OVERVIEW
MONEY
PRICES
INTEREST
ECONOMICS
SUSTAINABLE ECONOMICS
GOVERNMENT SPENDING
CAUSES OF THE ECONOMIC CRISIS OF 2008
A SOLUTION TO THE ECONOMIC CRISIS OF 2008
OVERVIEW: An economy is a network of value transactions over time. It consists of transaction nodes representing exchanges of goods, services or other items of value between parties, or economic actors. In most but not all cases a node represents a two way exchange of vaulted items generally for the benefit of the economic actors who exchange them.
The whole idea of an economy is to distribute valuated goods from actors where they have less functional value to areas where they have more. Generally this is because goods production tends to be concentrated in production areas but used in more distributed areas. thus the exchange of goods tends to maximize the usage value of all goods across the system. However distribution costs also play a role so that the exchange value of a good must be calculated minus its transpiration cost to the consumer location. Additional costs such as taxes, time deterioration etc. also must be considered.
In the ideal free market situation the exchange value of any goods at any node is determined by agreement of the two parties involved. This determines how much of each good one party is willing to exchange for the other.
Every exchange determines an exchange value of one good in terms of another. Values of goods are not absolute or fixed, but are dynamically determined by the individual actors who conduct transactions. There is no intrinsic 'real value' to any good, only the exchange value it has in transactions which can change from transaction to transaction.
The reason that exchanges are made is that the value of a good is less to the seller than the buyer. Thus the effect of the economic network is to maximize consumption value to all parties in the network. In this way the society as a whole maintains maximum value.
The result is an economy that consists of a large complex ad hoc network of exchange transactions through time that theoretically (with certain constraints) maximizes value to everyone in the network.
MONEY: Money is a fungible non-consumable standard good designed to facilitate the exchange of other goods. It enormously facilitates exchanges over barter because it is freely exchangeable in any transaction. The seller who receives money rather than barter goods he may not need can be assured he can in turn use the money in any subsequent transaction to purchase goods that he actually needs. With money a buyer can purchase any good that he wants without having to have an exchange good the seller wants. This frees up an economy by making every good independent of every other in exchanges. Economic actors can simply buy and sell what they want without worrying about what goods the other actor in the transaction needs.
Thus a monetary economy consists of a complex closed network of transaction nodes through which money flows in the opposite direction to goods and services.
PRICES: The available supply of any good relative to its aggregate demand tends to set its price relative to the similarly determined price of all other goods. However actual prices are determined in individual transactions by the relative value each actor in the transaction attaches to the goods involved.
Assuming a fixed money supply, the value of money (buying power) tends to remain fixed, and only the supply and demand of goods enters into the equation of value in transactions. However if the money supply changes one needs to consider money as one does all other goods whose supply and demand varies.
INTEREST: When an economy includes interest transactions things change. For interest to be paid back the money supply must increase and thus the value of money must decrease. The total amount of interest over time determines the eventual required increase in the money supply for the interest to all be repaid. For example, starting from a money supply M0 and no outstanding interest, if 50% of M0 is then loaned at 10% annual interest then for it to be repaid at the end of the year the money supply would have to grow to M1 = M0 + (0.5 M0 x 0.1) = 0.05 M0, a 5% increase.
There are other possibilities. One is defaulting on a loan where the interest due is not paid. Default does not require an expansion of the money supply. The other dynamic is to continually roll over loans by taking out loans on the some part of the total principle + interest due. This will temporarily avoid default and even the necessity to increase the money supply. However the more this is done the more unstable the whole system becomes because it is more subject to the shock of larger and larger defaults due to not enough money available in the system to repay larger and larger loans.
On the other hand if more and more money is pumped into the system to facilitate repayment of more and more loans then the purchasing power of money declines at greater and greater rates. Typically in modern oligarchic economies this is what happens. Corrupt corporations take larger and larger loans they cannot repay. The Government steps in and pumps large amounts of new money into these companies to avoid their defaults. However this greatly increases the money supply and significantly diminishes the purchasing power of ordinary persons finances. The net effect is a massive redistribution of wealth from the middle class to the super rich. This is but one of a whole set of methods by which this enormous income inequality is actively fostered by a government bought by the oligarchs. And more importantly money buys power, and control over government, thus the march towards ultimate wealth and power of a very few super rich over all other peoples is accelerating to the point that if it is not reversed a very few super rich will obtain absolute control over the entire rest of the population with that absolute power over everyone else enforced by an increasingly totalitarian government they control.
The only way debt (interest) works period is for more money to be printed to cover the interest otherwise it could never be paid off. That is Econ. 101. If you have more money in circulation and the amount of goods and services doesn't grow at the same rate to compensate then your money is worth less and you have inflation. Since the amount of food and energy, and thus all goods produced, can't possibly grow at the same rate as our hyper-debt compounding interest will, hyper-inflation is the reasonable expectation for the future.
The only way to survive in such a situation is to have constant increases in income equal to the rate of inflation, this has to be either through salary increases or investment income. Since only the already super-rich can accomplish that and the common man can't, the % of wealth will continue to go more and more away from the common man to the super-rich. The super-rich who run things know this full well. They have purposely mortgaged our future so we will be poorer and poorer and they more and more obscenely rich.
ECONOMICS: Economics is surely the Queen of sciences because it is where all the other sciences maximally interact with each other. It takes an elegant and complex and mathematically precise dynamic network of all the other natural and human networks and then adds a dash of quasi-rational decision making at a subset of the nodes (the human ones). Imagine God putting the laws of physics into place and then appointing a myriad of little daemons to alter them slightly based on their own local whims at every event.
Calling Economics the dismal science as some from other disciplines do is unfair. It is the most elegant and complex as it incorporates all the others. It just simply hasn't been mastered yet due to human intellectual limitations.
Certainly it is no more 'dismal' than evolution (actual evolution - not theoretical). Actual evolution depends on which individuals reproduce or survive in which environmental circumstance. That is extraordinarily complex based largely on chance and the impinging actions of other organisms and natural processes. It is absolutely beyond human computability to precisely determine that for any individual organism, much less the whole interacting network of organisms. Yet no one would argue that evolution is a 'dismal' science. The basic laws of the network are known though not the decisions at every node and that is all that EPer's require to say they understand it and that it is a 'real' science. In contrast they demand much more of economics, that not only that the basic laws be known, but that the aggregate decisions at all the nodes must also be known for economics to qualify as a science. By their own criteria, evolution would not qualify as a science - or at best a 'dismal' one.
SUSTAINABLE ECONOMICS: The ideal situation is efficient sustainable production of just what is necessary for happy healthy lifestyles without all the unnecessary consumer goods. The facts are that it is possible to produce that with only a small % of people actually doing the work. That's good not bad because it allows everyone to work only a few hours a week to produce everything society needs. The problem is how to allocate that minimal work among the population so that everyone can have the income to purchase it.
It's a difficult issue to transition to from the current system in which most salaries are paid to produce products that no one really needs and that drain environmental resources. However if we don't manage that transition we will eventually collapse back to pre-industrial conditions in which nearly 100% of labor time is necessary to produce that same amount of really necessary goods.
I am assuming some continuing energy source to assist in production and transport. The great majority of energy sources are currently being used other than to produce true essentials such as food. If those uses were to be discontinued there would be plenty of energy of one sort or another.
Exact % I'm not sure but my general estimate is that 95% of all work is done to produce non-essentials. Not to say that some of that is not positive like many aspects of science, but still non-essential.
GOVERNMENT SPENDING: Many believe that 'the government must act to stimulate demand'. NO! That is just more government spending money they don't have and increases the debt which is the root of the problem. And of course it will raise taxes. Demand should find its own level based on what people need and are willing to buy based on how much disposable income they have.
Government spending should be extremely minimal, sufficient only to provide minimal required services. Other than that the primary direction of government spending should be such as to incent sustainable long term progress and well being by encouraging new technology. The primary function is to offset the private sector's natural concentration on short term profit.
CAUSES OF THE ECONOMIC CRISIS OF 2008: There has been much discussion of the causes of the economic collapse and what to do about it. My basic take was that it was/is an unsustainable house of cards and a complete collapse resulting in vastly less consumption and thus much less production was natural and the best thing that could happen as it would greatly reduce exploitation of unsustainable resources.
The root cause is trivially simple even though no economist seems to note it: That credit issued for interest necessarily requires enough new money to be printed to cover the interest payments when they come due or they must default. The economic collapse was caused by an enormously inflated amount of credit and thus the due interest injected into the economy. There was simply much too little money available to pay it when it came due and thus the economy must collapse (since interest bearing loans default and thus don't have to be repaid) down to the level at which there was enough money to pay the the remaining ones off.
However rather than letting this natural event happen which would have rightly bankrupt many of the special interests, our government created new money to cover their losses by borrowing even more from future generations, i.e. basically borrowing more from the future to cover the present losses of their buddies. The result is that either we must have hyper inflation to create a great increase in money to repay those loans when they come due, or we will have an even more catastrophic collapse in the future.