Saturday, September 10, 2016
We are much more productive when we specialize in producing only a few goods than 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.
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 influence 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.
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.
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.
Posted by Doru at Saturday, September 10, 2016