Friday, October 24, 2008

ECONOMICS 101

Some fundamental tenants, followed by discussion and ramifications:

  1. There is no such thing as savings.
  2. Money is not real (although it is a valuable accounting tool).
  3. Prices are set by supply and demand.
  4. Any attempt by people or governments to change any of the above is doomed to failure.

There is no such thing as savings, other than to store food or other supplies in a larder. We all live off of the current productivity of workers. For you to retire, you must convince someone else to work on your behalf (to provide you with food, clean water, sanitation,  energy, health services, everything you need). At the beginning of life, your parents did that. At one time, we would depend upon our children to provide for our old age. Investing in children was investing for retirement. But that time has past.

In today's society, we save for our retirement and therefore depend upon society to care for us. The only way that works is if:

  1. We invest a portion of our current work productivity in infrastructure (capital) so that other, future, workers can be more productive. (In exchange, we expect those future workers to support us in the future via a fraction of their increased productivity.)
  2. A large enough fraction of the population is working in primary production to provide for the non-workers.
  3. The population dynamic is such that the future expected number of retirees is proportional to the future number of primary workers. This does not match reality!

Money is not real. Actually, money can be real, if it consists of coins or other valuable items (gold coins are real, as are gems and many other commonly recognized commodities). Paper money, or a coin whose value is based on a promise, is not real. Unfortunately, governments can print more money or stamp more coins. This dilutes the value of the existing currency, making it proportionally less valuable. Note that the total value of the good and services in the economy remains unchanged - only the number (accounting value) associated with the measurement of the economy increases.

The picture is not really so simple, but it will serve our purposes. The great thing about the concept of money is that it creates an accounting tool that allows us to share productivity, to allow a civilization to work together (some farmers, some miners, some builders, some engineers, etc.) where each of us can achieve greater productivity in a narrow field than any of us could if we each had to provide for all of our needs. Can a farmer build a house or a car? Can an engineer raise cattle and chickens for meat, milk, eggs? Yes, but not as well as a professional. And that, my friends, is the true source of wealth.

Prices are set by supply and demand. This is always true in the long run, although short term variation due to greed, fear, stupidity, and the delays needed to change production will happen. Capitalism works, for the most part, but it is slow to respond to changing markets. If oil prices jump, economic theory says that exploration, production, and distribution will increase supply to match (or exceed) demand. However, it takes years to find new sources of oil, drill the wells, build the distribution networks, the refineries, etc..

The government should have a role in pricing, to ensure fair competition, avoid fraud, and to make certain that the consumer fairly pays all costs associated with a commodity. For example, if a bottle of water is sold to the consumer, the price (manufacturing, distribution, and taxes) should reflect the total life cycle cost of that bottle of water, including the renewability of the water source (no dropping water tables stealing water from the future), and the disposition of the bottle (the cost of disposal or recycling - don't dump our current waste on our children).

Any attempt by people or governments to change any of the above is doomed to failure. History is full of failed attempts to control an economy. Price fixing invariably leads to shortages. Government attempts to define production invariably result in reduced choice and quality, with higher prices. Printing more money causes inflation. And since there is no such thing as savings, it is incredibly stupid to "invest" social security funds in government debt. All such debts must be repaid by taxes on future workers, whether you call them social security taxes or anything else. Who could come up with this concept? Unless the worker's funds are invested in things resulting in future productivity gains (which can include factories, research, infrastructure), this scheme is doomed to failure. Yes, I'm in favor of privatizing social security, just as I'm against the concept of government debt (except in the short term as a balancing mechanism). Unfortunately, it may be too late.

However, in our current economic environment I support government investment in real estate or other businesses (as well as research), because only then can we boost real worker productivity and escape the fragile house of cards we live in.

3 comments:

tOM said...

You assume productivity/worker remains constant when you are worried about retirees. If the retirees, while working, improved productivity enough, there could be ever growing wealth for all, even if we all retired.

Until we run out of good resources...

DB said...

Also...
If you look at the actual worker productivity vs GDP on a country by country basis you will find anomalies.

Examples are Yemen and Norway.
How is it possible that both countries have workers that work much harder than everybody else?

Answer: They don't. Something else does the work for them.

If you think about it you are half right but have made a fatal assumption.

It's true that potential retirees need to have services provided to them and that requires work which is exchanged for savings.

Where your argument falls down is that work is not necessarily done by humans. Much of it is done by machines.

The argument of four workers to one retiree doesn't hold either. It's theoretically possible that EVERYONE is a retiree as long as services are provided to them.

This could be done via corporations whose productive parts are entirely machine based and whose profits are taxed and then recycled back into the government which provides retirement checks for the retirees.

DB

marry said...

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