Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.
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John Quiggin 
An up-date of the economic measure of ‘real debt’ and ‘real budget constraint’.
https://www.theguardian.com/environment/2018/jul/23/earths-resources-consumed-in-ever-greater-destructive-volumes.
IMO (educated opinion I dare say in this case), it is the expansion of net debt (purchasing power creation) by the financial system – private and public debt – which is the cause of the imbalance (real debt) of resource usage exceeding the earth ability to replenish resources.
I have just note the unfortunate death of the young lady in Melbourne has resulted in a murder charge against a 17 year old boy.
Where does it leave our Minister for Home Affairs and former Qld copper Dutton who was yesterday within hours of the girl’s death openly happy to pronounce the culpability of African groups in Melbourne. It is noted the Vic.Police specifically exclude this yet there has been no apology from Dutton.
Throw in the Coalition’s attack upon the rule of Law generally like the near jailing of Hunt, Sukkar and Tudge in their serious contempt of the Victroian Court of Appeal in DPP v Besim VC {2017} true Conservative and those who believe in the rule of Law should punish the Coalition this Saturday
Last week Moz commented on the lucky being more successful. Probably true sometimes. Whoever heard a losing sportsperson lamenting “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” But as Kahneman showed, luck attribution is asymmetric.So losers never learn they were not just victims of bad luck, and winners never learn their success was not all about their good management. Sit back and watch regression to the mean.
I have been watching this morning’s Qld. Parliamentary Committee proceedings on the AG and Justice Departments. The former Newman AG Bleijie has done it again ! Typical of his hitherto unprofessional and proven puerile and self-opionated style! He has managed to be referred at about 11 am. to the Speaker for his behaviour in displaying for all to see,including the CCC Head under questioning, “F” and “U” on each of his cufflinks. Long may he stay as he is a great symbol for the LNP and what it stands for. He will never be forgotten for the “Carmody affair”, his failed Bikie laws and the alienation of many including lawyers many of whom were or are LNP voters.
re Ernestine’s comment: I would read it the other way around. The depletion is the driver of debt.
Money is debt (a claim on future resources). Wealth is equally debt. Monetary economies therefore face a perennial problem of keeping wealth and money in broad alignment with real flows. But since money and wealth are also keys to social position and enablers/erectors of the social pyramid, there is an enormous inertia built in – for those higher up to consume the base when real flows start of falter. IMO this started in the 60s in Britain and has since become an issue for much of the rest of the world.
Peter T, it seems to me your argument that resource depletion is driving debt pertains to the distribution of indebtedness among the world population (partitioned into regions or countries or regions within countries or within urban areas if you like) and over time. This would be a separate issue from ‘net debt creation’ or credit growth in aggregate. A rough approximation of credit growth in aggregate is the so-called money multiplier model, familiar in monetary economics.
My point is that net debt creation at time t means that the aggregate monetary purchasing power (the ‘money’ available to finance investment and consumption at t) exceeds the monetary value of savings at time t. In this sense, ‘money’ is a claim on future resources, as you say, and the details of these claims are set out in financial contracts called financial securities. So the question I am addressing is: Is the rate of net debt creation, denoted by D(t) consistent with the rate at which the Earth can replenish resources, R(t)? If not, then there is a serious disequilibrium problem. The scientific evidence (natural science) is that real resources are used up faster than the Earth can replenish them and, moreover, this disequilibrium rate is increasing. I am saying this scientific evidence tells me that D(t) > R(t) for a long time, ie t = t-1, t-2, t-3, …. t-k, where k may be 200 or even 500 and t is measured in years, even though it might not have been easily observable for most of this time period.
I am not aware that monetary economics deals with the above issue. I set aside you point about wealth, but your point about ‘inertia’ makes sense to me.
Ernestine
Thanks. My rough idea is that there are three main parts of the economy: the communistic small unit (family or band), the area of exchange (trade) and the mix of cooperation and coercion that makes up production. Money allows trade-offs between these (eg, very coercive systems like chattel slavery can “mine” the communistic sphere to boost some kinds of production, but is reliant on trade to realise the gains – there is no point flogging the slaves to make sugar or cotton unless there is a market somewhere else, because there will be no market for at home). By itself, exchange moves things around – on a small scale unless the systems of production get involved (good example – the trades that moved silk from China to Europe, or spices – all run by very small groups).
Money allows the erection of large-scale systems of production by allowing the easy (and near invisible) distribution of the gains in line with the various social roles that enable the system. More coordination: more production: higher social pyramid. If the flow of monetisable things (land/fish/trees/minerals/food etc) falters (either because the stock of things hits some limit, or they cannot be monetised), then the top of the pyramid must either fall or it must eat the base. At this point debt creation starts outrunning real capacity – both effect of the slowdown and enabler of the shift. Think of it as a system-wide version of asset-stripping, where the first move it is to use debt to monetise real assets at above their actual rate of return, then let someone else take the write-down.
Social inertia plus the desire to maintain production causes the latter – until the base gives way. Then the pyramid flattens, sometimes a bit, sometimes all the way.
It’s one part economics (exchange), one part sociology (production), one part anthropology (families/bands).
Peter T,
Thank you for your posts. I have no difficulties or argument with your description of the dynamics of the system. Moreover, I don’t believe it contradicts my hypothesis:
Ecological sustainability:= D(t) is ecologically sustainable iff D(t) is less than or equal to R(t), for all t.
If D(t) is greater than R(t) then a critical point is reached and a Peter T type dynamic may emerge.
D(t) = R(t) for all t would be both ecologically sustainable and an economic equilibrium in the sense of all available natural resources are fully used at all times.
That is, the institutional framework becomes critical for sustainability if D(t) is greater than R(t). The ‘institutional framework’, can be narrowly interpreted as the legal framework, or more widely to include philosophical, sociological, cultural, religious ideas and observations, which, in one way or another underpin the legal framework.
You mentioned the 1960s in the UK as a critical “t”. I have no empirical information to enlighten me on this question, including none to object to your point. It is a possible critical period. To be as general as I could imagine, I thought of the evolution of ‘capitalism’. (I try to avoid this term because it is so loaded in so many different directions, while using it in the back of my mind – a version of what JQ calls financial capitalism.)
It seems to me your point about production being ‘sociology’ in nature is interesting, although I wouldn’t have used the word ‘sociology’ but ‘institutional’. Not all production, of course, but primarily the corporate form. Your point about exchange on a large scale – silk from China – is interesting too. Large scale trade, in terms of locations or distance, does require a ‘producer’ in the Arrow-Debreu general equilibrium theoretical model. It is critical in my theoretical model of partially segmented markets with multinational producers. One of the results is what I called ‘unintended exploitation’ – unintended because in the model the producers are assumed to behave nicely in terms of competition (price taking behaviour). .
You seem to come from a different background to mine but communication seems possible and productive.
I would be interested in hearing why you say ‘wealth is debt’. Perhaps the sandpit would be more suitable.
Ernestine
the point about sociology was that economics studies exchange, sociology social structures (governments, corporations, churches, guilds…) which conduct production other than in households, and anthropology gives us a window into different small-unit groups (families, bands…).
My email is pdt@emailme.com.au if you want to take this to one side.
We must remember that correlation is not necessarily causation. Thus, we cannot immediately say that economic growth causes debt or that debt causes economic growth. There could be other factors causing both. My own view is that physical and biological factors are causing our overshoot and that this is facilitated by technology and mediated by financial systems.
(1) Many species without natural limiting factors will approach or overshoot carrying capacity.
(2) Homo Sapiens has overcome many natural limiting factors via technology.
(3) In approaching or overshooting carrying capacity, we are mirroring the performance of many other species when these species have natural limiting factors (predators, disease) removed.
Thus far in the reasoning, there is nothing special that needs an economic or financial explanation. But the extant financial system does mediate the overshoot process in the current economy. E.G. is essentially right in that respect. This is to do with the axiomatic system (finance) not behaving like or observing the laws of the real system (real biosphere plus real economy). The extant financial system is an axiomatic system which both presupposes and depends on the proposition of endless growth. The axiomatic formal system behaviors are in fundamental conflict with real system laws (using “laws” in the strong or hard sense as in “laws of physics”). When formal system are in conflict with real systems, real systems prevail. The real prevails over the formal and fanciful.
Other types of economies historically grew to collapse by exceeding local or regional carrying capacity. See Tainter and others. So again, once civilization arises (agriculture, cities) then people are on the path to approaching or overshooting carrying capacity. This phenomenon is not limited to modern technological capitalism. Modern technology and finance do greatly magnify, accelerate and globalize the process.
We know enough now to know that we need a steady state economy and we need a finance system to support this. Otherwise we will overshoot and collapse. We may already be past the point of no return. Nevertheless we still need to try to do something about the dilemma. We need to design the finance system as an axiomatic system where the axioms mirror the laws of the real system. Just my view of course.
Ikonoclast,
Yes, correlation does not imply causation. I did not use correlation in my argument. My argument is that net debt creation allows the usage of the Earth resources to be brought forward in time. Run such a system for some time and the carrying capacity (the static equivalent of the Earth rate of replenishing natural resources) is reached and overshooting occurs. The article I have referenced gives data on the rates of overshooting over a period of time. I conclude that the scientific data implies that the rate of net debt creation has exceed the rate of natural resource replenishment.
You agree that “EG is essentially right” but you are weakening my argument by replacing ‘net debt creation’ by means of becoming a little vague, if I may say, namely by writing ‘the extant financial system”.
So, what is the ‘extant financial system’? You say it is axiomatic. No it is not. It may well be some people act in a manner that makes sense if and only if perpetual growth is possible, without asking what ‘growth’ means.
I don’t understand your “real biosphere plus real economy”. The real economy is defined on the real biosphere – not very satisfactory in a technical sense and to the best of my knowledge but inseparable nevertheless.
I don’t know what financial system China had before and leading up to the height of its peak civilisation. My knowledge of history is too vague to say much other than conflict (with the UK from memory, involving an opium war) is another way to cause a collapse of a civilisation. I am not sure at all that a collapse of a civilisation is the same as the issue of overshooting the Earth ability to reproduce natural resources.
E.G.,
I agree that if companies use debt to commission the making of new real apparatus for resource extraction then it appears we can draw a line (of causation or enabling) from debt increase to increased and brought forward consumption.
Debt appears to me (in this guise) as a device for out-sourcing decision-making. Rather than making central command economy decisions on the timing and rate of resource usage, these decisions are outsourced by markets and debt-making to multiple competing firms. These, as we know, pay little or no attention to un-priced negative externalities. Capital markets arose before the modern ecological and biophysical sciences. At that stage of history, crude capital markets might have been the most efficient way to organise decision-making. Science was not advanced enough to predict many negative externalities nor to perceive real biophysical and ecological limits.
We are now in a new position. As well as productive science, we now have well developed impact science. We are better placed to scientifically assess real limits and predict what were previously unpredictable consequences. We are also dangerously close to those limits. In my view, the exigencies of this era and the advances in our knowledge, now swing the pendulum (as it were and perhaps for the first time in history) to the side favoring a command or planned economy: scientifically planned rather than ideologically or market planned and planned to be steady state and sustainable.
Or at the very least, markets, which might still prove better, need new sets of rules, scientifically derived, to achieve this end. Clearly, these new markets would regulate debt creation with explicit formulae to ensure debt creation did not amount to “promises” to extract more resources and create more waste than is ecologically sustainable into the indefinite future.
E.G., above is my general answer. Below are specific answers needed because of my loose definitions earlier.
The real economy is clearly a sub-system of the biosphere. I should have made that clear. Of course, there are some boundary definition issues. Do we now say the biosphere extends to orbiting GPS satellites because they clearly are part of the economy and of the “techno-sphere”?
I say that the extant laws of ownership and income plus the financial and accounting systems which support them are a formal complex system. I also say that they constitute an “axiomatic system” in the sense that certain outcomes are axiomatic (certain) if certain rules and procedures are followed and certain conditions are met. This might constitute my (unfortunately) idiosyncratic and incorrect definition of an “axiomatic system”. Perhaps I should have called it an “algorithmic system”. I am not sure.
Following Piketty (as an example);
“If Return on Capital greater than growth then inequality increases.”
I would term this discovery of Piketty’s, if we can attribute it to him, as the discovery of an “axiomatic outcome” of this system when the “if” condition is met. I am probably using “axiomatic” when I should be using another term.
In all our posts above, we seem to be talking about a formal system which attempts to pilot the real system in an ultimately impossible (unsustainable) direction. Our formal system needs to be more real system congruent if I can put it like that.
Bill Shorten has built an impressive record in defending his seats in byeelctions, seeing off threats from the left (Batman) and the right (Longman and Braddon). He takes a few risks and backs his judgement, which is very admirable.
Peter T,
There are probably good reasons for grouping research and teaching programs into academic disciplines such as sociology, economics, anthropology. However, IMHO there are also good reasons for not building research and teaching silos, while recognising the usefulness of having some questions pursued in isolation from all others at least for some time. To illustrate my point in relation to your:
“the point about sociology was that economics studies exchange, sociology social structures (governments, corporations, churches, guilds…) which conduct production other than in households, and anthropology gives us a window into different small-unit groups (families, bands…)”
I cannot agree with your description of the field of inquiry of economics. I must object. The generally accepted description of economics used to introduce this field of inquiry is: Economics is concerned with the allocation of resources. A slightly more precise description would be: The fundamental research questions of economics are concerned with the material welfare of people under alternative institutional environments. As such, research questions in economics do indeed overlap with the humanities, going back to philosophy, not one specific philosophy but potentially the global universe of philosophical ideas; it just happens that European philosophies have gained the dominant influence over the past few centuries in terms of the questions asked in economics. But the primary focus (ie no alternatives) is on the relationship between humans as they live and survive in the material world as studied by natural scientists. The boundary of economics is perhaps most easily seen in relation to religions. Religions could only enter via the institutional environment. As scientific knowledge evolves, new questions arise for economists. For example, the idea of physical resources being finite is quite clearly made explicit in the Arrow-Debreu model (ca 1950) via the definition of ‘a commodity’ and there being a finite number of them. The idea of taking into account the ability of ‘nature’ (the Earth) to reproduce ‘resources’ and comparing it to the usage of resources for a sequence of time intervals is a more recent one, leading to the notion of ‘sustainability’. (I’ve been out of active research for too long to provide a milestone reference on this one.) There is plenty of evidence that economists have been concerned about the ‘carrying capacity’ of the Earth for a long time (eg the Club of Rome). Economics also overlaps with the applied natural sciences (eg technological changes, as captured in the notion of a ‘production technology’, medicine, as in health economics, neuroscience as in studying the physiological differences among humans that may enlighten economists on the varying degrees of risk aversion, and of course climate science, to name a few. (An interesting but most likely idle question is: Was the Aboriginal society ahead or behind the European society in terms of the now acute problem of unsustainable development? – I won’t offer a guess on this one. Surely sustainability issue would be also of interest to moral philosophers and possibly others.) The notion of ‘alternative institutional environments’ entails both time and place. For example, during my undergraduate studies, many decades ago, I took electives in mathematics and in social sciences (an introduction to psychology, sociology and anthropology and a course in Economic Anthropology) as well as a course in the History of Economic Thought, which at the time touched on the European history going back in time to Feudalism and geographically from the North Atlantic in the West to the Ural Mountains in the East. As an economist I do not care whether Karl Marx or Fernand Braudel is classified as sociologists or economists or historians. They say something about ‘economies’ and it seems to me, they don’t easily fit into an academic discipline silo.
I cannot agree only sociologists study social structures, including organisational structures. Surely, the application of game theory, in particular mechanism design, is relevant, too (eg voting mechanisms, industrial structures, performance schemes). Furthermore, some economists explore the emergence of cultures via notions of similarity of preferences. Of course these analytical approaches draw on descriptions provided by others. And this is how it should be, IMHO. Competition with the aim of gaining academic hegemony isn’t always a good idea, is it?
To suggest, even with the broadest of brushes, that economics studies exchange elevates Ricardo and the movie The Wall Street to the sum total of economics. You may appreciate I cannot agree.
Having said all this, your hypothesis as to two possible solutions to the dynamic, which I called a Peter T-type, invites me to play pseudo-psychologist. Is it not conceivable that more and more people have accumulated enough information to form the expectation that ‘it cannot go on’ and they fear, rightly or wrongly, they end up in the base to be ‘eaten up’? Whatever the actual dynamic may turn out to be, it seems to me it will be difficult to turn the ship around.
I hope I didn’t bore you to much with my defence of economics.
No, you did not bore me.
My response would be that, while economics describes itself as the “study of choice in the allocation of scare resources” or similar words, what it actually does is take that to mean the study of mathematical models of exchange, expressed in money. One issue with this is what counts as a resource, and what counts as exchange, and what counts as money, tend to get very little attention – and often very cursory attention at that (eg Coase’ account of why we have corporations starts from issues with exchange, and then runs out of steam about 2 steps later). Yet the answers to these questions empirically define the choices available very stringently. If you want to know why the larger system does as it does, you need other disciplines.
Completely concur with you on Coase, Peter T. Yes, much of contemporary micro-economics describes itself as you said. There is indeed a jump (obfuscation in my terminology) going from the basic theoretical framework to the applied, eg setting all else that is unsatisfactory with the Fisher Separation theorem and focusing only on the jump, the intertemporal choice relates to commodities (preferences are defined on the commodity space Co and C1) but this model is then used in Finance textbooks where $ signs appear. There is even a bigger problem with the much quoted paper on ‘agency theory’ by Michael J. Jensen and William Meckling. Their conclusion rests on the condition that an agent have strictly convex preferences (makes sense in many situations when preferences are defined on commodities, eg people want to live as long as possible) but strictly prefers $0.5+$0.5 to $1 (except in a situation where a parking meter accepts only 50 cent coins and there is no way to exchange $1 into 2 x 50 cents, I can’t think of any situation where their model makes sense.) In mathematical economics (the stuff you find in Econometrica, Journal of Mathematical Economics, and the like) this error would be considered fatal because it destroys all results. (Finding this error saved me reading the rest of the very long paper, which was on the curriculum; my contribution to critical thinking in teaching Finance!)
On the mathematical models, I believe further discussion is required because there are several categories, ranging from statistical methods to the application of pure math to simulation studies. It seems to me you are talking about mathematical models found primarily in macro-economics. But your point is also relevant, IMHO, in relation to the purpose of institutions such as the ACCC. Only part of the economic aspect of the lives of ‘consumers’ are considered, namely the price of consumption goods. But, in a wider framework, eg general equilibrium theory – the analytical and not the belief variety – ‘consumers’ are also suppliers of labour services, owners of shares, directly or indirectly via pension funds, owners of bank deposits, sellers of debt securities (borrowers) etc. Hence reductions in consumer good prices that are financed by the suppliers of these goods by means of reducing the work force or making people run faster and faster on the same blade of grass – work harder for the same amount of money- has wealth redistribution effects and welfare effects. In short, what people get on the swings they lose on the roundabout, some more so than others.
I suggest you find a clearer notion of ‘resources’ and ‘financial securities’ in the work of Roy Radner,
My PhD is in general equilibrium theory – extension of the Arrow-Debreu model to the case of a partially segmented economy with multinational firms. It is old now. But this model is only one little contribution to the much more important results by Roy Radner on sequence economies with commodity and financial securities, and the work on incomplete markets, to name only a couple of milestones in this theoretical research program. An insight in the different results and policy suggestions obtained by people who worked in this area versus say some people schooled by Fama et al, consider Tobin’s financial transactions tax versus the belief of ‘capital market efficiency, or the implication of a Lindahl equilibrium for dealing with negative externalities versus shareholder wealth maximisation.
While I agree that other disciplines have important things to say for economists or society at large, I don’t agree that economists – at least some of them – don’t consider the system or are blind to observables. In particular, some questions asked by some people in sociology, using research methods not typically used by economists, provide useful empirical information for people like me, who compare empirical data with assumed conditions in some theoretical models. IMHO, we – in the so-called ‘West’ – are in this mess now because politics has adopted anachronistic economic ideas from 19th or 18th century Europe.
Are you getting bored now? I’ve tried very hard.