Our Financial Sector has Become a Parasite

This post is (mostly) a copy of a comment (@131) in response to reason (@123 & @ 124) over at Crooked Timber:  http://crookedtimber.org/2015/11/29/secular-stagnation-and-the-financial-sector/comment-page-3/#comment-650750

This is John Quiggin, the original poster, quoting himself in a previous post:

The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.

“Hugely costly financial sector” does not really describe what is going on:  Massive tumor sucking the life out of its host is a much better description.  The financial sector no longer serves society.  It serves itself.  Indeed, is 'Serve Oneself." not the motto of Capitalism?  While the financial sector, (and we are talking about the activities of the large, and very large, and the wealthy, and very wealthy,) does occasionally allocate resources in the rest of the economy, to the rest of the economy, mostly it plunders the resources of society and allocates those resources to itself, for its own engorgement.

My comment:

You have disinflation in the real economy, but inflation in the fictitious (financial) economy. They have become separate economies. Money is being taken out of the real economy and pumped into the financial economy. Not only does this drive up the price of financial assets, (like money, BTW. but other assets which do not have a real value in themselves, but only value depending on the health of the real economy. Most tech toys and their industries, for instance. ) but financial assets chasing each other also drive up the price of financial assets.

Imagine a continuum of reality, starting at the left and going to the right, most real on the left, and decreasingly real and increasingly imaginary as you go to the right : Food and energy, on the left end, mining, then manufacturing, transport, etc, retail, hospitality, etc. in some order, high tech in there somewhere, then money in its various forms, bonds, stocks, etc. derivatives, other phantasmagorical financial instruments. It is an enormous bubble of ‘value’ where each item to the right is dependent for its survival on the health of the parts of the economy to its left. If, for instance, the food and energy sectors collapse, none of the rest of it will have any value.

The economy on the right is easy to capitalize and leverage and extract (financial) profits. So all investments are allocated over there. ( Capitalism invests in what is profitable, and only incidentally in what is needed.) The economy on the left, however, is leverage poor, and profit poor, so it is instead being allowed to deteriorate, and even where possible, plundered for its capital.

It is the size of this bubble which is maintaining the value of the dollar. And as the bubble increases relative to the size of the money supply, the value of the dollar also increases. (There is also a deflationary effect due to the trade deficit, since money is continually being taken out of the real economy, and put into the fictitious economy when, say, the Chinese deposit their money in US banks.)

It is all, of course, a manifestation of debt. Were the debt of the real economy honestly accounted for, it would be clear to everyone that there was no possibility that the people who actually produce the things we need could ever paying those f**king bloodsucking leeches even a fraction of what our f**king masters of the universe have defrauded the people of the world out of.

Indeed, our masters own our world, and our country several times over.
It just comes down to the day they decide to collect what is owed them.

Progress and Pseudoprogress

What changes to what elements of society would qualify as evidence of ‘progress?’  We sort of assume society is making ‘progress,’ but we seldom check to see what is actually happening, or ask if what is happening is really motion toward a desirable, and necessarily sustainable, goal.  So let’s look at some trends, and decide whether they are indicative of ‘progress.’

 

Let’s start with some of the good ones. 

For instance:  Is increasing inequality a sign of ‘progress?’  One could argue that it is a (necessary) price for progress, one that fortunately doesn’t have to be paid by the wealthier beneficiaries of progress.  But do those who do have to pay this price benefit from ‘progress’ at all?  Or is other people’s progress bought with their decline? 

The environment is mostly more polluted.

More people, greater stress on limited resources.

http://efergy.com/blog/world-population-2013-what-do-we-now-know/#

More forests cut down.

Fewer wild animals.

More fisheries depleted or facing depletion.

Soil depletion.

http://news.berkeley.edu/2015/05/07/soil-depletion-human-security/

Increased depletion of ground water.

http://www.wrsc.org/story/groundwater-depletion-rate-accelerating-worldwide

http://water.usgs.gov/edu/gwdepletion.html

Warmer more acidic oceans.

(US).  Fewer factories  More office space

http://www.crosscamp.us/2013/12/peak-office-space-los-angeles/

http://www.industryweek.com/expansion-management/decline-number-us-manufacturing-factories-not-due-offshoring

 Fuel efficiency

But use more energy

Increasing reliance on distant sources of oil minerals which must be extracted at increasing cost.   including mineral fertilizers.

 

Increased incarceration.

http://www.delanceyplace.com/view-archives.php?p=2563

Increased polarization of society

Increased concentration of ownership of the means of production

 http://www.informationclearinghouse.info/article36743.htm 

  Increased concentration of ownership of media.

Increased concentration of ownership of whisky production

 http://www.zerohedge.com/news/2015-01-29/drink-world-4-companies-control-global-whiskey-production 

 

And:

 https://www.google.com/search?q=mega+corporations+that+own+everything&biw=1920&bih=996&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwidr5SB_6nJAhWJ8z4KHTqYAgoQsAQIHA

Increased debt burdens of government and non-wealthy

http://www.goldcore.com/us/gold-blog/global-debt-now-200-trillion/

More people:

More land planted

http://www.ers.usda.gov/topics/crops/corn/background.aspx

Increased spending on military.

Increased threats from terrorism

Lots more ‘data’

More money

(US)More guns in private hands.

(US) Increased costs of health services

(US) Increased costs of higher education.

(US) Increased trade deficit

http://www.tradingeconomics.com/united-states/balance-of-trade

(click on the little ‘MAX’ button)

Reduced spending on infrastructure.

More and more expensive technology for non-poor  especially the very rich

The Internet.

(US ) Bigger houses.  More mega mansions.

https://www.aei.org/publication/todays-new-homes-are-1000-square-feet-larger-than-in-1973-and-living-space-per-person-has-doubled-over-last-41-years/

(US) More homeless.  Increased poverty.

http://www.coalitionforthehomeless.org/state-homeless-2015/

More useless anti-biotics

 http://www.triplepundit.com/2015/11/antibiotic-apocalypse-economics/

The rise of neo-liberalism

(US) More militarized police force

https://en.wikipedia.org/wiki/Militarization_of_police

More corrupt politics  Serving narrow constituency, vs, the people.  

Increased concern with the self. Vs public.

Increasing privatization of the commons.

More mega yachts

http://www.nbcnews.com/id/13345720/ns/business-cnbc_tv/t/worlds-fleet-private-mega-yachts-growing/#.VlPki142cSY

I'll get around to filling in most of the other references. (Or you could.)  And perhaps some other indicators. (Or you could.) I apologize that some data are merely indicative.   But I wanted to get the next post out.

Thank you.

When, and Why, did the Economy Start to go Downhill

When, and Why, did the Economy Start to go Downhill

This post is in response to a question to a comment I made over at:

http://econospeak.blogspot.com/2015/11/gas-all-boomers-or-at-least-tax-and-cut.html

It is also posted as a series of comments at that site.

rosserjb@jmu.edu  asked the question:

“So, greg, please, exactly when out of all that mess was "the turning point"?” referring to the point at which I said “when the increasing energy cost of energy and other resource production started to be a significant problem.”  The word “mess” refers to the entire price history of oil production.

So:  The short answer might be that point when it became (nominally) more profitable to exploit society, to plunder it, rather than provision it and invest in it.  When it became more profitable to be a pirate, than a builder.  (Understanding this clarifies the motives and actions of the Right, and the modern capitalist. “Greed is good” is the motto of a pirate, not a builder.)   But this transition itself is a consequence of the increased difficulty in extracting resources from the environment.  In particular, non-renewable energy resources. 

So if you want a date, sometime around the Reagan presidency, in perverse reaction to the oil crises of the1970’s.

Roughly:

In the beginning, (Well, once the ball got rolling, about 1880.) http://cdn3.chartsbin.com/chartimages/l_oau_dff4ad5a049ca559d9105471f82bf873

the real cost of energy extraction was low, lower than the cost of  developing the infrastructure needed to distribute and consume the oil.  So the cost of extraction was the benchmark for the price. Only as the infrastructure for demand was emplaced did demand on occasion drive the price.  In the first half of the 20^th Century, because of the- inconsistent nature of the supply and its irregular rate of increase, sometimes demand, sometimes supply drove the price. 

With the opening of the Middle Eastern fields, supply smoothed out.  Supply and demand both expanded apace, the price relatively stable and low.     Until the Arab oil embargo of 1973, and the later panic in 1979 due to the Iranian crisis. The result was an effective and dramatic increase in the *real* cost of oil to the US, since it now had to hand over an increased quantity of goods and services to pay to import foreign production.  Domestic fields were becoming exhausted.  New ones (Prudhoe Bay, etc.)  more expensive to develop.

In an energy based society such as ours, (almost) all inputs can be traced back to the energy needed to support them. Thus the size of the economy can be measured in terms of energy consumption, and this is measured in terms of energy input. This instead of dollars.  With this understanding, the inverse of the EROI, the energy return on (energy) investment, is the portion of the real economy which must be devoted to the extraction of energy.  Only the remainder of the economy is available not only to providing services to society, but also to investment and maintenance.

For EROI, see: "Energy, EROI and quality of life"

http://www.sciencedirect.com/science/article/pii/S0301421513006447

Check out: Fig. 1  The Net Energy Cliff

Now:  From about 2004, supply has been constant, but until the 2008 crisis, demand increased, driving up the price.  Demand and price then crashed with the recession, increased with the recovery, and recently spiked again, and is now again depressed. 

http://www.themacrotrader.com/wp-content/uploads/2012/03/Global-Oil-Supply-1.jpg

The question is why is the price, and demand, now (relatively) depressed. 

We return to the short answer, considering the gradually decreasing EROI, that is, a gradually increasing average real cost of extraction.   

So:  We have two different measures of accounting in an economy:  Energy accounting, and money.  Is the price in money necessarily a faithful measure of the real cost, in energy, of energy production?

Why should it be?  Instances where monetary price does not reflect cost, real or even merely monetary, are common occurrences.  Is the current energy market one of them?  In particular, we ask: “How can we subsidize energy production? 

Well, we can’t.  When we subsidize something, we divert real resources from elsewhere in the economy to promote the production of the subsidized good.  We decrease the nominal cost, and therefore the nominal price at which the good may be offered for profit.  However, the real cost must be greater than if the good were produced without the subsidy. So when we subsidize the real cost of energy, we are merely increasing the real cost of production. (Note:  Subsidizing production is not to be confused with subsidizing the capitalization of production.)   That is, because of the cost of our churning resources through the mechanism of subsidy, we are worse off than if we let the price reflect the real cost of production. 

However, we can still manage to increase quantity produced, and depress price. Especially if we also depress demand.  Remember, those resources transferred to subsidize production can only come from one place:  The remainder of the economy, where a portion of those resources would have gone to maintain and capitalize the infrastructure which supports the economy, the infrastructure which also enables the consumption of oil.  

How much is the subsidy?  Well, according to: http://thinkprogress.org/climate/2015/11/12/3721677/g20-fossil-fuel-subsidies/

the world formally spends about $400 billion per year, one way or another subsidizing fossil fuel production.  (The US, formally, a mere $25 billion.)  Given an inelastic demand curve, this can result in a dramatic reduction in price. 

But there are other mechanisms of subsidy.  For instance, consider the US trade deficit in goods.  All those goods, if made in the USA, would require energy inputs, and concomitant infrastructure, for their production.  Just as agricultural imports can be regarded as water imports, the importation of goods can be regarded as energy imports. So energy supply is increased, while demand is contracted. 

Further, the production cost of fracking, while recently improved, is still above the current market price of oil. (Externalization of costs also represents a form of subsidy.)  This production has been financed in large part by massive quantities of debt. This debt represents an enormous effective subsidy, much, much larger than the formal subsidies provided the fossil fuel industry, especially those debts, (and they represent a substantial fraction,) which will never be repaid.  Considerations of the relative discount rates of oil and money, also suggest the actual effective subsidy is much greater.  (The discount rate of a non-renewable resource should probably be considered at most zero, and more likely negative, since all current consumption necessarily implies less ultimately available in the future, likely coupled with an increase in demand.)  And as above, these debts represent demand transferred from the larger real economy to support the production of energy.

Infrastructure neglect is also an effective subsidy. 

My guesstimate of a price that reflects the real cost, everything I can think of considered, of oil is somewhere well over $100 per barrel.  The difference between that and what we actually pay we are passing to the future, our own and that of our descendants.  It is a price we will begin to pay when the delusion live under (and which requires an input of real resources to maindain,) can no longer be sustained.

So, sometime around or, actually before1980, the leaders of society decided to pursue their own narrow and what may ultimately prove to be ephemeral gains, rather than look after the enduring interests of their society. The actual process of their choosing the consolidation of power has been noted elsewhere.  (Consider also eg the Exxon climate data suppression scandal.)  They propounded an ethos to justify their actions, and geared up their media to convince society of the rightness of those actions.  And the people, for their part, got to live beyond their means, splurging on underpriced energy,  their political acquiescence purchased with their own futures, and that of their descendants.  Most of them.  So now society is in a hole, 30 years and many trillions of dollars of squandered resources and mal-investment, with an economy ill-adapted for a future of costly energy.  

Now some might argue that the economy has not been going down hill for the past 30 or so years.  That we have instead made remarkable progress during that time.  We will address that issue in the next post. 

A Few Brief Remarks on Walmart

A few brief remarks on Walmart

We examine some of the effects of Walmart on a local economy, and the nation’s. There is about one store per 100,000 in the US, each with average revenues of about $110 Million.  The revenue of a small retail establishment is about $3 Million, so a Walmart displaces about 35 small retailers, generally locally owned businesses which previously helped provide much of the community leadership.  If we include the earnings of the owners of these businesses, the payroll of the Walmart is less than that previously provided by the sum of the small retailers, so the employment situation is also worsened when a Walmart moves in. 

This calculation, of course, does not include the benefit of the increased consumer surplus provided by Walmart’s always lower prices.  However, if these benefits are limited to an increase in purchases of consumer goods and services, as we would expect since the consumer surplus is widely dispersed among Walmart customers, we would not expect this to improve the capital situation of the community. Indeed, the value existing capital in the community is severely reduced. Downtown commercial rents, for instance, would be severely depressed, as the value of the buildings themselves.

In compensation for this damage, Walmart paid taxes of  $7 Billion on $22 Billion profits, or 31.8%.  But: Public assistance for its employees cost the US government $6.2  Billion last year, so in effect Walmart paid $800 Million taxes on $15 Billion profits, or slightly over 5%.   If instead it had paid its employees the $6.2 Billion more, so they would not need to collect public assistance, it would still have to pay 31.8% on $15.8 Billion. To raise the salary of their employees $1, roughly, they would have to pay out $2. The people at Walmart Headquarters are probably smart, so presumably they have made this calculation also, and given present government policy, optimized it.   Indeed, as the reference indicates, this is probably general behavior among retailers, and other low wage industries.  An interesting problem for economists. 

This calculation is for 2013:

http://www.forbes.com/sites/clareoconnor/2014/04/15/report-walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/ 

Many of Walmart's employees did receive a raise last year, somewhere between $1 and $3 so the figures have changed a little.

http://fortune.com/2015/06/02/walmart-workers-raise/

But not a lot.

 

Fast food companies do pretty much the same thing:

http://www.forbes.com/sites/clareoconnor/2013/10/16/reports-fast-food-companies-outsource-7-billion-in-annual-labor-costs-to-taxpayers/

So we're probably talking about a comparable manipulation of their tax bill, as well. Nominally, retailers seem to pay a lot more in taxes than they really do, if we subtract the billions and billions of dollars the government has to fork out to support the retailers'  under-paid employees.  So these retailers are not at all quite the good citizens they try to appear to be.

Clearly, a minimum wage where taxpayers have to supplement  the worker's income for them to reach subsistence is inadequate. 

Edited and corrected: 12/2/2019

A Third and a Fourth Reason Libertarian Societies Must Fail

A Third and Fourth Reason Libertarian Societies Must Fail

We previously presented two social problems libertarian societies are incapable of solving.  The first is the producer-consumer problem:  Without a compulsive mechanism to continually, or at least periodically, redistribute demand, that is, a government capable of effective taxation, the net consumers, (which is to say, those who actually allocate consumption,)  end up with all the money, and the producers end up decapitalized.  The second is the bully problem:  In the absence of a government, there is no mechanism to prevent the strong from victimizing the weak. 

A third reason is the necessity to regulate competition among the powerful.  The problem here is that, among the powerful, there are two incompatible expressions of self interest. 

Consider the rest of society as the common resource of the wealthy. Clearly it is in the collective interests of the wealthy to manage, maintain, and nurture society, since they are dependent on it.  However, it is in the individual interests of the wealthy to exploit society as much as they can, since any one who does not will be left with less, and weaker than the others.  The wealthy are thus in competition with each other to exploit society, and to the greatest of their ability.  It is the tragedy of the commons, where the commons is the entirety of society.

Now there are (many) cases of successful community regulation of shared resources.  But they are invariably local in scale, and associated with strong and close community relationships.

In the absence of close community, there are only two solutions.  One is to divide up the resources.  In terms of a country, this would be the fragmentation of that country into smaller ones, and the assumption of the government functions of each new country by a single individual. In this case, the libertarian society fails by fragmentation into a collection of independent autocracies. However, the force of competition between nations need not allow this as a solution at all, as resources may be consumed in a greater than sustainable rate in an arms race.  That is, the competition between the new, smaller, nations to build force will impose a higher rate of discounting the future. 

The other solution is to restrain and direct the self interested behavior of the wealthy by an overarching agency. That is, the institution of a government of sufficient strength to restrain the wealthy.  One of the necessary requirements of strength needed to accomplish this is an effective monopoly of force by the government.  So the third reason, then, that a libertarian society will fail, is that either it will tear itself apart, or it will acquire a government.

And this is already incompatible with the premises of Right Libertarianism.  However, even this government is not sufficient. The monopoly of force will merely prevent the competition between entities from itself degenerating into a balance of realized and potential violence.    The other required ability of the government is to force the internalization of costs.  The internalization of costs must be done in both space and time.  In particular, pollution must be eliminated, or at least paid for in real, compensatory, investment.  Also, all resources must be consumed at a sustainable rate. Since the consumption of non-renewable resources by definition cannot be sustained, they must be either recycled or, if they are of a nature where they cannot be recycled, dependence on them must be eliminated. Only with this requirement can society be assured that the benefits of production are greater than the costs. 

One note here. The greater the concentration of wealth, the greater the powers of government required to counterbalance it.

To put the point nicely: Right Libertarianism, except perhaps on the smallest scale, lacks the necessary organization to respond to the demands of its physical environment. This includes the demands made by other, more organized, societies.  This is the fourth reason libertarian societies will fail.  

Regarding organization, the body politic of Right Libertarianism might be regarded to most closely resemble that of a jellyfish, rather than any higher life form with some sort of functioning brain.  In consideration of that, the increasing rise of moneyed power, the concomitant reduction in government functionality as it increasingly becomes subject to control by the wealthy, the "Libertarianization" of our nation, are given additional perspective. 

A Response to Kanbur/Stiglitz: Economics is a Mess, and Economists Need to Fix it. Fast.

This post was basically written to be posted over at Naked Capitalism. It was written as a response to this post: http://www.nakedcapitalism.com/2015/08/kanburstiglitz-rent-seeking-as-a-major-driver-of-wealth-and-income-inequality.html

EDIT(8/20/2015):  Well, Naked Capitalism chose not to publish this.  Perhaps it is a bit frenetic.  I did crank it out in a few hours. As may be.

One possible issue is I did not address 'rent seeking,'  per se. My view on rent seeking is that it is up to the regulators of an economy to minimize and distribute it, and up to economists to provide the best theory for doing so.  Since basically everyone tries to  do it all the time, to address it as original cause would seem not to be a properly economic issue.  However, if the problem is some institutional structure which permits some small slice of society to damage the rest of society with their rent seeking, then that institutional structure is what  you want to address.

Anyway, if you disagree with this post, please comment.  If you agree, feel free to comment, also.  And then you might want to help spread the word. END EDIT.

A Response to Kanbur/Stiglitz:  Economics is a Mess, and Economists Need to Fix it.  Fast.

Recently, Yves crossposted (from VOXEU) an analysis by professors Ravi Kanbur and Joseph Stiglitz.  (Also posted by Mark Thoma at http://economistsview.typepad.com/economistsview/  )This analysis raises the issue that currently fashionable theories in economics may not be able to adequately explain our current, unequal, economy.  While their analysis has value, and admits to serious problems in the study of economics as it is currently understood, the post does not go nearly far enough in acknowledging or addressing the actual problems which may be found in the foundations of the field of economics,. 

As can be shown, these problems rest with some of the fundamental assumptions underlying the practice of economics, and until these errors are addressed, economics will continue to only poorly represent the reality it seeks to describe.

First, regarding the particular issues raised by Profs. Kanbur and Stiglitz.  In the concluding remarks to their post, they propose the following changes to the analysis of the problem of inequality.  They propose these changes as necessary to gain an adequate understanding of the problem: 

“Concluding Remarks

Thus, the new stylised facts of our era demand new theories of income distribution.

• First, we need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality.

This will entail a greater focus on the ‘rules of the game.’ (Stiglitz et al 2015).

• Second, we need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality.
• Third, we need to further develop normative theories of equity which can address mechanisms of inequality transmission from generation to generation.”

To be fair, the first item is actually a pretty deep cut.  ‘Marginal productivity theories’ are fundamental, some of their basics taught to budding freshmen in Econ101. For any economist to call these into question is an act, first of all, of intellectual courage. 

However, I think the problem with this formulation runs at once deeper, but is also more shallow, than the real issue.  On the shallow side, models are what economists construct to gain an understanding of a very complex reality.  If in some way, the behavior of the model mirrors the behavior of reality, the model is usually considered a success.  Models can be simple, and based on a few simple assumptions, or like the Kaldor-Kuznets model Profs. Kandur and Stiglitz discuss, more complicated, and based not on just simple assumptions, but some previous body of theory developed from and based on those assumptions.  So questioning such a sophisticated model is only an incidental attack on its underlying assumptions.  And replacing such a model, then, with one based on equally sophisticated theory, does not necessarily address the underlying problem with the assumptions.  And here, Kandur and Stiglitz  seem to be proposing we essentially start with model mechanisms which must ‘generate rents.’  This seems to beg the question, and so such a model will likely be basically useless. 

And on the deep side, are the assumptions underlying ‘marginal productivity theories’ the correct ones to attack?  I am not so proficient at economics that I can determine whether the assumptions underlying ‘marginal productivity theories’ are above reproach.  In my understanding of the theories, however, they seem pretty useful, and generally so.

So I can instead offer alternative assumptions, different from the assumptions I believe economists make, calling them into question. I believe the economics profession should, in any case, examine them.

Now. for item two, however, I think Prof. Stiglitz makes a wrong cut.  He lumps physical and financial capital together, when they are not at all the same thing, and the difference is especially glaring for this problem.  In particular, financial capital feeds off physical capital.   Prof Stiglitz then lumps all human capital together, when the relevant distinction is between labor, in particular labor closely tied to physical production, and management, in particular those who manage financial capital.  Thus the appropriate associations are between physical capital and labor, and between financial capital and (upper) management: The one exploits the other, and indeed, that is how we can define them.    So he puts the lions and the lambs in the same pen.  Twice.

But, let me add that the assertion financial capital and upper management exploit labor and physical capital may be unfair.  The necessary counter claim would be that the benefits to labor and physical capital of the activities of management and financial capital outweigh the costs to labor and physical capital of those activities.  This claim may, in fact, be true.  The claim would seem, however, to be contradicted by the evidence of the combination of increasing inequality, and the decline in the investment in and even maintenance of, society’s real capital. These processes do suggest that ‘exploit’ is indeed the proper word.

In item number three, I believe Prof Stiglitz implies that current normative theories of equity are basically correct, but “further” theories need to be developed, and presumably developed from those basically ‘correct’ theories. 

One of the fundamental and essential assumptions underlying current theories of equity, however, is the standard, textbook definition of money. If this definition of money is in error, then so is our understanding of equity.  So is our understanding of asset. So is our understanding of the nature of investment.  And so would our understanding of the flows and distributions of assets and their distributions. We could not claim to understand either the state of an economy, nor its dynamics.  In all these things we would be no more than part right, and certainly also quite mistaken. So. 

Conventional economics must examine some of its fundamental assumptions.  Here are three corrected assumptions for economists to look at. They need not agree with my assumptions.  But, as Yves said to my earlier post, they need at least to refute them.   As a fourth item, I also bring to attention statistical mechanics.  This is a field whose potential contributions I believe economists fail to appreciate.

1)        The textbook definition of money, which I assume is still relevant to the study     of economics, is wrong:  Money is only incidentally a measure or a store of value.  It is actually a measure and store of *demand* on (things of real) value.  Because money is merely demand, it cannot reliably distinguish between productive assets, and ‘assets’ which are in fact a drain on production and maintenance of real wealth in an economy.  Money, for instance, cannot distinguish between the value of a high school, and the value of a yacht.  In fact, money, especially if badly distributed in an economy, favors the production of yachts over high schools, and in general, the consumption of resources over their production. I argue this point in greater detail at: http://www.nakedcapitalism.com/2015/06/the-standard-definition-of-money-is-in-error.html

2)        While the costs of factors of production are additive, the combination of factors in production is multiplicative.  Labor and capital multiply to create production.  Consider, for starters, how much is *added* to the value of the freight of an empty truck going across country.  And in general, where the cost of an activity exceeds its benefit, it is because the multiplicative factor of that activity is less than one. For example, in the analysis of sectors, finance is multiplicative, as is government.  For another example, academia, and in particular the study of economics itself, is multiplicative. To say that economists add to the value of things produced in an economy is absurd. Economists produce nothing of substance: Nothing that anybody can eat;  Nothing that will heat anybody’s home.  What they do produce, or are supposed to produce, is understanding. This understanding offered by economists can multiply the productive capacity of an economy. Policy adapted from correct theory can increase the productive efficiency and resiliency of an economy.   Efficiency is a multiplicative factor. This factor can be greater than one for sound policy.  Or that productive efficiency can be reduced, the multiplier become less than one, when policy is based on unsound theory.

3)        The motives of capitalists are not the same as the motives of society as a whole.  Therefore, there is no guarantee that the activities of capitalists advance the interests of society.  Indeed, where their motives conflict, where, for example, there is opportunity for capitalists to externalize the costs of their activities, there is every reason to suppose otherwise. 

4)        The study of statistical mechanics is a well developed branch of physics, and one that a few physicists, at least, have been trying to apply to economics.  For statistical mechanics to have application to large systems of ‘particles,’ all that is required is some form of interaction between the particles. One implication of the approach is that there are what might be called ‘natural’ distributions of wealth an income.  Resources must be consumed to maintain distributions of wealth and income which are different from these ‘natural’ distributions.  And indeed, the greater the deviations of these ‘unnatural’ distributions from the natural ones, the more resources which must be consumed merely to maintain them.   There are problems with dimensionality to be worked out, and I have not been following the literature.  However, I can say that I have not heard much about this approach from economists.  I do not access the formal literature all that much, but from the economics blogs I frequent, I have heard nothing.   http://arxiv.org/pdf/cond-mat/0211175v1.pdf

       “Statistical Mechanics of Money, Income, and Wealth: A Short Survey,” from       2002 might be a start for the interested economist.    

Kanbur and Stiglitz are deserving of great respect, They have labored long and hard and produced important results in the difficult and, what also should be, the immensely valuable field of economics.  But, if the assumptions those results are based on are in error, then much of the effort that they and their colleagues have expended have been wasted. And the same can be said of any future investment they, and our society, make, if any errors are not corrected.  Worse, much of those efforts may even have been counterproductive, and this may continue.

To many outside observers, the study of economics seems incoherent. Is it? In many cases, diametrically opposed descriptions and prescriptions can each find support from one or another school of economics. If the study of economics is incoherent, this raises the questions: Is the study of economics incoherent because it is politicized? Or is it politicized because it is incoherent?  If economics is incoherent because it is politicized, then it cannot qualify as a science: It is not the study of, or the theory of, any objective phenomenon. It is, and can be, no more than one or another’s propaganda. 

If instead economics is merely incoherent in the understanding of economists, economics as a science need not be incoherent in principle. For coherent theory to be developed, consistent assumptions need first be discovered.  This failure of understanding then, a failure which is exploited by politicians, is because the assumptions actually used by economists to make and base their theories on cannot be consistent. From inconsistent assumptions, mutually contradictory conclusions can be drawn.  If contradictory conclusions can be drawn, we should not be surprised that the various players should choose from economics those conclusions which favor their own interests, and those economists, who espouse those conclusions. Neither should we be surprised if those players also deny the conclusions which stand in opposition to those interests. After all, they have refutations, and people to argue them.  And so we should also not be surprised if many of the pronouncements of economists are ignored.

Incoherency also implies that any conclusions economics reaches will fail, at least in part, to correspond to reality, where economics is so understood.  This does not necessarily mean here that economics will totally fail to represent reality.  Indeed, microeconomics provides much excellent application. But the true definition of money is not important in microeconomics.  In macroeconomics, however, the definition of money may be very important.  I claim that money, and its flows, impose many significant forces on an economy in the large, with the consequence of many stresses and distortions in that economy.  In this I do not think I am alone. So if the definition of money is in error, then so long as it is in error, explanations for these distortions, if even they are noticed and recognized, will remain mysterious.  The best theories will be no more than ad hoc rationalizations.  Like the Ptolemaic Cosmology, these theories will be bereft of any true insight.  

It is the implicit opinion of some policy makers on the Right that society has no genuine need for economists, or their dubious ‘economics.’  Their claim is that the free markets of unfettered capitalists create the optimum economy, and the optimum society.  To them, the only use for economists is to enable such capitalists to more efficiently exploit these markets, and so enhance their profits. Nowhere for them is there any other role for economists. There is no point to economic analysis, because there is no point to economic governance. To them, there can be no better economy.  There can be no better society.

One final word:

Today’s academic money-centric economics is to very large degree woefully unequipped to handle the analysis of the demands of an increasing population on a diminishing resource base. Most seem to be in denial, their activities increasingly irrelevant to our collective future. What ever else he, or she, may think of this post, every economist, every reader, needs to look at: http://www.overshootday.org/  and the links it points to.

Their analysis concludes that humanity is using the earth’s resources at a rate it takes 1.6 earths to replenish. The other way they put it, for the year up to August 13, humanity consumed the amount of resources it would take the earth one entire year to replace. Simply, we are consuming our children’s future today, and at an ever accelerating rate.

There is a need for a correct understanding of economics. There is a need for economists to clean their house.

It is the case that while we may never run out of money, we may run out of the things that money will buy.  However, if the standard definition of money is correct, we may indeed be fortunate. According to the standard definition of money, $10 of money has the same value as $10 of food.  So if we run out of food, we may yet be able to eat the money.

A Second Reason Libertarian Societies must Fail

In the previous post, we argued that a mechanism for the redistribution of demand was required to maintain a society. In a libertarian society, there can be no such mechanism. In consequence, in a libertarian society the market for production is progressively destroyed, and with the market the entire economy.

There is also a more direct reason libertarian societies fail: Libertarian societies provide no adequate mechanism for protecting your neighbor from  the aggression of others.  There must be a mechanism, because without such a mechanism, there is inadequate motive for you, or anyone else, to help your neighbor resist the bully.

It is in the concentrated interest of the bully to oppress your neighbor.  The bully may profit greatly if he succeeds.  The benefits to the bully will be greater than the cost.  But you, and everyone else, only have a diffuse interest in helping your neighbor resist the bully.  The cost to you to help your neighbor is concentrated, and may be far greater than the benefit to you.  Further, if mutual aid is agreed to, but such protection is voluntary, it is in your interest, and the interest of others who might be expected to contribute, to contribute as little as possible to the protection of your neighbor. Which would likely be nothing.  This is an instance of the free rider problem: If anyone can ride for free, everyone will ride for free, because only a fool, (or a saint, perhaps,) would pay for what is offered for free.

So the consequence is that in the absence of government, and police, and regulation, the bully, the large organization, the wealthy, will dominate and oppress your neighbor, and after your neighbor, you. A government diffuses the cost for the protection of your neighbor across the whole society. In the libertarian state, some are more equal than others, and the more equal shall devour the liberties of the less equal, because the only thing to stop them is: principle.  That is, in libertarianism, the only mechanism to stop the powerful from effectively enslaving the weak is the moral disposition of those same powerful interests.

From the point of view of Widerquist's thesis, there is only the pronouncement of platitudes and the benevolence of the powerful to prevent the establishment of absolute monarchy by force of violence. There is no real reason for the prospective despot to wait on 'legitimate' means.