Scattered economic thoughtsSubmitted by BILL3 on Tue, 05/15/2012 - 02:18
Let’s separate economic ‘luxuries’ from ‘necessities.’
Necessities are food, water, shelter, clothing, and some degree of medical care.
Income is a first derivative, because it is needed to obtain the necessities.
Second derivative is the physical capital goods employed as means to supply the necessities (and the income to obtain them).
Building materials, fuel, factories to produce materials, to produce means of transportation, utilities to supply electricity and fuel, water, and goods needed for necessities, durable goods like refrigeration…
Luxuries are things either not necessary or infinitely replicable (information, media, entertainment).
The one economy is finite — natural resources, energy, food, water, etc. It’s supply has to balance with demand (size and growth of population and its average consumption) in order for people to live at or beyond subsistence.
The other economy of information, ideas, culture, is technically finite but practically infinite because of its very low demand on real resources relative to total population and total energy/materials.
In any given economic structure, there is a population level sustainable by existing resources, capital and output. This output is distributed by the market price system. To consume you have to produce, or at least that’s the basic idea.
It is worth noting that an economy can be in a debt deflation, with deflating asset prices, as well as falling prices for non necessities, and still have inflation in necessities. This won't be reflected as inflation in the CPI.
‘Poverty’ is the only natural, built in break on population growth and family formation.
For a thought experiment, consider the strain on present resources and the present capital structure if, via redistributive policies, every Chinese and Indian laborer had access to an upper middle class western standard of living.
It is easy to bemoan the 1%’s massive stock of asset wealth and luxuries, and contrast the hardship of unemployment and poverty. But that kind of asset wealth/income places a limited demand on the ‘necessities’ category.
If that wealth was distributed evenly across the globe the demand strain on the necessities and resource category would explode… prices for real resources would explode, etc.
Poverty is the only natural break on population growth and resource depletion, and I don’t think it can be realistically replaced by some government managed controls on family formation and/or resource depletion, nor is it desirable.
There are very real limits to growth, income equality, and gov’t schemes to perpetually alleviate poverty – up against real resource and capital constraints.
If population grows faster than real output and depleting resources, degraded environmental systems, etc., as a result of diminishing the natural ‘poverty brake,’ we will catch up to subsistence/Malthusian conditions and the one thing that will be spread equally is universal poverty and misery.
Have we undervalued the utility of poverty and wealth inequality in matching population growth with real output growth, and in allowing capital formation (excess of production over consumption), which alone can potentially (but finitely) increase output and productivity?
Are the twin goals of 'alleviating poverty' and 'infinite growth' equally flawed?
The term inflation is used to refer to many things and is not very useful without specifying which meaning; it can refer to rising aggregate asset prices; to a weighted avg of consumer prices; to a narrow measure of prices of basic necessities; it also can refer to the increase in credit or state money or both...
Deflation can refer to most of these conditions in reverse.
Inflation requires a channeling of demand to effect prices, not merely an increase in some measure of state money...
Inflation and deflation broadly refer to the effect on prices which follow from the combined changes in money as a whole, which includes privately created credit.
Deflation in overbought assets, or in the cost of technology (computers, televisions, dvds, phones, etc.) can mask inflation in the price of necessities (food, water, basic materials, energy, etc.) in the "CPI."
Temporary demand drains due to a debt crisis can mask an impending inflation in cost of necessities.
Poverty is the only natural, reliable brake on population growth. Provided an adequate income - access to resources - couples can be expected to form families of 2-4 children or more on average.
The market economy (in theory) provides a means by which consumption is available only to those engaged in production, only those who add to output. (Or to those who inherit productive assets or previously saved income...) This balance limits the amount of consumption (demand) that can take place upon production (supply), according to the rules of voluntary trade. The price system facilitates the allocation of values to different things and to different activities (income).
On the other hand, redistributive policies by the state, or extension of credit that is not repayable (due to state subsidy or permitting fraud), both represent consumption demand not matched by the contribution of production to the total stock of goods and services.
By means of politics (contra market trade), the state can be used by a class of clients to obtain consumption (income, purchasing power) without engaging in production that increases the stock of goods available: by means of transfer of income/wealth (entitlements), the provision of make-work (military, police, contracts) subsidized or mandated lending, social services, loans and grants or bailouts to special interests.
An increase in demand not met by an increase in supply can be expected to result in a higher price. Some supplies are elastic and can always expand to meet new demand, others are limited by real constraints. In a complex economy, inflation gauges should focus on items not infinitely replicable, such as real resources and necessities. These are the items that will first reveal inflation and which will actually matter.
Any transfer of purchasing power by the state or the banking system not justified by the normal course of economic trade are likely to add to demand without any increase in supply; whether such a transfer is 'positive' is a value judgment to be decided at the political level; whether it is 'productive' in the economic sense depends on the specific nature of the situation.
To employ chronically unemployed labor or productive capacity by creating demand can possibly be net productive, as long as one considers the potential alternatives in the absence of intervention.
An increase in 'productivity' from the pool of willing labor is equivalent to a decrease in demand for labor, all else being equal, and is by no means necessarily or automatically offset by a new demand for labor for other purposes.
An increase in productivity and overall wealth -- the quantity and quality of goods and services -- by no law increases the overall living standard -- it may actually reduce the value of labor and its 'claim' on output -- its 'income.' There is no reason to assume this is automatically offset in the market or that all labor always has positive value.
Any growth in output, resources, productivity, etc., can eventually be 'caught up with' by demand -- more mouths and bodies to be fed, clothed, cared for, policed, etc.
Economic growth is finite, but potential demand -- new mouths to feed -- are theoretically unlimited, so that a condition of mere subsistence, and even the risk of starvation, always looms in the background and lags growth by some finite period. As long as growth in productivity and output outruns population growth, a standard of living above subsistence is possible for a portion of people. Producing more than is consumed is "capital accumulation."
Likewise, it is always possible to feed one more mouth or house one more body by taking the extra meal out of the mouth of the wealthier person, or by expropriating a building used for a capital purpose and making it into a dwelling.
Thus, reducing inequality (taking from some for others), or consuming capital,, can always feed one more mouth and spread the state of mere subsistence (one step away from starving) a little further.
At some point along the stalling growth curve, when population begins to smack up against the carrying capacity of environmental systems, resource depletion, and dilapidated capital, more mouths to feed -- more willing labor -- becomes not just 'cheap' (well below 'living wage') but of negative value for all others.
At this point or earlier, the 'superfluous' unproductive mouths to feed, and the privileged classes, will vy with each other for the support of the force of the state to advance their claims, whether to protect property and the distribution of goods/income/wealth by trade (the market order), or to advance equality and the claims of those in need but unable to obtain their need on the market.
Both sides will likely shed allegiance to the letter of the law and assert the sheer force of police power to either suppress or expropriate the other class as the case may be.