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Crisis of Economics 1

11/11/2015

What are the major problems of the frame of reference of the current economic system and thought?

It seems the number one problem is the limited sustainability  of world resources at the existing trend of world population increase together with increasing demand for ever growing consumerism, that is spreading gradually to most parts of the world. When speaking about limited resources,  usually people tend to think about limited energy resources or other row materials. But the technological development trend thought us, that when such a problem occurred in the past, the science and technology found its way to solve this problem within reasonable period of time. There is no reason to think it will not be the same in the future. But when I speak about limited resources I mean the world itself, as a living organ, where interlocked ecological processes created in certain balance that enabled life on earth to evolve, until reached today’s point, when human consciousness and cognitive processes gave to humanity tools to thrive and farther develop toward higher level of consciousness about the reality in the world. Also the humans managed in the last 200 years to develop at speeding up rate understanding about the extraterrestrial realities, at the whole cosmic scale, uncovering the time schedule of very beginning of the cosmos. On the other hand the sciences succeeded to discover realities in the micro scale, down to the level of the very basic elements that the reality consist of, and successfully implements these technologies in the everyday life. Also in field of humanities, the human cognition and social reality is put in more realistic perspective, diminishing the tendency among those educated in these realities to adopt forms of political thought based on unverified claims of conspiracies and faith in extraterrestrial omnipotent human shaped power.

These development in science change the level of consciousness among those who are educated to understand these realities in the world, beyond the realities obviously perceived from the everyday life. But this new levels of consciousness  that I would dare to call God like are not generally spread, far from that. Only small minority of the humans, most of them in places, with highly developed education system, have scientific education and are aware of these new findings. But the majority of the people in the world are out of this unique club of these scientifically educated people with high level of consciousness about reality, and there is a huge gap between them as to understanding of the world view that emerges out of sciences. In political system based on preferences of the majority, who are not aware of these realities and have preferences very different from those aware, create a huge gap between the political system and the scientific community. Yet the technological achievements derived out of the new scientific findings are free for use to all, and this includes also the destructive power these technologies can generate. This means the same development that brought the humanity to the edge of omnipotence, gave to humanity also tools to destroy the delicate balance on earth that enabled all this to happen.

The understanding that the world resources are limited are as long as the humanity. It didn’t need Maltus to formalize this understanding. Until the beginning of 19 century the global world economy growth was parallel to the population growth and not changing substantially per capita, with occasional changes due to population collapse due to plague or some significant technological change in agricultural technology. The big change came with the beginning of industrialization,  with it came growth of cities and general population but even more grew the economy, and with it the per capita income. The population growth speed up ever since the beginning of the nineteen century,  and get additional impulse since WWII,  with introduction of antibiotics,  and worldwide vaccination programs initiated by the world health organizations. The connection between income and lower birth rate appeared by then. The newly accumulated wealth in the developed countries was relatively widely spread due to social policy adopted after WWII, and was followed by cultural change from societies based on scarcity of the most elementary needs to societies of mass consumption.

While the population growth at beginning of the industrial revolution take of mainly in the new industrial countries, and with the increase in education level and standard of living the population birth rate has dropped, since WWII this has changed and the population growth was mainly in underdeveloped regions,  among poor people, with low level of public services and infrastructure. In parallel to the population growth, a global scale economic growth started, that gradually caused accumulation of wealth, at first in the US and the developed world of Europe and Japan, and gradually it spread to additional countries. It meant that the birth rate dropped worldwide, but not fast enough due to local costumes, local low income places, with inefficient economies, wide gaps in wealth distribution, social structures not adequate for modern functioning societies, and above all despotic and corrupt political systems. The result is that in the last decades the world population growth was around one billion people per decade, most if not all of it in the underdeveloped world. These phenomena creates big gap of conscious awareness about realities between people living in developed states with modern developed education systems and those who live in states characterized by all the ills described above.

Back to the definition of the problem of limited resources, it is not certain raw material in limited supply, as it was perceived quite recently, but the need to protect the world as a living organ, where interlocked ecological processes created are in balance that enabled life on earth to evolve, and human consciousness at its existing level can thrive. To adopt this vision of reality beyond the short term, short sighted vision demands certain level abstract system understanding. It can’t be achieved in communities whose behavior is adopted to the strife for survival for the basic everyday needs. This communities that have no luxury of feeling, that their daily basic needs will be satisfied, whatever happens, can’t be supportive to a long term policy, environment protection demands.

What has to be done to achieve immediate change of this unfortunate trends?

The number one problem is the uneven distribution of the wealth between different regions and cultures. The uneven distribution of the wealth is not only a problem of participation in the welfare the modern states are capable to create,  but also diversion of the population growth from the developed rich world, with developed education systems, to poor countries,  with very limited education system, or education system that opposes the modern values, of openness to diversity in cultural, ideological, and belief values.

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Since 2008 the collapse of world economic system have risen questions about validity of economy as a scientific field that has contribution to human existence.  My opinion, as contrary to the often heard views is;  economic profession and economists did prove their skills immediately after the collapse of 2008, when, as contrary to all the political ideologies connected to the president Bush, they helped to implement economic policy of support to the banking system,  saved the monetary system and with it prevented collapse of the fiscal economic activities. As addition to this policy, they supported fiscal economic enlargement by public investment initiations. This economic intervention proved to be very successful as compared to the devastating economic policy implemented at 1929, when similar economic collapse was treated very differently with policy of fiscal austerity and high interest rates. The catastrophic result of this policy is well explained in the economic history books, and is still a sign of warning, what consequences can bring desperation of the masses. Luckily since then, several economic models were developed,  sometime competing,  sometimes supplementing each other, that may be used at different weight in different economic situation. The basic idea of all these economic theories is, that the governments major economic task is to implement policy of anti cycle. When the deflation is on the economic horizon,  enlarged public expenditures and monetary loosening policy  is applied,  while when inflation is the problem the opposite economic policy is advised by economists to the policy makers.

Yet with all this praising of the economists, as  successful advisers in the macro-economic decision making process, i understand, that while the economists are good to find tools to make short term corrections in the existing economic system, to prevent catastrophic collapses, when it comes to long term corrections, it appears that the existing economic system itself has difficulties to cope with. The economist have no tools to find solutions that are out of the frame of reference, of the existing economic system.

The first question is, what is the frame of reference of the existing economic system,  that prevails and became the only dominant economic system after the collapse of the Communistic system due to its failure.

The second question is why the alternative Communistic economic system failed? Was it because of failure of the Communistic political leadership, the political system they implemented, or was it much deeper failure on the system and ideological level? If the failure was only political and not of the economic system then certain elements of communistic system, without the previous dogmatic implementation could be adopted in the future.

The third question I would like to ask is, is there a way to come out with a different economic system that has tools to cope with the major economic social questions the humanity is facing at the beginning of the 21 century.

The winning economic system, that happens to be the so called capitalistic system, is based on market economy. At its essential level the market economic system is based on belief that market is a place, where demand and supply meet, where the price of the items for sale and purchase fluctuate in a way that it tends towards certain equilibrium point, that may change continuously as the surrounding circumstances change, yet in every moment there is one equilibrium point that acts as a magnet dragging the price of the good merchandise or service towards it. The equilibrium point represents an absolute point of optimal utility, that can be created in a system where there is always a supplier and a purchaser. Every other price on the market is in relation to this price and relative to it.

The other essential basis of the capitalistic market economy is the generated capital, its attributes and the behavior of those who own or manage it, and its influences on the economy. The basic attribute of capital is that it is accumulated in two forms. On one side in form of physical assets, as machinery, technology, trained work force, stock, know how, etc. on the other side in form of monetary deposits. Both these forms of capital exist and aim towards one goal, increased yield on investment. Yet, there is major difference between the physical and monetary capital. While the physical capital is an essential part of the production process,  that creates economically valuable items, exchangeable on the market against money, the monetary form of the capital has capacity to be exchanged for economic values created by the physical capital.

The physical capital is owned by legal entities or private ownerships. While the physical capital translates the add value created into monetary form of profit out of production, the monetary capital gets its share out of the added economic value created by the physical capital in form of interest payments or participation in profits of the producers in form of dividends.

The production in the economy, while changing with the technological development, improves in efficiency in production processes and eventually with existing work force, the production growth’s continuously in its volume and quality. So to prevent unemployment or over supply and slump of prices and with it economic collapse, the demand for products needs to grow. The economic growth is also important to the monetary capital, that expects ever growing increase in yields for the invested money. It can be secured on the long run only with the economic growth.  Comes out that economic growth is the major goal of the macroeconomic models. The main instrument to measure economic growth and economic production volume is GDP (Gross Domestic Product)

Most of the economic model today support the view that GDP growth is necessary for a healthy economy. This views goes so far that their followers praise the Fukushima disaster as a positive event for economic growth in Japan. 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. This wrong position considers only very short term goals represented on the annual growth rate per capita income as a major indicator to the general public wealth-being. It doesn’t take in account the accumulated assets as an important measure for economic activity and its impact on the standard of living.

Other problem of the measure of economic performance with the GDP indicator 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 etc. Truth is all these are virtual services, but also products from the real material world are already knocking on the door to enter the markets.

Let’s try to imagine a 3D printer at home, and for the evening gala party if needed a new costume, you can just download a design with instruction for the 3D printing machine to print the new costume. All is needed is virtual instruction how to print the dress. Probably in the future will be such instruction free of charge on the web, exactly as you can find today some services. And here you have a product created just in time exactly done to the needs of the consumer, and it will not be included in the GDP economic measures, except the raw material needed for the 3D printing machine. An other threat to the GDP as an objective ruler for economic performance are the financial services, where bitcoin and kickstarters enable to replace whole range of financial services, and even more they may destroy the monopoly governments and commercial banks have in money creation.

This new economic phenomena called “Zero Marginal Cost Economy” (ZMC economy) as contrary to the classical economy, where product purchase is symbiotic with monetary cash flow, in ZMC economy inevitably bigger and bigger parts of  the economy will become virtual and without impact on the financial world, and as such will be not included in the GDP measurment. But of course it is not just a problem of statistics, and how to evaluate the economy, but a real problem to the whole existing financial system, that is based on need of usage of money in every act  of exchange of ownership on merchandise or service consumption ( cash flow).

If economy will be run without or with reduced level of cash flow, The monetary system will squeeze too. The institutions, that control directly the money flow, the banks, the government, the central bank, the insurance companies, etc. will have to squeeze, will have to start to share power with other elements in the economy, who are not centralized. The already existing trend of close to zero interest rate, stagnated prices, in spite of relatively stable economy, if we take in account the unemployment levels and the quantity of merchandises and services supply levels are not in stagnation, but rather in growth, together with stagnating GDP figures is an almost unknown phenomena.

In the past existed free of charge services, mostly supplied by the government, municipalities or some voluntary organizations. But these activities were financed by taxes or donations, that did have expression in the macro economic data and the cash flow, since someone had to pay to the suppliers of these services. It is very different in the new economy of ZMC, where the supplier is not charging for the service or merchandize or charging very little. This little it charges, by asking for donation (tips) or very low price, can work, since the individual supplier, when supplying his product, he is doing it through the internet, so he can reach millions of consumers, out of them if even very lowly paid, can thrive. This also means, that only the very best, the most popular, the most wide spread product suppliers can sell their products. It again brings as to the social problem caused by efficiency brought to us with the new technologies, when only few can be productive and successful, while the rest of the population is necessarily marginalized.

2 Comments
  1. Dear Patrice, we are at the eve of new economic and political era. The WWW is bringing to the world revolutionary economic changes with significance comparable to the change brought James Watt with his steam machine. Your criticisms of the existing system is correct, but i would like to focus on the near future. Very few if any one could predict at end of 18 century how will look the world 100 years later. We are of course much more aware of the changing world around us, but also the speed of change is much faster than it was 250 years ago. But back to the issues of economics and politics, we can see already the cutting intermediation rates in every aspect of commerce. Amazon started selling books, look what range of products it offers now. You can read economists (mainly with pro republican inclination) how surprised they are, when the economic model predicting translation of buget deficit and money printing to inflation doesn’t work. And until recently very little of system changing options the internet opened in industrial production was introduced. But with the introduction of 3D printers and oither similar technologies probably all this will change. People will start to print products at home, while choosing the product and its design directly out of the web. All what will be needed are printing machines and some powder compound raw material, mostly combination of carbon, silicon and metals. No more need for mass producing factories. All you need is a product disigner, printing machine and the compound. It will be a production method called “just in time at home”.

  2. I think the mother of all problems is the rise of inequality in power. From there the rise in stupidity, and brutality of the oligarchy. Then terrible decisions ensue, including about resources. Roma went through this. It took generations before disaster struck. Here disaster has already struck (see WWI and WWII holocausts).
    PA

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