Saturday, September 10, 2016

It is time to learn some economics, if you want to live.


1. Specialization

We are much more productive when we specialize in producing only a few goods then when we produce ourselves everything we need. This makes us wealthier when we specialize. Today we are too many to survive without specialization. We would be unable to feed ourselves without specialization.

2. Exchange

Since we are specialized we need to exchange goods. We exchange goods which we produce for goods we need. Exchange is much more efficient when we use an exchange medium. We call the exchange medium "money". In an economy based on specialization which uses money there is a "double circle", products travel from producers to traders to end users to producers, and money travels from producers to end users to traders to producers.

A product is scarce when the amount people want to buy, also known as demand, is bigger than the amount people want to sell, also known as supply. A product is in surplus when the demand is smaller than the supply. When a product is scarce, those who want to buy it offer higher prices for that product. This sends a signal to the producer, who will be motivated to produce more. When a product is in surplus, those who sell it offer smaller prices to sell. This sends a signal to the producer to decrease production.

Money is a product like other products, there is a supply and demand for money. People who need money to run their business demand money in return for their goods. Money is supplied by whoever owns the money printing machine.


3. Economic policies

In theory, money should be neutral. That means that when the money supply in an economy changes, all prices in that economy should adjust to their new equilibrium levels, and this should not influence the economy. In practice, people suffer from imperfect information, limited information processing power, risk adversity and some reason failures, such that changes in money supply greatly influences their economic decisions and therefore the economy. You can read here about the adverse effects of deflation, also known as negative inflation: http://mail001.blogspot.ro/2015/07/economics-as-weapon.html .

Because people are not perfectly rational, there is a need for a well designed money supply policy, also known as monetary policy. When business is weak, the money supply should be increased. Newly printed money should go to those in need, because they provide a foreseeable and stable demand, making investment decisions easy and increasing employment. With no such policy, it is probable that resources and people will remain unemployed, causing long-lasting misery. When business is strong, it may be good to keep the money supply stable to prevent overuse of resources and excessively risky investments. Also, keeping money supply stable when the business is strong maintains people's sensitivity to monetary policies during weak business periods.

Another economic policy available to governments is changing the tax level. This acts to some extent similarly to the monetary policy. A decrease in taxation is relatively similar to an increase in money supply, an increase in taxation is relatively similar to a decrease in money supply.


4. Power

Normally we would expect to see the people controlling the economic policies in order to ensure their well-being. They don't. Those who control monetary policies control people's livelihoods and they have countries as property. It is enough to suddenly decrease money supply to make business weak and money expensive, print some money for themselves, and use that money to buy the economy. It is possible that the Great Depression and the current crisis were created this way.

The only way for the people to control economic policies is to voluntarily associate with their equals in order to promote their common interests: http://mail001.blogspot.ro/2015/12/theory.html . Whatever institutions we create, the bottom line is always reciprocal care. You can be murdered with impunity by a center of power, no matter how many backups you provide for yourself, if people around you don't care. Involvement must be personal.


5. Responsibility

There is no way people can live well while they are irresponsible. However, they do try:

A. People want to live with no money. Abolition of money would cause huge suffering, and many would have to die, because a barter economy would be much less efficient then the current money using economy.

B. People would like to live with no banks. Banks are intermediaries between savers and investors. When a bank lends money, usually the investor does not spend it immediately and the money remain in his account open by the bank. Therefore, the cash remains in the bank's vault, and the bank can lend part of it again. This way the bank increases the money supply in the economy. In effect, the bank provides, to some extent, some services which were offered by money: it keeps track of debit and credit.This is called "money multiplication". This policy also exposes the bank to bankruptcy, because whenever the savers or the investors want to use their cash in an unexpectedly large amount, the bank will be unable to provide it. People who fail to understand economics believe that this is unfair and they would like to have no banks.

C. Communism. In communism there is only one firm which owns the whole economy. From an economic point of view, there is no motivation to produce, because nobody profits but the CEO. From a political point of view, resistance is futile, because power is concentrated at the top. Those who are unable to be responsible within the current "capitalist" environment are stupid enough to believe that anybody will listen to them in a totalitarian society. From a practical point of view, we have the examples of USSR, see https://www.youtube.com/watch?v=FdfCHrBhiu8 , and North Korea, see Google.

D. Because these "policies" proposed by concerned citizens obviously fail to work, there is the idea that they would work on a global scale. This is not true. Communism and moneyless economies could work only when:
a. people become able to know the needs of other people at least as well as those people themselves,
b. people will care about other people at least as much as they care for themselves.

Also, it is not possible to implement such a system on a global scale without making it work on a smaller scale before. People would not know how to proceed into such a maddening project. Consensus on such an abstract idea would be impossible. All other social changes took place in time, they succeeded only after endless corrections and negotiations, and none of them actually covered the whole society. Keep in mind that bigger projects are more complex and risky then smaller ones. I hope that people will never consent to such a suicide.

E. The free market economy is criticized for the creation of war, poverty, bad economic incentives and the destruction of the ecosystem. The free market is an institutional tool. No tool will ever take any decision in your place. The free market efficiently allocates resources, and it should be used for that. If you want to have peace, decent wealth sharing, good economic incentives and a healthy ecosystem, then YOU will have to defend them. If you break our basic individual freedoms as the Germans, Russians, Chinese, Iranians, Koreans did in the past, then you will discover the hell irresponsible people deserve.


Wednesday, December 16, 2015

Theory

We are too many and the ecosystem is too badly damaged to allow us to live outside a society. In order to live in a society we need rules to coordinate our activities, for example a common language and economic activity rules for property and currency. These rules must be created and defended by people.

There are only two ways to create and defend these rules:

1. A powerful person or group of people can impose the rules, keeping other people weak, divided and economically dependent. This is the case of a vertically integrated society. In such a society the patron to client relationships are more powerful than the peer to peer relationships. This situation describes a stable social equilibrium because the patron rewards informers and punishes those who associate to defend their rights. This social structure generates a propagandistic public discourse.

2. A voluntary association of equals can impose the rules. In this case the peer to peer relationships are stronger than the patron to client relationships. This is the case of a horizontally integrated society. This situation describes a stable social equilibrium because the association provides security and government to its members and it excludes those who betray its interests. The members of the association meet and communicate regularly, get involved into local administration and politics, initiate business ventures and address public problems of their society. Usually there is a large number of associations which pursue sometimes contradictory ends. This social structure allows and requires a rational public discourse.

These two social structures are stable over thousands of years in spite of powerful exogenous factors. Even though each individual's motivations to support the current social structure are weak, they are ubiquitous.

Bibliography: R. D. Putnam, Robert Leonardi, Raffaella Y. Nanetti, Making Democracy Work, Civic Traditions in Modern Italy, Princeton University Press, Princeton, New Jersey, 1993

Wednesday, July 08, 2015

Economics as a Weapon

Within a modern economy there are two important economic policy tools: the money supply and the level of taxation.

The money supply is the money the central bank makes available to individuals and firms which operate within an economy. There is a market for money, just like for any good, which determines the level of prices. If the money demand is stable and the money supply increases, then we see a rise in the level of prices, known as "inflation"; if the money supply decreases, then we see a fall in the level of prices, known as "deflation".

Deflation has a number of interesting effects on an economy:

1. In order for an economy to adjust to a lower money supply, all prices should decrease, such that the economic activity could continue with a lower amount of money. A shop owner, for example, will see that his clients lack the cash required to buy his goods as before and he has to lower prices. This means that his employees' salaries, prices for his acquired goods, utilities and rent should also decrease. The employees' utilities and rents also should decrease and so on, until all prices adjust. As a result, the economy could function like it did before the money supply decreased, but with lower prices. However, THIS DOES NOT HAPPEN. Some prices are "sticky". The building owner usually is rich enough to keep the rent high, even if this means that the building will stay empty and he will actually lose the rent over a long period of time. The utilities suppliers usually are large enough to function as monopolies and they even continue to rise prices in the middle of the recession. This squeezes the shop owner into bankruptcy. The unemployment increases, the production of goods decreases. We have recession.

2. Potential investors see that their money are more valuable every day. They are no longer motivated to invest the money, unless the business opportunities offer profits above the deflation rate and at a very low risk. Keeping paper money is safer than starting a business, especially during a recession, and now they get a profit by keeping paper money. This decreases investment, and further decreases the money supply, since more money are effectively withdrawn from the economy. As a result, unemployment increases and production decreases further. The circle of disinvestment and recession can continue for a long while.

3. Inflation acts like a tax: an increasing level of prices devalues any cash in the economy, while allowing the government to spend the newly printed money just like any other public money. Unlike a regular tax, inflation taxes undeclared money, money kept in a suitcase under a bed, as well. Deflation has the opposite effect, it rewards black money. In a country with a poor tax collection rate, like Greece, this effect alone can blow up the economy, because the government can no longer tax income as efficiently as before.

4. There is a psychological effect of low money supply. When you see money entering your pocket, and you expect more money to come tomorrow, you plan to spend or invest it. When you see that money supply is tight, you save even more than it would be rational to do. This goes beyond the rational planning in point 2. This strengthens economic booms and recessions, making them worse.

5. A government needs to face unexpected adverse shocks, like bad weather or financial attacks from global speculators. If that government can not print money then its ability to answer to such adversities decreases. When financial global speculators know that a government is unable to answer, the attack becomes certain, because its success is almost certain.

6. When a government prints money in the right amount and at the right time, and spends it the right way (which basically means helping the poor within the society), the economy will grow. As a result, the money demand will increase, and the price level may not even increase at all. This is what happened in the USA, which printed large amounts of dollars, as opposed to EU, which applied tight money supply policies. Today, the dollar grows stronger against the euro.

Taxation also has an optimum level which in Greece has been exceeded by far. In Greece, lower tax rates would increase tax revenues, because the economic activity would increase.

These simple statements are the conclusion of any economics college first grade Macroeconomics textbook.


I remind you that money supply is only paper, printed paper. So why are we having this problem of lower money supply in Greece at all?

Greece is less efficient and more corrupt than Germany. As a result, there is a level of euro money supply which would bankrupt Greece and allow Germany to function. Now ECB knows precisely what that level is. After five years of austerity in Southern Europe the German economy also bordered deflation. ECB reacted on the spot: http://www.reuters.com/article/2015/02/02/us-global-economy-idUSKBN0L60AT20150202 (risk of deflation in Germany) http://www.bloomberg.com/news/articles/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight (reaction).

Sunday, September 08, 2013

Syria Proposition

Western governments should organize a peace conference with Middle East regional powers, because the war in Syria is a regional war and not a civil war. As a motivation, the West should offer a credible recovery plan, that would create business opportunities for most parties involved. If a regional power rejects a correct peace and shows its muscle, then the muscle must be bombed. Also, more aid for the refugees. They know better than us what is going on in Syria and they must be part of the solution.

Wednesday, September 04, 2013

Summary

  1. We need to use the new IT technologies to monitor, control, and influence our gov't's decisions in real time. (Toffler)
  2. We need to support our interests against the interests of large centers of power, like governments and corporations. (Robert Putnam)

Syria: My dear 50% non interventionist Western citizens

Syria is not a problem of the Muslim world. There is only one world, and the Middle East lies on its most important fault line. Moreover, the Middle East society is vertically integrated. This is bad enough, but there is more. The conflict is hugely amplified by your dependence on oil. Western interventions in the Middle East have been intense and uninterrupted for a long time now. This created tensions which are big and concentrated, largely against you. In Syria, for example, both sides would like you better dead, and they don't make a secret out of it: Khomeini and Al Qaeda. ONLY THE SYRIAN CIVILIANS, caught in the middle, would like to live decent lives in a Western style democracy. Your decision to default on your (rather impressive) responsibility for those people's lives may well be the last straw before your payday. It is imperative for you to care and support peace negotiations among regional powers in the Middle East, even if that means for you to give up some of your interests and support financially, politically and civically the establishment of decent societies in the Middle East. About the racist and Christian fundamentalist components of your position, I better keep my comments to myself.

Sunday, May 05, 2013

All Together Now

An open society is not stable. (In an open society public decisions are made through rational discussions between members of that society.) People always try something new, and if they are on their own, they will change their society. Electronics and Genetics are only the last important change, turning our global society upside down, in a long string of changes promoted by open societies in a short period of time, starting with the ancient Greeks. And it only gets worse, the speed of change increases every decade.

Open societies are usually horizontally integrated (see Open Society) and they can cope with change much better than their poor counterparts, the closed societies, which are usually vertically integrated (VIS). (In a closed society change is arrested by dogma, terror, dictatorship, and it takes place in convulsions, at large time intervals.) You can't imagine how disruptive have been these new technologies to the Russian and to the Chinese societies, for example.

After the fall of communism globalization resulted. This allowed the rich Western elites to extend their area of interest to the whole planet. Horizontally integrated societies (HIS) find it now much more difficult to control their governments, because their governments colluded with multinational corporations and became stronger than the horizontally integrated societies which enabled them to conquer the planet in the first place. Also, communism is no longer a danger, such that the poor can be taxed to subsidize the rich during the economic depression.

Technological change places direct pressure on HIS's, too. According to Toffler, political institutions should change to adapt to the new technologies. When large businesses and government officials use the Internet to move their billions around the globe at the speed of light, they can not be controlled through a vote on paper every four years. Example: at the New York Stock Exchange, powerful computers intercept online buying orders and use their speed to buy those shares before the online order is completed. As a result of the increased demand, the online user buys the shares at a price a little bit bigger then when he placed the order and the difference goes to the one who owns the fast computers. Such problems can't be regulated through a four years vote on paper. And it is not about money only, it is about power, because the very way we protect property is in question. Digital private information, satellites, drones, we can't control them when we vote on three issues every four years. The problem of citizens' control over their governments in HIS's is serios enough to make the control of the Internet by large corporations and governments the main political issue of our time (for copyright protection, of course).

Lack of global government is also a major problem. Because of technological advances we do now have a global society and economy, but no global government. By global government I don't mean a centralized government, I personally support a distributed government, as I will soon explain, but we certainly need some government. For example it becomes clear that we need some population control policy. It would suffice to tax everybody's income with some percentage and distribute the money to mothers with one child. This should be enough to cover the cost of raising one child. With such a policy in place, very few women would choose to bear more than one child. But we can't do this. The pressure on our ecosystem is increasing to a point where people will support our traditional population control strategy: yet another war.

The solution is to voluntarily cooperate to solve our common problems, to govern ourselves a little bit more. Just as the French analphabet, superstitious and violent peasants had to learn basic mechanics and how to read the paper in the morning before they go to vote, we need to learn some more basic sociology, economics, political science and we need to begin to control our governments in real time, imposing limits on the mistakes they make on daily basis. I thought that it should be easier now, when we accept reason and science as the basis of our decisions, than it was in 1780's, but it is not. People continue to support well documented policies that destroy our economy and society. Why? Because the global society is vertically integrated. Every little individual is motivated to be stupid, to support austerity, to shut up when he sees injustice, to be irrational in the way he thinks, and so on. As I said here, there is no rational discussion in a VIS, only declarations of loyalty.

Tuesday, May 01, 2012

Reform

http://www.copyrightreform.eu/sites/copyrightreform.eu/files/The_Case_for_Copyright_Reform.pdf

This is the first time that I read such a long piece of writing on the computer screen. Really. The action does not fade after the first few pages. By the contrary, it only gets better.