going to do it.

Greek Debt and the Producer-Consumer Problem

2010-05-09T23:42:00.000-04:00

Well, I just looked it up and the Greek debt stands at euro 298 billion. Mostly goods. Mostly EU. (It joined the EU in 2001.) The EU is going to bail out Greece to the tune of euro 110 billion. Last I heard. As a loan. Basically this is really bailing out the people who loaned Greece money.

This will not solve the problem.

I figure the best thing for the EU to do is just give the money to the Greeks, and then they can go back to playing the same game. Give the Greeks back their money, so they can go back to spending it on imports from Germany, and the Germans can go back to making exports for Greece. Otherwise the interest on the loan is just going to come due, Greece won't be able to pay up, it will stop importing and put a little crimp in the German economy. And then the other little PIIGS come to market.

Another way to put this is just have Greece default on its debts.

The only other option is for Germany to buy up Greece. Which still won't solve the long range problem, which is maintaining Greece as a market for German goods.

Which is the general producer-consumer problem. No matter how much money the consumer starts with, eventually the producer ends up with all the money. Then the producer either has to give the money back to the consumer, stop producing, 'loan' the consumer the money, or buy the the consumer's assets. Buying the consumer's assets is just another step in the process, and doesn't work in the long run because eventually the producer will still end up with all the money. And the assets. And this chokes off demand. Loaning the money to the consumers doesn't solve the problem, because the loan compounds, and eventually the costs of servicing it chokes off demand. Only by giving back the money is demand maintained.

The only way for the game to continue is for the producer to work out a way to give the money back to the consumer. Otherwise the game comes to a stop. Chaos ensues. Anarchy. The death of millions, etc.

This is the general instability of the market system. This is important. Pay attention. This is the general instability of the market system. Especially under free trade, (ie a 'free' market.) And not just between countries, but between any organized entities, or any individuals. If any individual works just the slightest bit more than another, and there is free trade (exchange) between them, either the harder working individual trades down, that is accepts less that par value for what the other has to offer, and allows the other to trade up, or he eventually ends up with all the other's assets. The other ends up with no assets, and the harder worker ends up with it all.

And as between two, so between three or four or a million. The hardest worker(s) eventually end up with it all. And this might be called the most just result. Of course, it doesn't have to be the hardest worker. It could be the cleverest, or the luckiest. Or the one with the most leverage.

Because the producers don't necessarily end up with all the money. There is another class, whom we will call manipulators. The manipulators do not produce anything, but they control the money, and because they control the money, they can arrange it so that they themselves are the most efficient accumulators of money. More so even than the producers. So they are the ones who end up with all the money. And the assets.

And default will be prevented, the debts assumed by the people, so as not to offend the sensibilities of the manipulators.

Many libertarians go on about: "What ever arises from a just situation by just steps is itself just." (Nozick) Well, the end result of this 'justice' is the impoverishment of most of society, and ownership of everything in the hands of a very few. (Actually one, in the limit.) And not even those most 'deserving,' not even those who most contribute to the wealth of society, but the most skilled at manipulating. Horrorshow.

The generalization is mine, I think. The particular with reference to free trade, is: "Mathematical modeling reveals that under these conditions, outright Las Vegas decadence is not necessary for there to be a problem. It reveals that with free trade between nations with merely different discounts on consumption, the nation with the higher discount (more impatient) will tend to maximize present consumption by having past generations (who produced the assets that can be sold off) or future generations (who will service the debt) pay for present consumption. Various factors can interfere, but that's the underlying dynamic." Ian Fletcher, 'Free Trade Doesn't Work What Should Replace it and Why.' (p47) He includes this reference to Joseph Stiglitz: 'Factor Price Equalization in a Dynamic Economy,' Journal of Political Economy May/June 1970.

How Not to Counter the Trade Deficit Redux

2010-04-26T22:57:00.000-04:00

We have the identity: (I - S) + (G - T) + (X - M) has to equal zero. Investment - Savings + Government Expenditures - Taxes + EXports - IMports is equal to zero. So if (X - M) is seriously negative, (G - T) has to be seriously positive for there to be any net investment in the private sector. (Unless there is dissaving. The national Savings rate is now about equal to zero.) The government has to run a deficit, and it has to be larger than the trade deficit. Current trade deficit is about 5% GDP, so for investment to run 3% above private savings, the government has to run a deficit of about 8% GDP. Savings are future inflationary, since they represent consumption in the future, so you want investment to out pace savings. $1.2 Trillion deficit then is what the government should be running now. So only with a significant trade surplus can you allow government to run a surplus.

Can't run up debt, though. That would outstrip GDP growth. So you have to 'print' it. Would be inflationary but the extra goes to foreign countries, who can't get rid of it very easily. They have to spend it. Here. It would be like they had it in a savings account, if they buy bonds. Or like a checking account if they hold onto the cash. So one of the purposes (the purpose?) of selling bonds is to keep the money out of circulation, until the bond matures.

So, with deflationary pressure from the trade deficit uncompensated for because of inadequate government deficits a good investment strategy would be to short US industry. If you were a ...what? Traitor? How is investing betting of the failure of your neighbor? Or your own failure, for that matter. But the losing strategy results from the government inadequacy of spending.

Still not a very good way of compensating for the trade deficit, though.

On Rights

2010-04-23T00:24:00.002-04:00

These truths are self-evident:

All rights are the creation of men. It is the desire of men to have rights, which creates rights. Rights derive from the relations between men, and the resources available to men. Men give rights, so that they may have them. They are property, which each man possesses to one degree or another. Rights have value. The value of a right is not its formality, but its effect. Each man values each right, to one degree or another, according to its effect on his life.

All rights are by the consent of others. Since the consent of others is always contingent, no right can be absolute or inalienable.

Each society has available to it, even where it extracts rights from other societies, only so many rights to distribute among its members. A society with more resources has the potential for more rights. It may have less.

Each right that a person has is a limitation on the rights of others. Each right is a burden on others.

Rights incur responsibilities. The failure to meet those responsibilities is a cause tor the alienation of those rights. The first responsibility is the granting of rights to others. The second responsibility is their enforcement. The third responsibility is mercy. Since the responsibility of rights represents a burden, the fourth responsibility is the minimization of that burden, given the maximization of those rights, given the resources available. The fifth responsibility is the education to those rights, and their responsibilities, and their burden.

The people of a society grant rights for their own benefit. Rights are granted where the effective benefit of those rights is greater than the real burden of the responsibilities. Where the people benefit less than the burden, those rights will be discarded.

The people of a society develop institutions for securing their rights. These institutions formalize the granting of rights, and their enforcement. These institutions are themselves granted rights, to the benefit of and at the expense of the people. Such institutions necessarily also increase the rights of a few. To such degree as they use force, or are inefficient, they reduce the rights available to the people and increase the burden of those rights.

In a society, there is a natural distribution of rights, which depends on the resources available to that society, demanding the least force and incurring the least inefficiency, which maximizes the value of rights available to the people. The institutions chosen by the people need not guarantee that distribution, and indeed may be chosen to impose distributions of rights different from this natural distribution. The additional expense, the loss of rights to a society, will be more than proportional to the deviation from the natural distribution.

So by consent, the members of a society may make certain rights universal, and held in equal quantity by all, and inalienable except for failure to meet the incurred responsibilities. These certain rights then represent a form of property which cannot be bought or sold. A society may consent to this, at the expense of other rights, that the few more fortunate of more able, shall not otherwise acquire those certain rights of the many less fortunate or less able.

And by consent a society may make certain rights held by a few, who incur greater responsibilities. It may assign these rights, and those responsibilities, to the few, in
various manners. These certain rights then represent a form of property, which may also be bought and sold. A society may consent to this, at the expense of other rights, if the many choose to not effectively exercise themselves those responsibilities these rights incur.

Properties are rights, and by the consent of others. Therefore, no property is absolute or inalienable. Others consent to properties, so that they may also have properties. Those who consent to have less, do so in the expectation that they may attain more, either in the present, or in the future. Since properties are rights, those with more properties have more rights than those who have fewer. Those with more properties also impose greater burdens on their society, and incur greater responsibilities. Since there is a natural distribution, those with more properties may impose a disproportionately large burden of their society, and incur disproportionately greater responsibilities.

There will always be those with many rights. There will always be those with few. When those with few are many, and those with many few, a society is poor.

Where many rights are narrowly held, where the many have few, either the few exercise their responsibilities, and impose the lesser burden on society, or they impose the greater burden of society, and the consent of the many is obtained and maintained through fraud and excess force. The many may either shake off their burden, or succumb to it. The resources taken to enforce fraud and excess force take away from the rights available to society.

That distribution of rights which maximizes the value of rights, and minimizes fraud and force, is most just, and most merciful.

Subject to revision.

On how not to counter the trade deficit

2010-04-16T09:12:00.001-04:00

The thrust of our previous post was that mercantilist policies work, promoting economic expansion in the country running the export surplus, to the enormous detriment of the industry of the country running the trade deficit. This involves the exporting nation acquiring a surplus of the importing country’s money. The rosy idea that the system of free trade cannot be exploited to one country’s advantage is, on the face of it, absurd. No economic system has ever been developed which has not been abused. History has shown, those countries which adopt an export oriented posture prosper, those that do not decline. One may ask, why did the European powers prosper, while their colonies remained stagnant or declined?(They still practice it, in the form of foreign aid.) How did the Asian Tigers arise? Why does China prosper, while the US declines? Why is Germany tasked with ‘rescuing’ Greece? The answer is always the same. One country runs a trade surplus, while the other runs a deficit.

Warren Mosler, at
http://moslereconomics.com/2010/04/12/my-alternative-proposal-on-trade-with-china/
suggests, however, that we counter China’s policies simply by giving money to consumers sufficient to overcome its effects, and create sufficient demand to sustain domestic industry, as well as the excess in imports. He proposes a tax holiday, distribution of Federal money to the states, and national service employment.

His proposals have other significant merits. However, his proposals will not change the relationship between the Aggregate Supply curve provided by domestic industries, and the augmented Aggregate Supply curve provided by the combination of domestic industries and imports. The augmented Aggregate Supply curve will always be to the right, and the equilibrium price level will always be less than the price level in the absence of imports.
The revenue received by domestic industry will thus on average, always be less than the cost of its production, despite any overlay of inflation caused by giving money to consumers. Domestic industries will be under persistent competitive disadvantage.

Compare with balanced trade, where only some industries experience competitive disadvantage, but the others experience competitive advantage. The two even out, and the economy as a whole is helped. ( Although there is increased 'creative' destruction, as the economy adjusts. Do the costs of this balance with the benefits of trade? This seems to be just a transition state, however and in the long term balanced free trade will be mutually beneficial.)

An influx of cash shifts the demand curve to the left. The Aggregate Supply curves for just domestic production, or for balanced trade, and domestic production plus imports, do not change. With imports, price moves down the AD curve to the AS curve for domestic production plus imports, at the lower price. Solid lines. However, domestic revenue goes down the Aggregate Supply curve to the new equilibrium point at both the reduced price and a reduced quantity, and so is also reduced. Domestic industry, with reduced revenue, contracts. With an influx of cash, the same phenomenon repeats itself, but just at a higher price level. Dotted lines. But see Redux.

A reminder that might be pointed out is that the problem with deflation is that in general it reduces nominal profits and, at least in perfect competition, nominal costs are greater than nominal revenues.

A comment: The Aggregate Supply curves in this diagram could be vertical, or curved, for those who consider that an influx of cash is itself unlikely to cause an increase in production, but merely cause an inflationary increase in the price level, at least in the long term. The basic argument is the same. The country with deficit clearly declines both in quantity and price, and certainly could produce more at higher price levels, having idled capacity. The country with surplus is continually expanding, and its growing capacity must always outpace production.

The Effects of Unbalanced Trade

2010-04-08T11:16:00.002-04:00

The United States trade imbalance has long been an unresolved issue. Some claim that barriers to free trade are necessary, others that they are not only unnecessary, but harmful, and even immoral, since they would force higher prices on otherwise uninvolved consumers.

Those who claim that current trade policies are harming the US have, to our knowledge, proposed no clear mechanism. We propose one here.

We show that, while balanced free trade may be beneficial to all, or at least not harmful, when trade is not balanced, the net exporting country grows at the expense of the importing country. That is, the net importing country’s economy undergoes deflation, and erodes. The demand of the importing country’s economy is driven down, and its industry is increasingly idled. Since this affects labor, even many of those consumers enjoying the immediate benefits of lower prices, may pay a greater price, in lower wages and higher unemployment. Consumers are involved, whether they want to be or not.

We should also expect erosion of the tax base. There is, in the economy as a whole, more pain than gain. We model the mechanism.

The basic idea is that the price level in the importing country goes down, decreasing the revenue available to its industries. However, that country’s demand is ultimately equal to the revenue of its industries. That is the key relationship. The country's demand declines with the decline of the revenue of its industries. With continued imports, the price level continues to go down, as does revenue and demand, along the Aggregate Supply curve. With the continued erosion of revenue, industries are increasingly idled, and unemployment increases. The importing country is forced into a deflationary spiral.

In the exporting country, on the other hand, the price level goes up, and including the revenue from its exports, so does the revenue of its industries, and ultimately the country’s demand. Its industries, with increased revenue, grow, as does the country’s demand, along the Aggregate Supply curve. With continued exports and continuing increases of revenue, industries continue to grow. So does demand, and employment.

____________________________

The unbalance of trade has been an issue for some time. When one is not doing well, one looks around for someone to blame. One also looks for causes. When one finds both, one must act- wisely.

Note that when trade is balanced, there is, here, no effect. Only when there is an imbalance in trade, where one country is a net exporter, and the other country a net importer, does the importer’s economy erode, and the exporter’s economy grow. There is a certain symmetry: The exporter benefits at the importer’s expense, despite the apparent benefits to the importing country, and the apparent costs to the exporting country.

In Praise of Smoot-Hawley?

2010-04-05T09:28:00.001-04:00

Smoot-Hawley may have helped reduce the depth of the Great Depression.

The Smoot-Hawley Tariff Act was passed in response to protectionist sentiments at the beginning of the Great Depression in June of 1930. US tariffs, already averaging 40% due to previous legislation, were increased an average of 20% or so, initiating retaliatory tariff increases by US trading partners. It is generally credited with worsening the international economic situation, and aggravating the Great Depression.

We will consider a depression to start with an excess of supply over demand, due to a contraction in demand. Excess inventory leads producers to cut back on production, and further to cut back on factors of production, particularly labor. However, labor is the ultimate consumer, and by cutting back on labor, producers ultimately cut back on the final demand for their own products. This leads to a vicious cycle: Job cuts lead to reduced demand leads to job cuts etc.

In order for the cycle to end, supply must eventually equal demand. Since the cycle starts with an excess of supply, supply must decrease at a rate greater than demand, in order for the two to eventually become equal. This forms the bottom of the depression. One process that tends to happen is that, as the number of workers in a firm decreases, a point is reached where the marginal physical product (units per worker) decreases. Under these circumstances, supply indeed decreases faster than demand.

Other policies which help to maintain demand, such as unemployment benefits and deficit spending, also work to reduce the severity of a depression. The collapse of credit, by reducing demand, works to aggravate a depression. At the beginning of the Great Depression, between 1930 and 1933,the money supply declined by about a third.

With a reduction of trade, supply of goods and services is also effectively decreased. This is especially the case with a country operating with a trade deficit, but it is well known this decrease happens even under the conditions of balanced trade.

Consider the case of two countries, which trade two goods. If the countries impose barriers to trade, such as a tariff, each country becomes short in one good and has a surplus in the other. (To phrase it more precisely, the price of the first good goes up above the expense of production, while the price of the other good goes below its production cost. However, it is now apparent that markets do not always clear immediately, that surpluses and so also that shortages may exist, and may persist. If a good is a factor, other shortages may result.) Since the good a country is short in it produces less efficiently than the good it produces in surplus, when the now excess factors of production are transferred from producing the good in surplus to the good in shortage, the new total of production will be less than before. The combined supply of the two goods will be reduced. Further, during the transition period, the good in surplus will no longer be produced in surplus, but production of the good in shortage will not have begun, since it is still being capitalized. Also, during the transition period, the cost of the transformation of capital will increase demand.

In 1934, President Roosevelt signed the Reciprocal Trade agreement, liberalizing trade and undoing much of the tariff legislation. But by 1933, the Depression had already bottomed out.

This analysis suggests that the Smoot-Hawley Act, by helping to more rapidly reduce the surplus supply, helped supply and demand to equalize at higher price and quantity levels than they otherwise would have. Despite the negative effect the act had on business confidence, the Smoot-Hawley Act may have reduced the severity of the Great Depression.

This raises the issue of the general application of restrictions to free trade. In a sense, free trade maximizes the supply of goods and services to the world economy. It also maximizes international competitive pressures. Is this desirable? Is it desirable that only the most efficient producers survive? That is, is it desirable that the producer surplus be minimized?

It also suggests that a certain level of restrictions on trade may be beneficial for global economic stability. With some restrictions, balance of payments may be maintained. With unrestricted free trade, imbalances will almost certainly occur. Some have touted the benefits of trading goods for over-valued pieces of paper, but that paper represents debt, and the promise to repay in goods and services, which may come at an inconvenient time for a hard pressed economy.
I will not go into the well known equalization of factor prices under free trade, except to mention that it suggests US professors in economics will eventually be paid the same as their Chinese counterparts.

The analysis can be generalized to internal trade and specialization at all levels of social structure, due to the effects of comparative advantage. The relentless drive to specialization, while it increases the quantity of goods and services produced, may be socially destabilizing, and perhaps policies should be adopted that ameliorate these pressures.

I have simplified the discussion of supply and demand. The real discussion is more complicated, involving the shifting of the "Aggregate Demand curve" to the left, and the "Aggregate Supply curve" also bending to the left at the lower level of demand, so that the equilibrium point where they cross, where quantity demanded equals quantity supplied, is at a lower level, as may be the price, etc. The process stops when the equilibrium price level, which may be lower than originally the case, is greater than the cost of production, at the new price level. The reason the demand curve, and following it the supply curve, doesn't just spring back is because demand is money. No money, no demand. And money has been taken out of the demand side of the system. One answer is to gradually pump money back into the system, on the demand side. Under these circumstances, giving money to producers is useless, and worse, since they need no longer produce to make money. And so can lay off more people, etc. So is giving money to bankers. They have no reason to lend to the unemployed, nor to producers who have no demand for their product.

Manipulators and Maintainers

2010-03-29T09:21:00.000-04:00

Is increasing income stratification due to increasing complexity equitable? Or does it constitute a rigged system?
With increasing complexity, an increasing proportion of the population cannot be expected to cope. Indeed, many of the potentially most productive members will be less capable of coping, because they have invested a greater percentage on their education in their skill, rather than in their ability to cope with the system. In most cases their skill will be necessary to maintain the system. The system, as it becomes more complicated, thus selects against its most useful members, those most skilled in maintaining the system, and selects for those most skilled at coping with, or manipulating the system. (Or course these skill sets are not independent, but there is only limited overlap, as is evidenced by specialized educations. Not all education is to learn to do things that help maintain a society.) There is increasingly a separation of population, into those skilled at manipulation of the system, and those who maintain it. Those who manipulate the system come to do so for their own benefit, at the expense of those who actually maintain it. They thus gain income at the expense of those who maintain the society. Further, it is in the interests of the manipulators that it be sufficiently complicated that those who maintain it cannot both maintain and manipulate.
But with the prosperity of the manipulators, more people become manipulators, and fewer maintainers. Since the maintainers are the strength, and the manipulators are the weight, the society gains weight and loses strength, becoming less capable of performing essential functions. Increasing income stratification due to increasing complexity is not only inequitable, it is destructive of the society.
And we have not even addressed the issue of those who are insufficiently skilled at either maintenance or manipulation, for whom the maintaining skills, and the manipulation skills, are simply too complicated for them to cope with, but who could cope with and perhaps even prosper in a simpler society. To what degree of exclusion should these people be relegated, especially considering that society is, for many of them, at least partly responsible for their miseducation.

The real problem with Health Care in the US

2010-03-26T09:16:00.001-04:00

Well now that health care reform has passed, it's time to look at the real problem with health care. The real problem, and the reason that health care in the United States is so expensive, and takes a larger share of our GDP than that in other industrial nations, is that the United States does not provide adequate health care to its people.

With health care, an inadequate supply will show up in things like reduced life expectancy, higher infant mortality, use of emergency rooms by the poor because there are not enough clinics, shortages of doctors in some areas, especially rural ones, and higher prices than in countries that have adequate or better than adequate care for their people. These things we see. Also, the mere fact that payment is such an issue suggests there is demand among those who cannot pay for it.

With health care, people only need so much, but that much they need. They are willing to pay high prices if they have to, and if they can. But even with low prices, they are not, individually, going to buy that much more health care than they need. ( Unless they are sold more. We have heard of some places where they are sold more, driving up expenses still further.)

If our health care is inadequate, why is it also so expensive? The paradox of a nation paying more and getting less is explained by elementary economics. Health care is an
example of what in economics is called a service with inelastic demand. (More properly the equilibrium point of supply and demand for health services is in the inelastic region of the demand curve.) The demand for such a service, or such a good, like oil, does not change much, no matter what, within reason, is the price. If the supply decreases, the quantity demanded does not change much, but the price goes up a lot. An inadequate supply will lead to excessive prices.

Conversely, increasing the supply a comparatively small amount will lead to a dramatic decline in prices. The paradox arises because, if the health care system supplied enough services to meet or exceed demand, the share of the nation’s resources consumed by the health care system would be less than it is now. Competition would drive the price down. (Down to zero, in fact. The role of government would be to keep compensation up to cover costs, despite prices being insufficient to cover those costs. But the total cost would still be less.)

The calculation is simply quantity of services provided times the costs of those services. This equals the burden the health care system places on the economy. For an inelastic service like health care, a small increase in that service, times the large decrease in price, would bring about the reduction in total costs, reducing that burden on the economy.

And clearly health care is an inelastic service, because other industrialized nations provide their people more health care, and usually more than adequate healthcare, for a smaller share of their countries’ GDP than ours. If instead the demand for health care were always elastic, no matter how low the price, no country could afford a nationalized health care system. Then the nominal prices charged by many national health care systems, which are much less than the costs, would lead to an uncontrollably greater demand, and the total costs to an economy would be impossibly large.

On the contrary, it is the cost of the US’ privatized system that is becoming impossibly large. Already 17 percent of GDP, it is estimated to increase to 20 percent of GDP, an incredible burden that the rest of the economy perhaps cannot even bear. This is happening because a privatized system is unlikely to provide adequate, and thus inexpensive care, or even to restrain its costs. It simply cannot be expected. Since adequate care will drive down prices, and thus drive down profits and force down costs, it is in the interests of a privatized health care sector to keep health care inadequate. That is, to keep it in short supply. It is rather unreasonable to expect private health care providers to act altruistically, and contrary to their own interests. Indeed, the future may well correspond to the delivery of an even more inadequate service, especially with reform expanding demand, but not supply.

Many would claim competition is in fact keeping the price of health care down. However, by this principle, we would expect competition to keep prices lower than the non-competitive nationalized health care systems in other countries. It does not. Therefore the amount of competition in the health care industry is simply not enough to restrain its prices. The sheer cost of privatized health care, as it is in the United States today, justifies its replacement.

If the United States had adequate health care, it would cost less for individuals, however they paid, and take up a smaller share of our GDP. It would be more efficient. This would increase the efficiency of the entire economy, free up resources for other, more vital, uses, and increase the competitiveness of American industry in the world market.

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The Nuclear Equivalent to the War on Terror

2010-03-22T09:05:00.001-04:00

All the money spent in Iraq and Afghanistan represents resources destroyed. How much, in terms of real resources, does $1000 Billion represent. Let's do residential. Say $140K per house, on average,which isprobably generous. That's about 7 million houses. The equivalent value of 7 million houses which is not being invested, rather is being destroyed in warfare. 7 million houses which are not being built.
7 million houses figure 4 persons per house, 28 million people. So the residential equivalent of a several very large cities has being leveled. This kind of calculation has been done, more accurately and in greater detail, both nationally and for the share of one's locality, and can be found by searching in say: 'cost of the war in Afghanistan'. Nobody is being hurt though. But:
Let's look at it in terms of man lives. Average GDP per worker is roughly, $14T/140M in the labor force, these days gives $100K per worker. So the cost is 10M man years. Figure 40 years productive life: $4M per life. So: $1000B/$4M = 250K lives. So the war on Terror has destroyed the lifetime production of 250 thousand men. Economically speaking, these are the casualties the US has sustained.
Let's check the nuclear option. When you nuke a city, you destroy only half the lifetime productive capacity of the population (half has already been contributed) so DOUBLE the number of people killed. Figure 500K. Note we are now considering everyone in our city as labor or potential labor. Now the total capital of the US is about $50T. Divide by total people (300M) and you get about $170K per person, of physical capital, that is houses, factories, offices, roads, utilities, etc. they occupy and use. An interesting number in its own right. But we'll use $200K. So that's $100B worth of capital our 500K people occupy and use. (200K x 500K.) Figure $100B to be the equivalent of 25K man lives. ($100B/$4M = 25K man lives.) We subtract 25K man lives because we're blowing up their productive lives equivalent in material destruction, giving 475K. We're subtracting it because we don't want to count it twice. But we see that counting the actual material that is blown up is just a small correction. We can just as well ignore it, given the approximate nature of all our numbers
So, roughly, the War on Terror has, so far, cost the economic equivalent of the total destruction of a city of 500 thousand people. Give or take. That's everyone and everything in it. That's a lot of terrorism. Of course ‘economic equivalent’ does not include pain and suffering. Or cleanup.
Most of the numbers we've used understate the answer. One can argue that we understate the earnings per man life, but don't forget capital is spent on the individual at both the beginning and end of his life, so the net contribution of a person to society is probably considerably less than 40 years of labor.
By our calculations 9/11 resulted in the destruction of something under 5 thousand man lives of production. The War on Terror is, it seems, a rather disproportionate response. But then, one can always claim WWII was a disproportionate response to Pearl Harbor.

Why no government is best. No, really.

2010-03-15T09:08:00.000-04:00

Little theorem on no government.
Government is bad. We will proceed to demonstrate this: Consider a purely market economy. It consists of different sectors, with different functions, each contributing to the economy. Each sector buys from all the other sectors, and each sector sells to all the other sectors. (This assumption need not be so strong. The sectors just have to be 'well connected.' They don't all have to be connected all to each other.) Let us start with the economy in equilibrium, each sector at some appropriate size so that its supply and demand is in balance. To simplify, consider consumption and production each proportionate to the size of the sector. (They need only be in the same direction, larger size implies larger production and consumption. Smaller size implies smaller production and consumption.)
Now let's say some sector grows larger compared to all the others. Its production also increases. In the market, however, this will drive the price of its product down. Its income will decrease, so it will shrink back to where it was at equilibrium.
Now let's say some sector shrinks compared to all the others. Its production also shrinks. In the market, however, this will drive the price of its product up. Its consumption will decrease, driving the price of its inputs down. Its income will increase, so it will expand back to equilibrium.
Thus the economy will stay in equilibrium, each sector in fixed relative size to the others.
Each sector will grow (or shrink) in fixed relative size to all the others. The economy as a whole will grow with each of its sectors staying in the same proportion.
Anyway, let's introduce government to this happy state of affairs. Let us suppose the sectors each have influence with government, and these influences are not equal. Then each sector will seek to use its influence to become larger, and inflated by subsidy. But only those sectors with the greater influence can gain subsidy by influence. By the conservation of the whole, the subsidies have to come from somewhere. Other sectors must pay this subsidy. These sectors must be taxed. Taxed, they will not grow as fast as the subsidized sectors, and may even shrink. The larger sectors, therefore, will become disproportionately large compared to the less influential sectors, and these sectors will become disproportionately small. (Further, the sectors with greater influence will use that influence to acquire even more influence with the government, and the influence of the other sectors will decrease, and they will receive proportionately less, so the situation becomes increasingly aggravated. )
Now those sectors which receive inputs from disfavored sectors will develop shortages. But all sectors require inputs from the disfavored sectors, either directly or indirectly, and so all will experience shortages, bottlenecks in production, and production will be slowed. Growth will be slowed, halted, or there may even be decline. Thus the economy will become increasingly 'unbalanced,' in a way which will become clear if we look at a concrete case, such as the US economy.

Commentary:
Some sectors do clearly have more influence with government than others, and we would expect these to become larger in proportion to their influence, and others with less influence to become smaller, in their ability to compete in the government for resources. It's easiest to see this by pairs. For instance, suppose manufacturing has less influence than traders. Then this would lead to free trade and a trade imbalance, and erosion of our manufacturing position in the world, and considerable international debt.( Note, however, that imports would become increasingly necessary to maintain the economy, as shrunken sectors no longer able to keep up the necessary production to maintain the other, sometimes bloated sectors.) Suppose the motorist/highway lobby has more influence than rail. What would we see. Below real cost gasoline prices, a surplus of roads and vehicles. Desultory efforts at passenger rail. Deferred maintenance of rail. Sprawl. Inefficient use of resources and space. If the financial sector has more influence than the public, then this would lead to a bloated financial sector, making it a disproportionate burden on the rest of society, high interest rates to the public, and a government looking after finance's interests despite the sector's manifest peculation. If labor has less influence than management, then we would expect a stagnation of wages and disproportionate remuneration of executives. An increasing flow of wealth to the top. If the health care industry has disproportionate influence with government, we would expect increasing costs and decreasing quality of care for many, and ineffectual efforts at reform, and slowing and arresting of growth of the economy as a whole. I'm sure the reader can come up with many other if-then pairs.
Then the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them. Wealth and income will become ever more concentrated, until they can no longer be supported by the rest of society.
In the short term it is in their separate interests to corrupt the system to their benefit. They will cooperate to do this, and secure advantage over the people. They may even engage some of the people, making them temporary allies, though they will be discarded, must be discarded, later. Securing advantage, they will plunder the wealth of the people. But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. Those who do not compete will be at competitive disadvantage. Thus all are forced to compete. They will compete to cause the government to pursue purposes to their own separate ends, the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth of the people is exhausted. But the welfare of the people is essential to their own welfare, and where it is compromised, so is their own. If they destroy the income flow of the people, they destroy their own income flow as well.

In the long term, an uncorrupted government serves their interests better. A government can only remain uncorrupted to such degree as their influence is limited.

For wealthy (also) read people.
A small government, if corrupt, is relatively harmless. Relatively useless, too.
Well...In securing their separate interests, they will cooperate with the exchange of gaining favors, (trading for votes) which is not 'zero sum' as regular trade is, but both gain, and both their influence on, and burden on, government will expand. That is, through the instrument of government, they both acquire disproportionate size. And since all resources are competed for, other (sectors) are at a disadvantage.

You are at anamecon.blogspot.com

2010-03-11T12:34:00.000-05:00

Another Amateur Economist:
Eccentric insight from eclectic theory.