Let's talk about economics...

[Sandia]

One of the greatest sources of confusion, when it comes to discussing economics, is the failure to understand the nature of money.

Money is defined as a thing that is used as a unit of account, a store of value, and a medium of exchange. The problem with the definition is that it's overly broad; a bicycle and a train are both means of transportation, but you might still want to know the difference.

Over the course of history, all kinds of things have been used as money: gold, silver, copper, shells, feathers, paper, cows, and women. All these things share an important attribute: they exist in the real world.

There is another kind of money, however, which doesn't share that attribute. An early example is the use of tally sticks in England. A tally stick was a stick with a series of lines marked on it. The lines represented a sum of money. The stick was broken in half, lengthwise, and one half went to each party in the transaction. One half was made shorter than the other, and that half - the short end of the stick - went to the debtor. The long end - also called the "stock" - went to the creditor.

When the government wanted to buy something - say, wheat from a landowner - it might issue a tally stick to the seller. When tax time came around, it would accept the tally stick as payment for taxes. The system continued for about 700 years. (When the tally sticks were finally burned, in 1834, they started a fire which burned down Parliment.)

In addition to its value as a tax credit, the sticks had value as currency as well. They could be used to purchase things in the marketplace. Because some people needed them to pay their taxes, others were willing to accept them as well.

What's interesting about the tally sticks is that they illuminate some things about the modern financial system that are otherwise obscure. For example:

• Taxes don't fund spending. The reverse is true: spending funds tax payments. Without the government having first spent the tally sticks into the marketplace, no one could use them to pay their taxes.
  
• The government can't "run out" of money. In theory, it could run out of sticks. But since money is now recorded electronically, even that's not an issue.
  
• Government spending is constrained by inflation. If the government creates far more tally sticks than what it collects as payment for taxes, the value of the sticks will fall. Taxes are important not because they fund government, but because they prevent inflation.
  
• Government has no actual need of tax payments for its own benefit. When Parliament got tired of storing its tally sticks, it burned them. If you show up at a tax office in California with stacks of hundred-dollar bills, the IRS official may send them on to Washington. Or he may toss them in the shredder.
  
• Government debt is the record of private sector savings. If the government spends one million in tally stick marks, and collects half of as much in taxes, the net increase in tally sticks accumulated by the public is the same as the deficit of the government - .5 million.
  
• If the public wishes to save tally sticks, the government must net-spend tally sticks into the marketplace, so that the public can save them. The same thing applies to foreigners - if foreigners, including foreign governments - wish to be net savers, we must be net spenders in order to accommodate them.

 

[JohnnySavage]

And thus ends our course in 9th grade macro economics.

 

[VaticanAssassin]

I am sorry I missed the class, can you please send me a copy of your power point? Will there be a quiz?

 

[richard_daily]

And thus ends our course in 9th grade macro economics.

Considering that people like AJ are promoting going back to the gold standard, I think a refresher might be useful for some of our economically-challenged litizens.

 

[JAMESBJOHNSON]

Taxes create inflation.

 

[unregistered]

 

[rosco rathbone]

I actually met Randy Wray at OWS. I told him "love your ideas, but your writing style doesn't do them justice" and he looked at me askance.

 

[garbage can]

One of the greatest sources of confusion, when it comes to discussing economics, is the failure to understand the nature of money.

Money is defined as a thing that is used as a unit of account, a store of value, and a medium of exchange. The problem with the definition is that it's overly broad; a bicycle and a train are both means of transportation, but you might still want to know the difference.

Over the course of history, all kinds of things have been used as money: gold, silver, copper, shells, feathers, paper, cows, and women. All these things share an important attribute: they exist in the real world.

There is another kind of money, however, which doesn't share that attribute. An early example is the use of tally sticks in England. A tally stick was a stick with a series of lines marked on it. The lines represented a sum of money. The stick was broken in half, lengthwise, and one half went to each party in the transaction. One half was made shorter than the other, and that half - the short end of the stick - went to the debtor. The long end - also called the "stock" - went to the creditor.

When the government wanted to buy something - say, wheat from a landowner - it might issue a tally stick to the seller. When tax time came around, it would accept the tally stick as payment for taxes. The system continued for about 700 years. (When the tally sticks were finally burned, in 1834, they started a fire which burned down Parliment.)

In addition to its value as a tax credit, the sticks had value as currency as well. They could be used to purchase things in the marketplace. Because some people needed them to pay their taxes, others were willing to accept them as well.

What's interesting about the tally sticks is that they illuminate some things about the modern financial system that are otherwise obscure. For example:

• Taxes don't fund spending. The reverse is true: spending funds tax payments. Without the government having first spent the tally sticks into the marketplace, no one could use them to pay their taxes.
  
• The government can't "run out" of money. In theory, it could run out of sticks. But since money is now recorded electronically, even that's not an issue.
  
• Government spending is constrained by inflation. If the government creates far more tally sticks than what it collects as payment for taxes, the value of the sticks will fall. Taxes are important not because they fund government, but because they prevent inflation.
  
• Government has no actual need of tax payments for its own benefit. When Parliament got tired of storing its tally sticks, it burned them. If you show up at a tax office in California with stacks of hundred-dollar bills, the IRS official may send them on to Washington. Or he may toss them in the shredder.
  
• Government debt is the record of private sector savings. If the government spends one million in tally stick marks, and collects half of as much in taxes, the net increase in tally sticks accumulated by the public is the same as the deficit of the government - .5 million.
  
• If the public wishes to save tally sticks, the government must net-spend tally sticks into the marketplace, so that the public can save them. The same thing applies to foreigners - if foreigners, including foreign governments - wish to be net savers, we must be net spenders in order to accommodate them.

Uhmmm, Sandia, can you give me an executive summary???..............

 

[rosco rathbone]

Uhmmm, Sandia, can you give me an executive summary???..............

"Everything you know about money is wrong".

http://pragcap.com/resources/understanding-modern-monetary-system

 

[Sandia]

I actually met Randy Wray at OWS. I told him "love your ideas, but your writing style doesn't do them justice" and he looked at me askance.

I'd love to talk to him. I've been playing around with the idea of going back to school, but my wife would never go to Kansas City. We do have Jamie Galbraith here, but not sure it's the same thing.

 

[rosco rathbone]

I'd love to talk to him. I've been playing around with the idea of going back to school, but my wife would never go to Kansas City. We do have Jamie Galbraith here, but not sure it's the same thing.

KC is the only place to go. It's the epicentre!

 

[KingOrfeo]

Let's ask TVTropes (pay special attention to #7) about economic fallacies:

There are two brief notes that need to be observed for the following fallacies:

First: These fallacies are based on Neoclassical economics, which is a broad designation that refers to all economic schools that accept the consensus formed in the wake of the "Marginalist Revolution" caused by the work of Leon Walras, William Jevons and Carl Menger. Basically, this approach to economics emphasizes economic subjectivism; the belief that a good is valued by a subject and that market prices for a good only come about when subjects desire them. This is a great contrast to the Classical economists like Adam Smith and Karl Marx, who argued the value of commodities are related to the labor to produce them (the labor theory of value, a theory derived from the philosophy of John Locke).

Second: These fallacies are only always accepted as fallacies in a healthy economy. Schools of economic thought greatly differ on matters relating to an unhealthy economy. For instance, a Keynesian would only accept Fallacy 1 (the Broken Window Fallacy) is a fallacy in a healthy economy. In an unhealthy economy, committing this fallacy is (according to Keynesianism) a potentially beneficial thing. Thus, for all the following fallacies, Your Mileage May Vary in an unhealthy economy.

1. The Broken Window Fallacy aka. Destruction Equals Employment aka. Digging and Filling Ditches: Named by Frederic Bastiat, this fallacy consists of ignoring opportunity costs. Specifically, an important principle in economics is when one has an opportunity to choose between multiple outcomes, the cost of picking one outcome is having to forgo the other outcome/s. In practical situations, this means resources spent on one thing cannot be spent on another thing. Some examples include:
• Destruction Equals Employment: or when someone says "breaking windows is good for the economy because people will then buy new windows, thus increasing business done by glaziers." The ignored opportunity cost is that the money used to repair windows could've been used to buy other things and the business would've gone to other merchants. On a larger scale, the belief that "war is economically productive" ignores the opportunity cost of spending resources on building bombs instead of building something else. Of course, this is profitable for the arms industry, but for the economy as a whole it isn't. There's also the minor matter that society's poorer by what was destroyed; the resources spent replacing it are used to restore lost wealth. A Raubwirtschaft economy based on plunder often works in the short term but is unsustainable in the long run as existing territory becomes depleted of resources and conquering new territories is not possible - or would cost you more than you could rob. Cases in point: The Roman Empire and Those Wacky Nazis.
• Digging And Filling Ditches: The government (or a corporation) gives everyone a job and pays them, without regard for the actual usefulness of said jobs. There are significant opportunity costs associated with the resources required to pay the people working on the newly-created jobs (because these resources could have been used to do something else, which may have been more beneficial).

1. Fallacy of Intrinsic Economic Value aka. Money for Nothing aka. Superiority Equals Success aka. Wealth Is Zero Sum: This fallacy consists of forgetting that the value of a good is not necessarily related to any measurable quality of this good, but is rather granted by the fact that people desire more of the good than is avaliable immediately. Examples include: ◦ Money for Nothing: The government prints more money or a gold mine gives out free gold to everyone, claiming they are creating more wealth. This does not create "more wealth" because "wealth" doesn't exist inside gold or money. All it would do (holding demand constant) is lower the market price of gold, or generate inflation (i.e. more money is required to purchase the same good/s). Regarding the printing-money example, in the short term (i.e. before the inflation kicks in) this gives the issuer some extra wealth; but as time goes on the effect becomes a wealth-transfer from the holders to the issuers of the currency; holders are left with Worthless Yellow Rocks.
◦ Wealth Is Zero Sum: This fallacy alleges that someone can only get wealthy by making someone else poor. X's gain must be Y's loss. It's a dog-eat-dog world and business consists on grabbing the largest share of the pie one can. The fallacy is the belief that the "pie" is a fixed size. If economic value is objective, then it is finite; it cannot be created. However, that premise is wrong; economic value is subjective. Thus, the pie size can be increased by increasing the supply of subjectively-valued goods.
◦ Superiority Equals Success: This fallacy alleges that a product's market price is determined by an objectively measurable aspect of the product. For instance, lets say I place a bucket of my phlegm on the market. And then I place two buckets of phlegm on the market. By the logic of Superiority Equals Success, I should get more money for two buckets of my phlegm than one. Thankfully, no one wants my phlegm and as such I wouldn't get any money for either bucket (clarification: I might get money for the buckets themselves; but the phlegm would have to be removed from the bucket). Objective superiority of any good along any measurable aspect (for instance, quantity) only translates into a higher market price if people want more of that measurable aspect (holding all other variables constant). And let's not even mention adding marketing into the mix...

2. Exporting Good, Importing Bad: It's usually used something like this: Exporting something makes others dependent; this is good. Importing things makes you dependent; this is bad. Note that there was an early economic theory, mercantilism, which taught this exactly. In truth, some countries have a relative productive advantage in some areas, while other countries have different relative productive advantages. Trade allows countries to specialize in whatever production they have an advantage in, thus producing more in total, and then trade with each other. This makes both countries better off. For example, perhaps Country A can produce 4 cans of butter, or 2 cans of butter and 1 carton of eggs, or 2 cartons of eggs. Country B can produce 4 cartons of eggs, or 2 cartons of eggs and 1 can of butter, or 2 cans of butter. With trade, they can produce at their advantages of 4 cans of butter in A and 4 cartons of eggs in B and then trade so they each have 2 cartons and 2 cans. Making them both better off than if they produced everything in their own country. ◦ It's worth noting that in an Empire that has expanded sufficiently the Mercantile system makes more sense (although probably still isn't optimal) from the perspective of enhancing state power. However, in terms of delivering an economically optimal outcome (i.e. maximizing utility), the Mercantile system still Fails Economics Forever.
◦ In theory, Empires can benefit from mercantilism. In practice, of course, this was often not the case. The late 19th century European empires all spent far more maintaining their empires than they got back in revenue, and the colonies themselves represented a very small fraction of their overall GDP.
◦ Some economists (e.g. Ha-Joon Chang) consider avoiding imports extremely important when the economy of a country is still developing. If country A currently produces 4 cans of butter and country B can't produce any butter at all, but could potentially produce at least 4 cans, country B should limit the importation of butter from country A to encourage the development of the local butter industry. In the modern world this applies most strongly to third world countries, which are dependent on imports in nearly all sectors of economy and have a very limited selection of exports. That is, real protectionism is about either having certain production at all or balancing import and export. So the export may be seen as a problem too*


◦ Most of the arguments about promoting exports and avoiding imports for developing countries center around the idea that a country needs to industrialize to be truly prosperous, and the best way to do that is to promote local industries by limiting foreign competition. It seems to work with Export-Led Industrialization, but not so much with Import Substitution Industrialization, although obviously this is a major simplification of the internal economic processes of each country that tried these policies.
◦ It's also worth noting that importing and exporting will, with few exceptions, always balance. If the US buys stuff from China, but doesn't sell anything, they'll have a bunch of dollars that are worthless to them, unless they start buying stuff from the US, or loan the money back to them, or something else to that effect. If both countries use the same currency, this won't happen as quickly, but in this example the currency would slowly get more valuable in the US and less in China until the trade balances.

3. Ridiculous Future Inflation: The main problem with this is that it is often portrayed as being a natural and normal result without any of the many social and economic problems hyperinflation show in the real world. It is, however, normal to see drastically inflated prices as a result of a past inflation.

4. Ridiculous Rationality: The first things that are spelled out in Econ 101 are a set of assumptions about how people decide on their actions. In brief, these assumptions are that individuals act to optimize their own utility (pleasure/satisfaction) and they have perfect information about all prices and how much utility will be provided by any good (as well as other things). Needless to say this is a simplifying assumption and by no means holds true in all cases of how humans act. Ridiculous Rationality occurs when a work of fiction appears to assume that all cases of human action must conform to the previous assumptions. Needless to say, most Economists know these assumptions need to be taken with about a teaspoon of salt, and there are many schools of economics that begin their analysis from different starting points. A good example of this can be seen in any given grocery store that stocks both name-brand and generic versions of the same product, like breakfast cereals. Generic breakfast cereals are invariably cheaper than name-brand cereals, usually identical in quality, and sometimes even contain slightly more food per box/bag (for the same or cheaper price). If the ridiculous rationality fallacy were real one would expect generic cereals to constantly sell out and name-brand cereals to be shelf-warmers. In reality, the opposite is true. Sales for name-brand cereals leave the generics in the dust, mostly because consumers come to the (irrational) conclusion that name-brand cereals are better because they come in colorful boxes and/or are promoted by entertaining cartoon characters and/or because, if the brand name cereal turns out to be of inferior quality, the consumer has a multi-billion dollar corporation to shun/sue.

5. The resource halt: A source of conflict in many post-apocalyptic scenarios is the sudden exhaustion of a valuable natural resource such as oil and the conflicts that inevitably flow from it. Any microeconomic principles student will tell you that the real world does not work this way. If mankind is faced with such a threat, owners of the resource will withhold some of their stockpiles now in order to take advantage of the future scarcity. Furthermore this will mean that the price of the resource will rise slowly, giving humanity time to adapt. As a result, the point where we do run out will not be a trigger for a massive calamity, rather it will hardly be noticed. ◦ This would presume that the progress of science, and, indeed, the circumstances of the physical world itself, are determined by economic demand; events may very well occur to which humanity is simply unable to adapt. Furthermore, if the resource is sufficiently important - for example, water - the tactic of stockpiling may backfire by way of having your throat cut by a thirsty mob.
◦ A sudden, temporary decrease in availability, however, can be entirely plausible. This can occur (and has occurred) due to the obstruction of transportation routes, the destruction of the production apparatus, or monopoly/oligopoly producers artificially withholding supply in order to serve other motives. The effects of these scenarios are likely to be tied to relatively specific times and places rather than being The End of the World as We Know It (although it may feel that way to those affected).

6. Rights-Efficiency Tradeoff: The false dichotomy that suggests that civil liberties and workers rights would automatically undermine economic efficiency. This idea, which is implicit in the idea that Hobbes Was Right, is not only an oversimplified model of political theory, it's also a severe bastardization of welfare economics. In fact, many economic models like the coase theorem suggest that markets become more efficient when certain rights are institutionalized. This trope was notably more popular before the fall of the Soviet Union effectively discredited it forever, but many writers still haven't gotten the message. Whenever this trope is invoked, expect to see a lot of rag clad vagrants mucking about in the wastes outside a clockwork efficient police state, consoling themselves "at least I have my freedom".

7. America the bankrupt: National debts don't work like your personal debt. For example, people don't buy your debt to prop up your currency. Yet for some reason a lot of writers tend to think of the national debt in the same terms as a bank loan, with angry creditors and everything. When this trope is invoked expect to see a consortium of angry foreign dignitaries banging on a conference table that they want their money back. In reality, if countries actually acted like this, the global financial system would probably collapse pretty spectacularly and everyone would be screwed. This trope is not specific to America, but for some reason Americans are exceptionally paranoid about the National Debt, particularly when the Chinese are buying it up, and now not buying it anymore. Oddly enough, America's National Debt isn't even that bad by international standards. Also, the US national debt is in terms of dollars, and the government can create as many dollars as they need to pay off the debt. Everyone would be paid the amount owed, but the new dollars would lead to inflation. The key here is that governments usually owe substantial portions of their debt to 'themselves,' i.e. either the government owes money to different branches, or those branches hold their assets as bonds and treasury bills instead of money; by owing money to yourself, you usually don't charge yourself interest (beyond inflation) and you theoretically can't default on money you owe yourself. This is how Japan can have gross debt worth over 100% of their yearly economic output and have little economic effects: 70-80% of its debt is owned by the Japanese Central Bank. In the United States, around 35-40% of the government debt is owed to itself, mainly to the Social Security Administration. Also, debt owned to foreign entities makes up MUCH less of the debt than people seem to think: as an example, China owns only 6% of the total US debt.

8. Free Market equals Big Monopolies: A general feeling among many people is that if the market goes without any check, eventually, a business would out-compete all its competitors, buy them off, or drive them out of business, and then it would snowball into becoming the sole provider of a good or service, crushing without mercy any feeble attempt of entering the market. In Real Life, monopolies are extremely hard to maintain without at least either blatantly criminal means or collusion/support by the government; And if a monopoly charges monopoly prices for monopoly quality within an actual free market, this could act as an incentive to bring in new competition and/or motivate the customers to look for alternatives.

To an extent, this is complicated by the existence of natural monopolies (i.e. goods and services where economies of scale render the most efficient method of producing a good to be a method where one single producer makes the good). Additionally, certain parts of a production process may be naturally monopolistic and some may not be (i.e. you can have multiple telephone carriers, but network infrastructure is naturally monopolistic). However, rarely do works of fiction deal with complex issues surrounding regulatory economics (or even the possibility of voluntary solutions, like all the telephone networks agreeing to use the same set of infrastructure because it is cheaper for them to do so). Regardless of this, it is in general correct to say that for the most part the belief that free markets are friends of monopolies is a false one; indeed several individualist anarchists like Lysander Spooner have argued that free markets (genuine free markets, i.e. not rigged corporate statism) undermine monopoly privilege.

9. Third World Countries: Paradise of rich nations' investments: Ah... Third World Countries, with their cheap labor supply, lax regulations, and prime materials just waiting to get exploited. With such advantages, wouldn't the average Joe invest his life savings into opening a business in say... Somalia? As you probably answered... not so, normally, the reason labor is cheap in TWCs is because the workforce is also unskilled, lax regulations also usually mean a high crime rate or even political instability. That's why it's usually the big businesses the ones that take the plunge to do the tremendous investments in TWCs, since they can absorb the cost of giving training to the workforce and providing security for their investments.

10. Ideological Identity Idiocy: This is the intersection of Artistic License - Economics and Strawman Political. Often, a work that wants to make a political point will (probably accidentally, but possibly deliberately) make mistakes about the definitions of specific economic systems. In short, authors often don't know (or don't care) how economists actually define economic systems. Economic systems exist to allow a society to economize, i.e. allocate their supply of means towards various different ends. The supply of means is scarce because it cannot achieve all these ends. Thus, an economic system is something that provides a method by which these ends are prioritized and means are directed to fulfilling them.

 

[LadyFairfax]

A lot more genius here today than yesterday when Wiki was "difficult to access".

Bravo.

 

[trysail]

Let's ask TVTropes (pay special attention to #7) about economic fallacies:

Geeeeezzzzzzzzzuuuuuuuzzzzzzzzzzz.


If you truly believed in the science fiction known as catastrophic anthropogenic global warming, you wouldn't have caused coal to be burned to generate the electrons that were wasted on that massive waste of time.


Somebody was smoking some really good shit when they wrote down that hallucination.




Let's take a look at the U.S. national debt outstanding and its UNFUNDED LIABILITIES as reported by http://www.usdebtclock.org. At the moment, the total stands at a stunning $117,237,067,400,000 ( for U.S. based innumerates, that's ONE HUNDRED SEVENTEEN TRILLION TWO HUNDRED THIRTY-SEVEN BILLION SIXTY-SEVEN MILLION FOUR HUNDRED THOUSAND DOLLARS ) or $411,064 per person or $1,038,500 per taxpayer.




U.S. Debt Clock:
http://www.usdebtclock.org/

 

[eyer]

THE DEATH OF ECONOMIC FREEDOM
Andrew Napolitano: Only 1 candidate will actually defend private property

The root of economic freedom is the recognition of the right to own private property. That includes the right to utilize it unmolested, to dispose of it without anyone’s permission and to exclude anyone from it, even the government. Suffice it to say, no American president since the advent of the income tax and the Federal Reserve 100 years ago has fully accepted or meaningfully defended that right. The more the government extracts in taxes and the more it inflates the money supply, the more it rejects and assaults property rights.

...If you believe you have the natural right to own your property and to trade and spend your money as you see fit, then there is only one Republican presidential candidate who agrees with you. That candidate, when asked last week in South Carolina what the rate of income taxes should be, replied: ZERO. One needs to laugh at Mitt Romney and Rick Santorum and Newt Gingrich as they pitifully attempt to defend natural rights and the right to pursue happiness, when they have no respect for the right to own private property.

More @

http://www.wnd.com/2012/01/the-death-of-economic-freedom/

 

[Love_Puppy]

I have a plastic card that works just like money.

 

[4est_4est_Gump]

Let's ask TVTropes (pay special attention to #7) about economic fallacies:

If you pay attention to #7, which KO has staked so much on and which I answered in a thread he devoted completely to the one phrase:

"America's National Debt isn't even that bad by international standards."

Which is actually an embedded link.

http://www.kathylien.com/site/forex-blog/which-countries-have-the-most-debt

We're third behind Japan (who followed out current polity which led to the Lost Decade which has yet to actually come to an end) and Italy, one of the €PIIGS. It then contrasts us with the rest of the PIIGS and *asp* we're right where they are, so yeah, things just aren't that bad.

I mean, we can always do tricks like this, cut everyone's SS tax, by taking past SS IOUs from the general fund to pay for the "tax cut" (which, btw, used to be referred to as a premium) and then turning around and reissuing them to the general fund as new SS IOUs...

Yeah, no one can see anything at all wrong with $16,000,000,000,000.00 in national debt.

 

[4est_4est_Gump]

KO, completely wrong:

9. Third World Countries: Paradise of rich nations' investments: Ah... Third World Countries, with their cheap labor supply, lax regulations, and prime materials just waiting to get exploited. With such advantages, wouldn't the average Joe invest his life savings into opening a business in say... Somalia? As you probably answered... not so, normally, the reason labor is cheap in TWCs is because the workforce is also unskilled, lax regulations also usually mean a high crime rate or even political instability. That's why it's usually the big businesses the ones that take the plunge to do the tremendous investments in TWCs, since they can absorb the cost of giving training to the workforce and providing security for their investments.

The problem with the third world is the government's proclivity to confiscate successful wealth, the path Obama now, with the help of the community-organized (remember ACORN) OWS crowd, wishes to walk happily down in the name of third-world "Social Justice."

Plus the little guy invests in the aforementioned big-businesses, so he is free to indirectly invest; I have a lot of my portfolio in emerging Pacific Rim economies where they have embraced more Libertarian (classic Liberal) economic ideals.

 

[Wat_Tyler]

If you're looking for justice . . .


well, best of luck.


Our right arms make justice, and what we do with that is up to what we will let us sleep at night.


The illegal can be done right away, the unconstitutional takes a bit longer . . . I heard that once.

 

[JAMESBJOHNSON]

Inflation will move you into a higher bracket too, increasing tax revenue.

Here's anuther metaphor.

The gubmint pisses in your soup pot and charges you more for having a fuller pot.