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Economy on edge of paradigm change-

05/07/2014

The politics of macro economy is based on two opposing theories, one is a theory emphasizing the demand as a major drive to economic growth and lack of demand is considered as major cause to economic crisis, and the other theory emphasizing the supply as a major phenomena influencing economic growth. Both these theories agree that economic growth is necessary for economic stability, since the capital invested into equities and loans, demands positive yield.
The Demand side economic theories claims that any kind of increased demand will always be satisfied by increased supply, what means economic growth and they neglect the possibility, that the supply can run into difficulties of limited resources. This views go so far that their followers praise the Fukushima disaster as a positive event for economic growth in Japan. They just don’t take in account the positive economic impact, accumulated assets create on the volume of economic activity and on the general standard of living. They judge economic activity only from point of view of the recent and near future economic current activity. According to this view also the WWII is sometime praised as a positive event that ended the 1929 world economic crisis, though even in US it took years until its economy, as a tool to create standard of living, returned to its prewar level. Of course, the damaged infrastructure and social-political disruptions the war caused, depressed the economic activity focusing to improve standard of living in the US, not to speak about Europe. There is no need to explain that this economic view supports macro-economic policy with a very short term goals.
On the other hand the supply emphasizing economic theory sees as the major obstacle to economic growth the limited resources and limited supply capacity.
Non of these economic theories try to create an economic model, where there is no necessity for infinite economic growth. It would of course force them to thing about economy in a completely different dimensions.
To my opinion without to be observed, we are heading toward a new economic model, in which money will be inter-mediated without the traditional financial institutions. The very best example is Bitcoin, which still exists, even if the banks try to disqualify it as a trustful financial instrument. Other example is kickstart which opens a direct channel between the entrepreneur and the investor, without need for inter-mediation.
An other important economic phenomena is the growing number of products available free of charge, that annihilate whole range of services as paid services, and as such doesn’t appear in the GDP statistics. As example for such a service i would mention the availability of academic level education free of charge on the web. We can speak also about films, music at.c. Truth is all this are virtual services, but also products from the real material world are already knocking on the door to enter the markets. Just try to imagine you have a 3D printer at home, and for the evening gala party you want to wear some costume you saw on the web. All you will need to do is virtual instruction how to print the dress. I am sure the instructions will be available on the web free of charge. And here you have a product created just in time.
Another monetary theory suggests, that a prosperous economy needs a currency anchored to basic row material item, like energy resource, or other raw material, that seems to be limited and the human civilization can’t do without it. Scarcity of currency is very important, but it has to be stable scarcity. What if some new technology makes the anchor raw material abundant? Then inflation will be inevitable. And the opposite way, meaning too limited energy resource can cause deflation.
If you ask my opinion what should be the currency anchor, it has to be “SOMETHING”, just in right volume, meaning the right quantity in circulation multiplied by its price that is equal to the volume of products in circulation as explained in my book, viz:
https://rodeneugen.wordpress.com/2013/04/10/1801/
In today’s system the anchor is created artificially by the central banks, while they manipulate with the interest rates, rules imposed on commercial banks, their regulations and interventions in government security markets. This system has several disadvantages. The main is, it is a very undemocratic system, that gives to much power in hands of too few, who are elected God knows how. They may be clever and even honest, but still very far from being Goddesses. The other disadvantage is the limited effect these monetary tools have. As an example, the interest rate cannot become negative, or the limited possibility in today’s “Western”, financial system, to force commercial banks to increase lending when deflation prevails, and decrease it when everything seems to run towards prosperity. In Chinese non democratic government system it can be done.
From my point of view a virtual anchor, based on an algorithm with unbreakable code (if exists such an algorithm) and honesty, could be a perfect tool. Yet this Googlisation phenomenon, I mean free of charge services, make these products very attractive to potential consumers and the consumption will lean more and more towards these products. It means the other products will have to compete with them. Take for example the mass tourist industry. If Google Earth will become a 3 dimensional tour experience, will this mass tourism survive with sometime stupid guides, repeating again and again the same jokes, and telling the same shallow stories? Or people will stick to their chairs and have the tourist adventure right from there?
I recently experienced in Portugal a tour made free of charge (income of guide is based on tips) of an unemployed teacher, a historian, giving us a detailed 3 hour history lecture, without compromises and without mentioning Michael Jackson and some other scandalous superstars.
If my prediction is correct, bigger and bigger part of economy will become virtual and free of charge, and the significance and hopefully also the arrogance of the whole financial system will decline.

 

2 Comments
  1. Zuzana permalink

    Your articles are bit complicated and futuristic. The change in the balance of economy can only be partially affected by the free virtual products as there will be just an amalgamation with the current situation. The introvert people will take up the virtual products but the extrovert will always feel the need to act and go and experience.
    Furthermore there is a push on people to start moving and not just sit in front of the screens and they are all aware of this already. Take for example football. We could watch it in 3D-or be there, the experience will never be the same.
    The young will always go to concerts and shows, even though they can download the music, because they can let off steam and emotions in that way.
    Education as we know it will however suffer. Read the interview in the journal with a lecturer from Stanford University (Fortune, April 28, 2014, page 16). They sent a message to 1000 people about their new online course in AI and 160,000 applied (no mistake in the number of 0s)!

    • Zuzana you are correct. Not all th people will join this trend. Yet not only the introverts. There is a whole movement out there on the web called Singularity. They speak about what I wrote. The world will be divided to two parts, those in and those out. Better to be in.

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