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It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
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John Quiggin 
I like the changed look.
I know it was forced upon you, but the Red was too much. this is easier on the eyes.
Nice new blog look. I note that John Quiggin is now on the right of the political plane :).
More on intellectual property as protectionnism here:
http://guerby.org/blog/index.php/2009/06/04/201-pascal-lamy-propriete-intellectuelle-et-protectionnisme
(some in french, quotes in english)
“””
Frequent seizure of Indian drug consignments in Europe may force domestic pharmaceutical firms to avoid the European sea routes to destinations in Africa and Latin America, Commerce Secretary G K Pillai said.
Concerned over continuation of the “non-trade barriers” (seizure of drug consignments), Pillai said the Indian firms would have to avoid “European ports and take the goods through some other ports”.
The seizure of drug consignments by European authorities has gained momentum in recent times. In the past few months, four large Indian consignments destined to African countries were seized at European ports ostensibly on allegations of patent violations. […]
“””
It’s too bad there’s no study around on the good use of protectionism because of the dominant ideology, we end up with the worse of protectionism (and dead people here).
For comment, Herman Daley on growth and the steady state economy
http://www.theoildrum.com/node/5464#more
I found out today that the Waxman-Markey will have a US$10 auction reserve price. This will increase at 5% above the CPI per year. The reserve price will function a bit like a price floor in the emissions trading scheme. It also sends a long term price signal.
If I was thinking of building a coal-fired power station in the US, I’d be thinking twice now.
BilB,
The first two of Daley’s conditions are true. Here is a quote from his article:
“A long run norm of continuous growth could make sense, only if one of the three following conditions were true:
(b) if the economy were growing in a non physical dimension, or
(c) if the laws of thermodynamics did not hold.”
Let me take (c) first as this is one of the “laws of physics” that is a law about thermodynamic processes. The evidence of increasing entropy does not apply when we move to systems that are little to do with heat. There is considerable evidence that the universe is becoming more complex rather than less complex. Certainly on earth we can observe the ever increasing complexity that we call life. So to use the second law on thermodynamics that says
“The second law of thermodynamics is an expression of the universal principle of increasing entropy, stating that the entropy of an isolated system which is not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium.”
The entropy being referred to is heat and all it is saying is that if we leave an isolated system on its own after some point in time it will have the same temperature everywhere. Extend this beyond heat at your peril.
It is an intersting thought tool and idea but to apply it to economics and say that because of this we can not have ever increasing growth is a big stretch when the evidence is that the trend is for economies to continue to grow.
Let us take (b). The evidence is that (b) is the way most economies grow. Most economic activity is now in the so called “service industries” and they will continue to take an ever increasing role because they do not require physical resources (except perhaps energy) to achieve. We know there is an infinite amount of energy in the universe (or perhaps not infinite but close enough:) so there is no reason for economies not to grow for ever.
We can also start to pay people NOT to consume rather than consume. If we pay people NOT to consume then we have economic activity and we have reduce consumption of physical goods.
Two of the reasons for the impossibility of continuous growth not occurring do not apply and the first
“(a) if the economy were not an open subsystem of a finite and non-growing biophysical system,”
Well the economy is not bounded by the physical world because our economic systems encompass much more than the physical world and it is called complexity. We are getting much better at making our world more complex and that in turn increases the size of the economic pie.
Economic activity is a complex system that is growing and unless we destroy the system through stupidity like blowing ourselves up or continuing to pump more ghg into the atmosphere or the sun blows up sooner than we think or something else occurs to destroy our economic systems they will continue to grow.
Read Robert Wright’s book NonZero http://www.nonzero.org/ to see what is more likely to happen than a stable state sustainable economy. It points to an ever growing sustainable economy if we are clever enough.
Sunday is Capitalism Day. I hope it is a good one for you and yours.
http://www.celebratecapitalism.com/whatiscapitalism
@Kevin Cox
Kevin Cox,
To the best of my knowledge, Economics is concerned with the material welfare of humans where ‘material’ refers to physical and biologial (‘real’) world, and ‘welfare’ is a term that ultimately depends on the philosphical foundation of a society. But, whatever the particular interpretation of ‘welfare’, it is not independent of the material world. Hence, ‘the economy’ cannot be separated from laws that govern the physical and biological world. If, as scientists tell us, this material world is finite, then ‘an economy’ has a natural finite limit and therefore ‘growth’ is finite.
The above is most easily seen in theoretical models of economies where the term ‘system’ can be interpreted (eg general equilibrium models).
You suggest people could be paid for not consuming. What would be the means of payment? And, why would people accept payment, in whatever form, for not consuming? There are empirical examples where people are ‘paid’ for limited consumption. For example Buddist monks are ‘paid’ with alms for their ‘service’ of being non-commercial (for the lack of a better word). But it is not true that they are paid for not consuming – a reminder of the link between the physical world and the philosophy of a society.
It seems to me (and I seem to remember that I wrote this once before), if one looks at an economy system ‘locally’ (a projection on a time dependent small sub-space)then one may well get the impression that ‘growth’ is not limited, where ‘growth’ is defined in terms of the value of monetary transactions. And therein lies the problem with research methods in economics which try discover what is (naive empiricism, positivism) instead of trying to research possible differences between what ‘we’ think about an economy and what we observe at a particular time interval and at particular locations.
In short, I don’t agree with your argument.
Ernestine,
One definition of economics is “Economics is the social science that studies the production, distribution, and consumption of goods and services.”
Whenever someone who owns something sells it to someone else then we have paid the seller not to consume. In other words if I have a right to consume and I forgo that right I can be paid. So paying people not to consume happens all the time. The fact that the person buying the goods may or may not consume whatever it is they have purchased is irrelevant to the fact that we can pay people not to consume.
The second law of thermodynamics is about heat distribution. The fact that complex systems show a tendency to more complexity the longer they exist is not going against any “laws of physics”. The idea of entropy is a useful thinking tool but that is all it is. (By the way the fundamental constants of physics such as the speed of light in a vacuum, the universal gravitational constant, and the constants of Planck and Boltzmann may not be as constant as we think they are and there is some evidence that in the past some of these have had different values).
There is another way of looking at growth and that is to look at the complexity of the economic system. There is good evidence that complexity of evolving systems is towards more and more complexity. However, growth in complexity does not necessarily require more physical resources. That is what knowledge and innovation is all about. We do more with less but in the process we often make the total system more complex. So economies can grow and at the same time we can reduce the consumption of physical resources.
I think a major problem with economics in its present state is that the models being used to understand economics do not come close to modelling the complexity of economic systems. This leads to the unfortunate situation where general equilibrium models (for example) are taken as being “correct” even though there is overwhelming evidence that economic systems do not work like an equilibrium model says they should. It also leads to thinking that it impossible to grow an economy without consuming more physical resources.
Kevin,
“Paying people not to consume” as you put it has another possible word – it is called “saving”. To support saving is simple – pay interest on bank accounts. This way you sell something, get paid for it and then put it in a bank account and you get paid for not consuming.
This happens on demand accounts, if you are not sure how long you want to be “paid for not consuming” or term deposits if you have a reasonable idea on how long you want to be “paid for not consuming”.
Wonderful process – and one that requires no additional government intervention at all.
Andrew,
Saving is almost as good as paying people not to consume – but not quite. For example, I can get paid for consuming less than my allocation of water because I use water more efficiently and if the money I receive if left in savings does not earn interest, and if I have to invest the money I receive, through a market place, in ways to further save water we get a double effect on the “savings”. Once by me trying to save water and the second by me investing in ways to effectively increase the supply of water. The investing is more important than the savings because its effect compounds.
This is the key idea that I have been trying to promote. Savings are worthless if they are not used for productive purposes and this approach sets up a system with a positive compounding feedback system. It works to the advantage of both the individual and the wider community who will have more available water through better use. It is a far better scheme than trying to set up water trading systems and use water pricing to achieve the same purpose. Investment based schemes compound. Pricing based schemes are linear.
The same effect can be set up to fund any community resource. The one of great concern to many is ways to reduce ghg emissions. Forget carbon trading, emissions trading, and give people money if they consume less polluting energy but require them to invest in ways to reduce ghg in the atomsphere. This will work and it will compound and rapidly (within 10 years) get Australia to zero or less net emissions.
Kevin @ 8,
My education and interest in Economics is grounded in the real world. Of course you are free to develop your own theories as a social science expert.
A point to which I feel obliged to respond is the term “correct” in your sentence: “This leads to the unfortunate situation where general equilibrium models (for example) are taken as being “correct” even though there is overwhelming evidence that economic systems do not work like an equilibrium model says they should.”
It is fair to say that the models in general equilibrium theory are ‘correct’ in the sense that their results are correct in the logic of mathematics. If you have any evidence to the contrary, please let me know.
Kevin,
I would agree that “[s]avings are worthless if they are not used for productive purposes…”. That is one of the reasons why I think that FRB is essential – it allows demand savings to be mobilised. 100% reserve effectively stops that.
The problem with your analysis, Kevin, is that the current system, the way it is currently set up, does that. If you put in the block on FRB then d to add the additional complexity you say – but this only achieves what is there. The end result would be very similar to the current system – only at additional cost, more regulation and waste.
Kevin, your writings show that you have no idea what entropy is, and so your opinion on Daly’s writings are useless. Your claim that “There is considerable evidence that the universe is becoming more complex rather than less complex.” labels you as a crackpot.
Keven @8,
I’ve just noticed the need to respond to another word in your statement: “This leads to the unfortunate situation where general equilibrium models (for example) are taken as being “correct” even though there is overwhelming evidence that economic systems do not work like an equilibrium model says they should.”
The word “should” is the word in question. General equilibrium models (post 1950) belong to analytical economics and not to normative (prescriptive) theories. Hence the word “should” is categorically wrong.
Joe,
Have a look at “How order emerges from Chaos in sync the universe, nature and daily life” by Steven Strogatz.
Here is a plain English definition of entropy
“Entropy is the quantitative measure of disorder in a system. The concept comes out of thermodynamics, which deals with the transfer of heat energy within a system. Instead of talking about some form of “absolute entropy,” physicists generally talk about the change in entropy that takes place in a specific thermodynamic process.”
perhaps you can give me your definition of Entropy.
Ernestine,
I was intending to convey the idea that the general equilibrium model is inadequate to model a dynamic economic system.
Andrew #12,
I think that banks giving loans is an excellent idea and I think the way we mobilise resources through the use of money an amazing accomplishment and want to see it continued. ALL I am suggesting is a different way that money “appears” so that it can be lent.
At the moment it “appears” through the mechanism of a loan. I am saying there are other ways it can “appear” that will not cause inflation which the simple printing of money would cause.
Five years ago what I am proposing would have been technically difficult and expensive. However, our information systems have changed dramatically over the past few years and we can now implement systems we could only dream about a few years ago.
I understand why you think a variation on the current system in the way we let money “appear” could be expensive. I can assure you that it will be less complex in operation than what we do today because we build most of the work into the information systems themselves. In other words if people use the system I propose they will automatically follow the rules and comply. We do not need regulations and legislation to control the system – we can build them into the system. Perhaps the biggest conceptual leap in what I am suggesting is that we move away from defining systems through regulations and legislation and we define the system in the way we build it.
I say this from a position where our company is revolutionising the way we identify ourselves to others in society. See http://greenid.com.au The change is a “small one” conceptually.
The difficulty with electronic identification is privacy. Privacy concerns prevented the Australia Card and make it difficult to implement a good health information system. What we have done is to give tools to individuals to help them identify themselves to an organisation instead of an organisation trying to identify the individual when the individual wishes to transact with them. This builds privacy principles into the system so that if you use our system you are automatically obeying the privacy principles and there is no need to legislate or regulate about privacy.
I believe we can increase the real money supply in non inflationary ways so that the banks no longer need to use FRB to lend money against existing assets. That is there will be enough money in deposits for banks to lend against the assets. I believe we can do this by building ways to increase the supply of money without causing inflation and do it in such a way that it is built into the system itself and hence works – if people use the system.
I am in the middle of preparing a submission on how to fund the National Broadband Network which uses the principles. I have put up a draft for you and others to look at http://cscoxk.wordpress.com/2009/06/11/financing-the-national-broadband-network/
Any thoughts, criticisms, comments would be most helpful.
Ernestine,
First I am not a social scientist. I am an Engineer turned information systems builder. Theories are of interest to me if they help me build systems that people will buy.
A theory – like general equilibrium – can be correct but pretty useless when it comes to constructing economic systems.
I am looking for theories that help me understand the systems we build so that we can build them more efficiently and to better effect. An economic system can be viewed as an information system and nowadays we can design and construct all sorts of information systems very easily. If we build a “new economic information system” then that system will behave differently to our existing economic systems. I want theories that can help me understand what it is we are building – and build them we will.
I started thinking about building economic systems with a variation on the existing system system to get rid of water restrictions in cities. General equilibrium did not help me explain how and why the system I want to build will work the way I expect it will.
I am now starting to believe that the system itself is the best model of itself:) That is for practical purposes of making systems work to achieve our purposes the best way is to build the minimum system to achieve a task, instrument it, and adjust the system in the light of experience rather than try to completely design a system through modelling. (If you want evidence then look at the fiasco over emissions permits)
However, that is another debate. In the meantime I appeal to economists to come up with better models to help me understand the systems we are building. So far I believe the models that appear to be the most use to me are the ones based on “evolutionary” principles.
Kevin, my apologies for my intemperate language @13, I read your comment as denying the 2nd law of thermodynamics and so believing in the existence of a perpetual motion machine. I now understand you as saying that, in an open system, ‘order’ can appear, which nobody can deny. No problem with your definition of entropy, but of course the important point is that, in a closed system entropy never decreases – things are always falling apart. To return to the problem of a growth economy, the only way we can continue to grow our economy is through using ever-increasing amounts of energy. But the 2nd law says that some of this energy must go to heat, and eventually we cook the Earth.
Joe #19
I am always a bit suspicious about the interpretation of the second law of thermodynamics once it moves beyond “heat” and believe it only tells half the story. Consider this. We know that if we apply energy to systems we can make them more “complex”. We know that if we leave heat energy to its own devices it degrades to be less complex. However, if our systems – such as living organisms – take matter and reorganise into more complexity have we “destroyed” energy or rearranged matter? The interesting thing about the Sync book and similar ideas in Wright’s book NonZero is that they point out that we can observe “natural” processes working against disorder.
There are at least two separate processes going on – the simple one of entropy (disorder) increasing – and the other process of what we call life which increases complexity. What we call life also appears to happen in what we consider to be non living systems such as atoms and stars – where apparent randomness through dynamic processes creates increased complexity and order. This to me is a more satisfactory model of the Universe. That is the view that we have natural processes increased order and compensating for the increase in disorder. The forces of order appear to be winning:) otherwise we would not be here.
I think there is too much gloom and doom about sustainability and population and lack of resources etc. The evidence is that if we are smart enough we can organise ourselves to overcome physical limitations – but we need to change our systems so that the systems stop favouring exploitation (consumption) over investment (sustainability). That is, we should be looking for economic systems that through their “natural processes” build complexity rather than increase disorder.
An example of these two forces is the production of useful energy. If we use energy that is out there in the environment and we convert it into usable energy then that is a long term sustainable solution compared to taking something that is complex (like fossil fuels and breaking it down into something less complex heat). By converting heat into usable energy we increase complexity and so we are working against disorder. By creating usable energy by burning fuel we may have a net increase in disorder.
Where does economics come into this view of the world? We could perhaps call sustainable economics that which gives rise to greater complexity which is expressed as investment. Unsustainable economics brings disorder and is expressed as consumption.
My belief is that we can do much better if we separate these two ideas and we increase the bias of our systems towards investment and away from consumption. Hence the idea of paying people not to consume but requiring them to spend their payments on investments. I think this “simple” mechanism will change the balance of our economies and lead to sustainable systems. Because the resulting system will be more complex it will make us all richer in a material sense while at the same reducing the exploitation of our natural systems.
However, current economic systems and models seem to have difficulty handling this view of the world. We have what I consider to be an absurd situation where we measure our “wealth” by how much we consume (produce). An alternative is to measure wealth by how many useful goods and services we can produce tomorrow.
If I sell some cigarettes that will contribute as much to the GDP as the same amount of invested in a medical cure for cancer. Even worse our system favours the consumption of cigarettes over research into ways to cure cancer. That is it makes it much easier for me to spend my money on cigarettes than on research.
I claim that a system with characteristics that favour consumption over investment is fundamentally flawed and cannot build a sustainable society. We have to change our underlying systems so that investment is favoured over consumption.
This of course is not a new idea. What I am bringing to the table are possible mechanisms to encourage investment over consumption in ways that benefit us all.
Kevin,
This is what I have been telling you. No money “appears” through a loan. It simply does not.
The process is simple – I deposit money into a bank. Bank lends out the money, keeping a certain amount in reserve to cover the possibility that I want some or all of my deposit back. Apply Occam’s razor to your process and you will see that this is what happens.
Banning FRB (if it were possible without nationalising the banks) would just mean that the pool of available savings for lending out would be substantially diminished. You may then need all sorts of schemes to try to replace the savings you have artificially removed from circulation. Really, though – you wold be just trying to fix a system that you have already broken.
Pointless.
Andrew,
Why bother requiring banks to keep a certain amount in reserve? Surely that should be a matter for the banks and their depositors?
Of course we can stop FRB with one simple rule that everyone can understand. A bank cannot commit more money to loans than the money they have already received on deposit. That is we get rid of the notion of a fractional reserve.
This on its own would stop the economy in its tracks and cannot be done overnight but we can overcome the problem of not enough money to represent assets against which we wish to secure our loans by providing other mechanisms to supply money instead of loans themselves.
I assert that with modern systems other mechanisms to supply money is easy to do and can be done in ways that will not lead to inflation. You say it can’t be done.
The only way to prove it one way or the other is try it.
You say we already have an adequate system. I say we have a system that time after time, boom after bust, business cycle after cycle has proved to be unstable and unpredictable.
You advocate removing regulations on lending and say that will fix the problem.
I disagree – not because I agree with regulations – but because regulations are not the problem. The problem is a feedback mechanism caused by equating money with loans. We need to separate the two.
The downside of $1 reserve = $1 loan is that the difference between the interest in depositing and the interest in lending must be large enough to mitigate the credit, market and operational risk of lending that $1 out as well as then including costs and a profit margin.
Now… how high will the interest be on loans?
Kevin,
If that is the only rule needed to get rid of FRB – great. That means it has never existed. A bank cannot commit more money to loans than it has on deposit (add in shareholders’ funds of course – but I presume you do not object to shareholders funds being lent out. As I have said ad nauseum – a bank cannot do this.
Find me any bank anywhere that this is happening and I will show you one with an incompetent auditor – because it would be an accounting error. That’s all.
Do I have to say it again? A bank cannot commit more money to loans than it has on deposit.
.
SeanG,
If you require full reserve banking like that the consequences would be simple – no lending by banks at all. None.
Andrew #24 you are not listening to me. Please read the following without prejudging what you think I am saying. Work through it step by step.
1. A bank has $100 on deposit.
2. The bank has no loans.
3. A person with assets of value $100 comes along and asks for a loan.
4. The bank gives the person a loan of $100
The bank now has $100 on deposit and $100 in loans.
If the person now deposits the $100 from the loan in the bank that is not “counted” as money available for lending because it is money from a loan. If the person deposits the money in another bank it is not counted as a deposit available for a loan either.
I am saying money on deposit that was created from a loan is not to be counted as a deposit for the purposes of lending.
Of course the system will not work unless there is a ready supply of money that gets on deposit that is not a loan. I am giving ways for money to get onto deposit that is not backed by a loan and that will be self regulating and will not cause inflation. The critical part in what I am proposing is this method of getting money on deposit.
Making loans backed by loans is a positive feedback mechanism and it inevitably leads to the random behaviour of the financial system that we observe every day.
That is the long term goal. However, we do not have to do it overnight but we can do it slowly. One way is to start introducing money by my method and to gradually increase the amount of money kept as the fractional reserve by banks.
So the rule is that money backed by a loan cannot itself be used for another loan. Before this makes sense you have to believe that my method of getting money (I call it creating money) on deposit will work. Do take a look at the submission I have made a copy of which is at http://stableproductivemoney.wordpress.com/2009/06/12/submission-to-national-broadband-network-greenfields/
The last paragraph of the proposal says
“In summary the “third way” of funding broadband FTTH could be financed without the government going into debt. Existing infrastructure would be utilised where practical. The system will apply to greenfields and brownfields. Every dwelling that wanted broadband would receive retail services based on the same wholesale costs. The system would have competitive tensions through the market in infrastructure funds and the bidding for geographic areas . This will ensure the most efficient use of funds and the ownership of the resulting assets from the use of the funds would be distributed equitably throughout the community.”
Kevin @18,
Of course general equilibrium models (of competititive private ownership economies) are useless for someone like you who wants to design an economic system. To begin with, the idea that a single individual is to design an economic system is not compatible with the philosophy of the theory. Specifically, the philosopy (moral) underlying is such that no individual is given a privileged position in society to tell everybody else how things should run.
I mentioned general equilibrium models in the context of the finiteness of ‘resources’. More specifically, the finite life of planat earth.
.
Wow. This is pretty amazing, a post in which I can quite happily agree simultaneously with both AR and Ernestine. Of course, that’s only because Kevin Cox is completely ignorant of anything even vaguely resembling economics or banking or finance.
Kevin: What Andrew says is true. Under a fractional reserve system, a bank must lend less than it holds in deposits. Taking your example, the bank lends me $100. I don’t deposit the money in the bank. I spend it, say, on getting a new fence built. The money ends up in the bank accounts of the fencing guy and his suppliers. Their banks get $100 in deposits. If we assume a 10% reserve, then their banks can then lend out $90. That $90 will end up in other peoples bank accounts, and their banks can lend out another $81 dollars. It’s easy to show that the original $100 deposit leads to $100/i, in this case $100/10% = $1000 in loans. There’s no way to distinguish deposits that originate from loans, because they are deposited by people other than those to whom the loans were made.
Likewise, Ernestine is correct in her dismissal of your argument about “payments not to consume”. Such a thing isn’t possible. You can’t be paid not to consume, because the only use of a payment is for consumption, by definition. You can, however, be paid to consume one thing in preference to another. You need to understand the difference.
I meant to use the symbol “r” for the reserve fraction, not “i”. We need to get the preview function working again. 🙂