Money Literacy – Part I

The 20th century was strongly dominated by two schools of thought on how to design a system that guides human effort towards the improvement of living conditions and the advancement of human society: On the one hand, we have "capitalism", on the other hand "communism". While both are often regarded as irreconcilably opposing philosophies, the one proposing a de-centralized market mechanism, the other one a centralized planned economy to allocate "scarce resources", it is important to notice that, in the past century, both gave disturbingly similar results in one important respect: Back then, they both amounted to increasingly damaging vital life support system resources in order to meddle through the problems of the day. One might try to capture this thought in a succinct provocative phrase: The one thing communism and capitalism could not agree on is whether the process of destroying the current best available remaining resources should proceed in a centralized or de-centralized way. Mindless bickering over this – essentially minor – detail brought the world insanely close to the brink of instant nuclear annihilation at least thrice in the 20th century, in October 1962 [1], in October 1969 [2], and in September 1983 [3]: we should perhaps count ourselves lucky we even made it so far.

Seen like this, it becomes very visible why both essentially self-destructive approaches are ultimately doomed to fail. Soviet-style communism did so quite spectacularly back in the 90s, while western-style capitalism started bleeding more recently. The important point to note is that the key aspect of our collective behaviour so far under both systems was to gradually exploit our then-best resources until they were gone, before necessity – the mother of all invention – forced us to devise "clever" ways to exploit the then-next-best resources that had been ignored before. In principle, the downward spiral we are on could – even in the present situation – go on for quite a while, certainly at least until we are driven to lure the earthworms out of the soil to eat them. There are countless very direct examples of this process all around us: oil certainly was easier to transport than liquefied natural gas. But how many engineers can actually see through the "interesting engineering challenges" associated with LNG infrastructure to see this as just the next step further down in the big picture?

But does it all have to be like this? Looking at us as a species, what are we most proud of? Perhaps, a good answer is: "Head, Hand, Heart". Given those, we actually have an unparalleled potential for system stabilization and damage repair – it almost seems as if Nature originally intended humans to be the ultimate gardening pioneer repair species. At some point in the past, we must have become confused and embarked on a destructive mega-project that allocates human creativity (literally, "the power to create") to ever more cunning schemes for exploitative destruction. The dissonance between this sort of "cleverness" and "wisdom" could not be any stronger. Personally, I sometimes wonder whether the book of Genesis is all about man’s dissociation from gardening, and hence the beginning of this doomed project that was started by the one fellow who first ploughed the soil ("adamah") and actually was named after it by his contemporaries ("Adam"). "In the sweat of thy face shalt thou eat bread." Now, could we not just get rid of much of that sweat once again by getting our carbohydrates from trees? And, might all those apocalyptic prophecies in the Bible actually be just nothing else but warnings that the basic scheme underlying that civilization, exploitation, is ultimately doomed to fail?

In some of the recent literature on education, an important useful concept is that of "alignment": When designing an assessed educational program, it is important to pay attention to designing the test in such a way that it actually effectively tests the desired competence. While this may sound painfully obvious, widespread use of multiple-choice tests in inappropriate ways is one of many indications of a real problem here. It seems useful to also think about our unnecessarily destructive behaviour in terms of an "alignment" problem. Viewed like this, the obvious question to ask is: "How would we have to re-design the rules of the (economic) game in such a way that human creativity gets allocated towards earth repair?" This question comes with an imperative, the imperative to dream, to consider daring ideas that completely run counter to our life experience – to think what has not been seen before. My impression is that many of the ideas that seem promising will in some way involve re-thinking money. After all, allocation of human effort is the central economic question, and money is a central mechanism for making economic decisions.

What is money? Interestingly, history of economic thought shows that this is a highly confusing question, and widespread beliefs on what is a good answer have changed in time. But isn’t it strange to be confused about the nature of something so fundamental? It is not as if, say, physicists were confused about the nature of energy. Let us, for now, consider the simplistic idea that "money = gold". The comedian Mike Harding came up with an interesting observation [4]:

Gold, n.: A soft malleable metal relatively scarce in distribution. It is mined deep in the earth by poor men who then give it to rich men who immediately bury it back in the earth in great prisons, although gold hasn’t done anything to them.

It is not that if we could just agree on "money = X" for some arbitrary X that has a number of desirable properties without expecting this to have any consequences towards our collective behaviour. A quite immediate consequence of the equation "money = gold", for example, is to have poor villagers on the Philippines poisoning their environment with mercury and cyanide, i.e. allocating human effort towards producing a more poisonous environment for their children. This strongly smells of a "misalignment" problem. Would it then be possible to turn this around by thinking about "money = X" as a design problem? An idea that almost suggests itself here is to take something as X that is fundamentally related to ecosystem health, such as e.g. forested area, stabilized dunes, or fertile topsoil. What consequences would such a scheme have for an economy that has to extend its monetary supply? While caution is strongly advised here, as there easily can be unexpected side effects, and one very easily becomes blind to the flaws of an idea one is in love with, the direct answer seems to be: this is only possible if people plant more forests, and improve soil fertility, hence providing a compellingly strong incentive towards repair. (Of course, these thoughts are just a crude first outline that may need a number of refinements.)

Our present money is based not on gold, but debt, which brings with it a host of problems, in particular in situations where – e.g. due to declining availability of cheap work in the form of fuel energy – there is a systemic reason for promises pledged becoming unfulfillable. One curious very different sort of money is the stone money of the ancient Yapese, Rai stones [5]. Essentially, while a key idea again is scarcity (based more on a difficulty to obtain, rather than limited natural abundance of raw material), this in effect is "merit money": one can "make new money" by embarking on an adventurous journey and then investing even more work to produce new "money stones". To society as a whole, such activity may not be overly damaging, like poison-dependent mining, but it still seems somewhat strange, as it uselessly burns up human creativity. So, the idea of "merit money" seems to be more beneficial than the idea of "scarcity-based preciousness money". Still, would it not be even much better if the actual "merit" were tied not to an essentially nonsensical activity, but to actions providing ecosystem abundance, such as repairing degraded soils?

A naive "formula" seems suggestive here: money based on scarcity will bring scarcity, while money based on abundance will bring abundance.

Continue to Part II of this series….

References:

  1. http://en.wikipedia.org/wiki/Cuban_Missile_Crisis
  2. http://www.wired.com/politics/security/magazine/16-03/ff_nuclearwar,
    http://en.wikipedia.org/wiki/Operation_Giant_Lance,
    http://en.wikipedia.org/wiki/Madman_theory
  3. http://en.wikipedia.org/wiki/Stanislav_Petrov
  4. http://www.mikeharding.co.uk/books/comedy/armchair/armchair2.htm
  5. http://en.wikipedia.org/wiki/Rai_stones

 

Related

Popular

23 thoughts on “Money Literacy – Part I

  1. Scarcity is linked to the human desire to control the environment, both the natural and the human, and thereby improve the chance for survival and, by extension, self-realization. In this context, scarcity serves as an instrument of control. When selectively employed, the survival and growth of A can be favored over those of B, or vice-versa.

    Of course scarcity works against stability (since there will always be someone who is lacking), but at the same time promises potential for (seemingly limitless) growth and, by extension, self-realization. Thus, in an age like the present one where the powers that be seek limitless growth, scarcity is an oft-employed socioeconomic instrument.

    As for the relationship between communism/socialism and capitalism, both can be seen as two extremes of an evolutionary cycle in economics. At first, there is a large unclaimed market share and several entities compete to secure as much of it as possible. Then, there is a competitive phase wherein many of these entities fail and disappear, with the winners becoming even bigger and stronger through mergers and other means of acquiring the assets and market share of the losers. Those who survive and thrive at the end of the competitive phase may use their economic clout to influence government regulation and so further consolidate their advantage, thus bringing about the “communist” phase of the economy. In this phase the incentive for competition disappears and the established players have almost unchallenged influence over the entire economy, until the incumbent hegemon(s) are unable to adapt to changes in market conditions and become broken up (since maintaining economic hegemony requires large sums of money and resources), thus allowing new competitors to attempt to take over the remaining market share and assets, thus repeating the cycle.

    Curiously odd how nature and economics mirror each other, eh?

  2. Fiat money is daylight robbery from us, but basing our money on rare trinkets or an almost useless metal directs our energy towards useless tasks.
    So what’s the solution? Very modern, traceable, Cash, as long as it can’t be lent out at anything other than a 1:1 ratio.
    I see money as resource vouchers, because they (dollars) enable you to choose where and how any resources are used, whether it be something useful to something very wasteful.
    The Entertainment industry is one that creates huge wastages of resources and is rewarded even more to do so. But we need them to understand how much damage they are doing so they can at least have a chance to change voluntarily. I can’t offer a solution with much detail but a tax system that encourages people or appeals to their desire for status to contribute to a community benefit or infrastructure and be proud to do so wouldn’t be unachievable. Funds from local abundance would filter up not down like they do now.

  3. Greate article! After being recommended the matematichen and architect Christopher Alexander from http://www.permacultureprinciples.com, I’m now studying the first book of four in “The nature of order”, called “The phenomen of life”. Alexander show us here how both the capitalistic and the socialistic systems have destroyed our cities, houses and living areas. Both systems have done so because they have throw away the traditional knowledge and wisdom, but most of all because both systems see everything as fragments, they don’t see things as wholes, with a greate interconnections. The result from communism and capitalism is the same, houses and living areas that doesn’t support life and happiness.

  4. http://www.natureoforder.com/

    Here you can learn about “The nature of order”. I’m just half my way through “The phenomen of life”, but already I have changed my wiew upon the world. What is clear is that people and communities, before the damaging modernism damaged our world, then had a knowledge and skill in creating beauty and harmony much more advanced than we have today. Capitalism and communism are just two different faces of the same monster, Modernism. A better name may be “Murderism”. What I mean is that modernism is not just about architecture, it is about as how we organize our society as a whole!

  5. Oevynd,

    Yes, Alexander is a very important source, I totally agree with this.

    The one question for the 21st century is: If we were serious about designing human habitat in such a way that it does not generate excessive levels of stress, what would we pay attention to?

    I think a key problem is that 20th century design is characterised by going totally against the grain of our co-evolutionary context.

    If we just got serious about building low stress environments, that would perhaps solve more than half of our energy problems as well, in one go.

  6. If one ponders the why ~ what motivates the insatiable corporate giants? Greed can only motivate one so far, but conformity, that is an endless battle to win. Massive cookie-cutter production with no need or want for any creative originality. Keep everything the same, no substitutions allowed, if we do it for one we have to do it for all. Human chores cost under $10 per hour with no benefits. Artistic value is not only worth nothing, but perceived as a dangerous threat to the compliant society as a whole. If it sounds to good to be true it is. You can’t change city hall. Don’t make waves. Improve your ability to avoid disturbing others.

  7. Toni,

    Fritz Schumacher often used the distinction between “convergent” and “divergent” problems, pointing out that the human life experience involves challenges that can be solved, and also challenges which are unsolvable. In his ontology (as I understand it), if life only consisted of one of these, it would either be pointless in the sense that all the answers were in principle already fixed from the first second, or it would be pointless in the sense that our great abilities exist in vain, as they never would allow us to make any sort of progress towards a deeper understanding. So, there are both sorts of problems in the world, and the big task for us is to find out which is which.

    Now, what happens if one tries to come up with a “world formula” universal recipe that “solves” one of the fundamentally unsolvable problems? I would expect receiving feedback in many different ways that we are on the wrong track: The world would keep on telling us that our ideas contradict reality. There are, actually, quite a number of such “world formula” approaches out there. One tell-tale sign is that they all come with a catch-it-all excuse telling the believer that no sort of set-back should ever make him question his assumptions. A textbook example for this perhaps is Wallace Wattles’ “The Science of Getting Rich”: ‘A fundamental pre-requisite of this scheme is that you believe in it. If it does not work, than that certainly must be because you still had second thoughts.’

    Note that such ideologies are extremely attractive, especially because many people feel rather uneasy about the possibility of “unsolvable problems”. Most of us have a desire for the “Miracle Cure”, the “Philosopher’s Stone”, the “World Formula”. You find that throughout our entire culture.

    The problem is that, to some, economics plays the role of such an “I explain everything” belief system. (Note that I am not specifically talking about e.g. capitalist economics here – there are multiple ideologies – “economicses” – out there, and this holds true for pretty much all of them: all have some religious zealots among their followers.) Specifically for Adam Smith flavoured economics: Regardless what we do, The Invisible Hand of the Market will miraculously solve all problems. If it fails to solve a problem, then this is just because people worked against it. What a splendid recipe! Now what would we do to a doctor who treats all illnesses with large doses of mercury – and if a patient dies (all do), then, obviously, that’s just because he stopped taking as much mercury as he should have.

    I think that, with such people, “fear” is often a much stronger issue than “greed”. Greed is just part of the specific belief they adopted. Fear is what drove to adopt them such an inherently irrefutable (and hence insane) belief system in the first place. Fear of living in a world where some questions might not have a good answer to them.

    That is, by the way, a good way to spot them. Throw an unsolvable problem at them. Do they immediately have the miracle answer to it? An example: What, say, should we do about the shortage of organs for transplantation? “Ah, that’s just a problem of distribution of scarce goods, and we know that the market is the best conceivable mechanism for that…”

  8. First of all, let’s remind ourselves that the so called capitalism nowadays are only a half hearted capitalism. In a truly free market, money itself would be free (as in free speech). But all of us have grown up in a world where the production of money is monopolized by a central body.

    It is essential to learn the history of money. In the old days, people begin trade with barer, direct exchange of goods. Milk was exchanged for eggs. But what if the egg producer doesn’t want milk, but fish? The milk would need to be bartered for fish first, then to egg. Fish became a medium of exchange. Overtime various medium of exchange have been used, such as spices, stones, seashells. Eventually precious metals such as gold and silver became the medium of choice due to the characteristics such as uniformity, rarity, divisibility, long lasting, transportability, marketability, etc.

    Thus money originated in a free market, not by decree. It took World War I and the great depression to wrestle money out of the free market and breaking the link to hard commodity (gold) and thus ending sound money. With the inflationary policy of central banks, early recipient of new money benefits at the cost of those who receive it later or not at all. They can enjoy goods at present prices before prices go up.

    Money is subject to supply and demand, just like any other goods. One needs only to glance at the money supply charts [2] to realise continuously rising supply of money and thus with it destruction of value.

    In a free market, various forms of money will compete with one another. They will also be interchangeable, at various exchange rates. Thus it would be possible to create new money based on any schemes we like. It is then up to the market to decide to take it up or not.

    If we were to propose a new form of money, it is essential to understand the history of money, what worked, and how it became like now. See [1]

    References:
    [1] http://mises.org/mysteryofbanking/mysteryofbanking.pdf
    [2] http://en.wikipedia.org/wiki/Money_supply

  9. Johan,

    while I don’t agree with the implicit idea that the free market would always magically manage to solve all our problems (see the “organ shortage” issue above), I agree with you concerning the problem with non-free money (i.e. money designed by a central authority, rather than the people).

    Concerning this point:

    “Eventually precious metals such as gold and silver became the medium of choice due to the characteristics such as uniformity, rarity, divisibility, long lasting, transportability, marketability, etc.”

    I am still not so sure about the “preciousness” issue. What essential uses do we need gold or silver for? There are some technological applications, sure, but I’d consider it conceivable to live well entirely without them.

  10. Certainly free market is not a magic bullet. But so far it is the closest thing we have considering all the alternatives.

    Before we consider the “organ shortage” issue, we first need to differentiate between “shortage” and “scarcity”. Diamonds for example, is scarce, but we never experience a shortage of diamonds. Anyone who wants diamond and willing to pay the price can get one. A shortage occurs when people could not obtain a good for the advertised price. Most often this is due to price control and regulation.

    Note that where shortage occurs, black market thrives.

    A free market for organs will establish a high price for organs initially. This would motivate biotech companies to speed up development on artificial organs or tube grown organs from mature stem cells, for example. Profit motivated they may be, the end result is a plethora of choice for consumers and eventually affordable options, just like any other consumer goods we have in the free market at the moment.

    Without a market for organs, development of artificial organs depends mostly on government handouts which result in slow and inefficient progress.

    What about third world country people selling their organs to developed world? Well, the fact is, organ buying and selling occur in the black market in spite of all the regulations, but unfortunately without the benefit of free market progress.

    [1] http://mises.org/story/660
    [2] http://mises.org/daily/898
    [3] http://mises.org/media/1384

    As for the preciousness of gold, the fact that gold has limited industrial use upholds its merit for money as the value would not be much affected by changes in the use. It would be great if we could eat gold, but that would run counter to the criteria for money as long lasting. In fact, the perceived stability in gold value is one of the factors that makes it ‘precious’. Let’s not forget that originally, money serves as a medium of exchange. You only want money because you want to exchange it for other goods ultimately.

  11. Johan,

    “Certainly free market is not a magic bullet. But so far it is the closest thing we have considering all the alternatives.”

    What is this assertion? A belief? A proven fact? A simple rhetoric trick to evade specific criticism? If you just substitute “free market” with some other belief system, say “communism”, even “scientology”, “yogic flying”, or whatever else, you can reasonably expect religious believers to make precisely the same statement.

    Some thoughts:

    a) Do dramatic failures of the free market approach actually occur in reality, or are these always and exclusively just manifestations of “imperfection flaws” in our attempts to set up effective markets? Take, for example, privatization of water in Bolivia and the “Cochabamba Water Wars” of 2000.

    b) Personally, I always find it quite scary when I hear assertions that “strategy X will have effect Y”, even though history should teach us that such thinking often has produced quite remarkable surprises.

    c) While I don’t share that view, let’s assume for a moment you are right about a free market for organs. How, then, about a free market for Plutonium, say? Or Nuclear Weapons? Or let’s consider more abstract goods: scientific integrity certainly is of high value. But, as it takes effort to obtain and maintain, shouldn’t there then be a price tag on it? There undeniably also is a “black market” for votes in a democracy (using absentee voting). Buying and selling votes is a serious crime. Should there be a free market for that as well? How about that ingenious concept presented by the Yes Men, “justice vouchers”?

    Pondering these issues a bit further (an art can play a very important role in exploring things here), it is hard to avoid the conclusion that there are some aspects of life, such as integrity, that have a very different quality of “value” than anything that could be expressed in economic terms (in the sense that we could then stick it into an “utility function”). In a sense, we consider them as “holy”. So, what all this amounts to is that, ultimately, there is no way around the conclusion that economics inevitably is linked to an ethical framework.

    And that, actually, is just the heart of Permaculture: a minimal (hence widely acceptable) core ethic covering just the inevitable aspects related to long-term inhabitation of this world by the human species, from which everything else flows. What is this series about? It is about a deeper look into the somewhat elusive third “redistribution of surplus (towards accelerated rehabilitation of our habitat, and that of our co-inhabitants)” pillar of the Permaculture ethics.

  12. Imagine, for a moment, as difficult as it might be, a world where the demand for organs is almost non-existent, because all people in the world live healthier lives to such an extent that the lifestyle diseases now prevalent are history. Such a lifestyle might include plenty of outdoor exercise in a permaculture garden (completely free of agricultural ‘products’, like chemicals, fertilisers, GMOs, etc.). It might include lots of fresh fruit and vegetables from that garden. It might include a happy mindset that results from living a rewarding, constructive family-/community-oriented existence and it might include immense personal satisfaction from living from one’s own labours and ingenuity whilst working interdependently with the people around you.

    A need to trade in organs in this scenario would thus be reduced to almost only those who had hereditary issues (where some would try to resist the natural selection process).

    If everyone lived such an existence – largely self-sufficient and framed within personal self-restraint to avoid non-essential stimulants, etc. – GDP would plummet whilst health would go through the roof. The healthy scenario is based on ethics and restraint, whereas the ‘free market’ organ trade scenario is based on disease and misery (misery is profitable – as we see in the war industry just as we do in the badly named ‘health industry’).

    Which ‘system’ do we aim for? The one that increases the ‘efficiency’ of the free market by removing all regulation/constraints on the organ transplant industry, or do we somehow incentivise a shift to the ‘healthy’ scenario to make such transactions largely redundant?

    Just like war is a very lucrative industry, despite the fact that if it were to be implemented everywhere life would be hell, the same goes for the free market organ transplant industry. A desire for continual growth and profits in this industry actually incentivises a desire to see everyone with the need to trade in these goods (i.e. CEOs of organ transplant industries would be looking for ways to increase their market share, and then increase the total number of sick, desperate customers out there). The free market in this context, disconnected from ethical restraint, thus creates a moral black hole that sucks everyone into a ‘health’ industry hell.

    The post entitled Why ‘Increased Energy Efficiency’ Won’t Save Us (which could just as easily have been called Why the free market disconnected from ethical restraints won’t save us), which covers Jevons’ Paradox, might be useful in this context.

    I am fully behind the ‘freedom’ aspect of capitalism. But if we let the invisible hand loose, on its own, in a world full of unethical people, then the end result will always be deeply negative. It wreaks havoc. (As I said in the aforementioned article, we just “become increasingly efficient at depleting our resources and hastening our own destruction”.) I detest centralised control, but we bring it upon ourselves because we don’t learn to constrain our greed and selfishness. People end up voluntarily surrendering their freedoms and demanding governments take control, because they can’t bear to live with the consequences of their own collective greed any more. We lose our privileges because don’t deserve them. We see it with the current financial crisis – we swing from right to left, left to right. The cycle continues until we learn (one day?) to live in a way that finds true fulfilment and health and that finds satisfaction in working for the common good and not just for a short-term, reductionist view of what happiness really is (today’s consumer treadmill).

    The only way to truly remain ‘free’, and to avoid a move towards centralised totalitarian control, is to see ethical considerations applied to all that we do. If this doesn’t happen, we will always swing back and forth between communism and corporate feudalism until the world is completely desolate – until we have ‘consumed’ it.

  13. Craig,

    I don’t see why you say “The healthy scenario is based on ethics and restraint, whereas the ‘free market’ organ trade scenario is based on disease and misery.”

    The ‘healthy scenario’ relies just as much on freedom from political coercion as the organ trade scenario would. Free people could choose either course of action. It’s our job to help people choose wisely via education and demonstration of permaculture’s benefits.

    It seems I agree with pretty much everything you wrote here, except that I am willing to continue the salvage effort on the term “free market” and say that we must have one to live well. Free people can be persuaded to our way of thinking and make changes in their lives; slaves of political masters cannot.

  14. Hi JBob.

    >>”The ‘healthy scenario’ relies just as much on freedom from political coercion as the organ trade scenario would. Free people could choose either course of action. It’s our job to help people choose wisely via education and demonstration of permaculture’s benefits.”

    Agreed!

    I’m just saying that whilst ‘freedom’ is essential, if ‘freedom’ is not wielded by an ethically-motivated populace, then it’ll still all end in tears.

    An unrestrained ‘free Market’ system, whether it be in organs or other, will end up being based on ever increasing consumption. “We need to sell more organs!” You can only increase consumption by increasing demand (I can almost see the heart, lung and liver upgrade adverts now – “Add years to your life with a tri-pack install today!”). How to contain the present demand for perpetual ‘economic growth’ unless the market is controlled by moral power, at an individual and collective level. The term ‘sustainable growth’ is an oxymoron. The exponential function, combined with the realities of living on a planet that cannot inflate to accommodate it, means we will only survive if we discover/build an economy that is not based on continual growth. Tell me how the invisible hand can accomplish this without some kind of system of restraint. Ideally that restraint would be at the individual level – rather than enforced from above – but that can only occur if everyone in the system is operating ethically, with a mind for everyone around them.

    Not sure if I can make it any clearer :) (Did you read the link in my last comment?)

    People argue over left and right constantly. Particularly now. But to ignore what I’m saying, I believe, will just continue the pendulum, and history, swinging back and forth between these two ‘options’, without actually solving our problems.

    I personally suspect we’ll never learn this lesson, and we’ll instead watch the world sink into a more fascist, centrally controlled government that takes its cues from big industry.

    If people do realise the moral aspect of what I’m saying, but fail to actually achieve it (a widespread resurgence in ethical values that respect individual rights/beliefs, etc.), then there’s also, unfortunately, the definite possibility that, instead of this grass roots resurgence in compassion and morality, morality itself will be prescribed by the same government/big industry collusion – but with set, inflexible parameters that don’t take individual opinions/beliefs/freedom into account. We’ve seen it many times before – when church and state were integrated, and a predetermined set of ‘moral guidelines’ was enforced. That always ends in tears too. (Think dark ages, for one example.)

  15. JBob,

    one specific problem I am having with this idea of “the free market will solve all problems” is that it is very easy to blame all sorts of problems on not having a free market somewhere.

    So, the key question here is: What sort of observation can you use as a criterion to discern between a problem that ultimately is caused by a non-free market, and a problem that has other causes?

  16. Thomas raised a good question. How can we tell if a problem is due to non-free market or other causes? Well, it might be worthwhile to go back to the basics.

    In a free market, the elements of demand and supply interact to determine the optimum price. When demand for a particular good increases, such as due to population growth or increased standard of living, this will push up the price. For example, say the price of coffee is $2 per kg. As demand goes up, coffee will disappear from store shelves sooner. Retailer will start to increase price to take advantage of the high demand. Price increase will continue until the demand stabilises. Any further price increase will result in leftover coffee on the shelves that will have to be discounted later on to sell.

    The high coffee price will encourage existing coffee farmers and new entrepreneurs to grow more coffee which will increase supply. Eventually, the additional supply will reach the market and price will start to decrease. The decrease in price will spur more demand, which will stop further price decrease. The price will settle at a new spot where supply balances demand.

    The dynamic of the market is changing all the time. It is important to note that the price will always settle at a point where the supply balance demand.

    But suppose for example, when the demand for coffee increases, instead of allowing the price to rise, a regulation is created to place a cap on the coffee price. Coffee will continue to disappear from the shelves, but as the price is capped, there is no incentive for new coffee farms or for existing farmers to expand. So what will happen next? Subsidies and grants will be given to encourage more coffee growers. The subsidies mean that coffee price at the farm has increased, but at the market, it will be still be the same old price. What an unbalance! Interesting phenomena isn’t it? If looked at the regulations in isolation, they seem good (who wouldn’t like price of goods to stop increasing? can we have a cap on petrol price as well?) For the producers, who wouldn’t want subsidies and grants to increase their profit (or even just to enable them to continue business). But looking at the big picture, these regulations result in unbalances.

    So to tell what causes a problem, it is necessary to look at the details and also the big picture of how people and processes interacts.

  17. Johan,

    somewhat frustrated, I must point out that you did not even make the tiniest step towards answering my question. You just presented some self-justification for the free market logic.

    A general principle that would have avoided so many tears: For any oh-so-great explanation how the world works (or ought to work), it is worth nothing if you do not have a clear evaluation metric telling you: “If I ever observe X, I am forced to get rid of one of the fundamental assumptions underlying this system of thought. This would invalidate much of the concept.”

    If you do not have this, your belief might just be functionally equivalent to that of the physician who treats all his patients with mercury – the worse they feel, the more mercury they have to take. And if they die (all do), that’s “of course precisely because they did not get enough mercury”. What would *you* tell such a physician? I would ask him: “what observation would force you to re-evaluate your belief in mercury being the solution to all problems?” He would not have an answer. And this tells me to stay well away from him as he means trouble.

    Now, I am asking *you*, again, “what observation would force you to re-evaluate your belief in the free market being the solution to all problems”?

  18. First, let me clarify that I am not proposing free market as a solution to all problems. What I do believe is that the free market economy performs better than regulated ones.

    Ok, let’s help the doctor with some observations. Before he can determine the efficacy of a drug, first he should establish that it is not harmful. Administered to healthy persons, it should not make them sick. So the doctor will need a few healthy volunteers. They will be given varying doses of the drug, and their health observed over time. If they all fall sick, and if their degree of sickness correlate with the dosage, that observation would be a clear indication that the drug is actually poison. I’m simplifying here. In reality, it is possible for a drug to be beneficial for the sick while on healthy persons what you observe is the bad side effects (for example, chemotherapy).

    So it is important to define the baseline, the healthy person, which would correspond to a healthy economy correctly. In my personal opinion, a healthy economy is based on healthy trades, which at it’s most basic level is a voluntary exchange of goods or services by two parties. Any regulations and restrictions will correspond to administering a drug. Sometimes a person does get sick and might need a drug. But a good drug is one that restores balance and allows the person to continue living as before without the need to continue taking the drug. It is a temporary measure, not a permanent one. If a drug is needed permanently, then it can be said that it never cures. It might prolong life, but it is not effective in curing the person. It is certainly possible that in certain cases, taking away the drug means killing the person. In the world of economy, taking away regulations might cause shock and the collapse of the system, but unlike a mortal person, the economy will always regenerate.

    Now as Craig mentioned, a good economy is not independent of ethics. I fully agree. Free market is not truly free unless there is also property rights and private ownership. Many of the current environmental issues can be traced to a lack of property rights. But this would be a separate topic in itself.

  19. Johan,

    you claim that: “In the world of economy, taking away regulations might cause shock and the collapse of the system, but unlike a mortal person, the economy will always regenerate.”

    I am very disappointed to see that you do not seem to realize that economic “shock and collapse” is a process in which people actually lose their lives. Here is an interesting graph for you to study that shows this: http://preview.tinyurl.com/russia-mortality

    Note the quite visible effect of the 1989 collapse of the Soviet bloc on male life expectancy. You talk as if “the economy just recovers and everything will be fine afterwards”. Actually, the situation is literally the same as in medicine: prescribing the wrong drug easily can *kill* people. In that sense, the economic policy-makers has precisely the same sort of responsibility as the physician. It only is frightening to see to what extent policy-makers seem to be unaware of it!

    Let us consider a specific example.

    The “patent recipe” of the World Bank for water shortages in Cochabamba were to establish a free market by privatizing the city’s water services. Not surprisingly, actually. After all, with hyperinflation in Bolivia since the 80s, the country turned to the World Bank for solutions. The World Bank would lend them money, but, as usual with their “Structural Adjustment Programmes”, coupled to conditions. This has led to policy decisions such as the privatization of Bolivias airlines, rail and telephone system. With water in Cochabamba, the problem was perceived to be that many poor people were not connected to the network, so paid a high price for water brought to them by other means, such as by truck, while the state’s activities to provide cheap water via the network actually were perceived to selectively subsidize richer families and industry (connected to the network).

    How did this privatization go? There was a single bidder interested in running the water system – an international consortium. They secured the contract and brought in mostly technical staff (engineers) from developed countries not overly familiar with the socio-cultural situation in Bolivia. Part of the contract with the government was the completion of a somewhat questionable, but fairly expensive project, and to pay for this, the utility company of course raised prices for its water – quite considerably by the way, by roughly 1/3, amounting to $6/month. Now, that might not sound much, but with minimum wage being only about 10 times that, many poor people suddenly were forced to spend more money on water than on food.

    Back in 2000, this caused serious unrest, and people got killed. In the end, they returned to the previous arrangement. Not that this would have been a major improvement over the considerable stresses that were tried to resolve through privatization.

    Of course, when considering a potentially dangerous drug, a physician has a difficult choice to make. He might risk killing a person. What can he do? If he acts in an ethical and responsible way, he will provide his expertise to the patient in a way that it helps the patient to make an informed decision about the situation – does he want to risk that particular treatment or not? Hence, the concept of “informed consent”. Now, if we applied the concept “voluntas aegroti suprema lex” to economics, that could be the basis for participatory structures. What we have instead is a hybrid system of “one dollar, one vote” and the facade of “representative democracy” to provide the default excuse “your right to complain is at the ballot box, once every so many years”.

    Really, the problem is ideologists believing in their silver-bullet miracle cures, who, in applying them, kill people. In the medical profession, we got that problem somewhat under control. So one could say that by now, people no longer get killed by quacks, but get a real chance to get killed by their economic policy equivalents.

  20. Ah, thank you for reminding that economic shocks and collapse might cause loss of people lives. You are certainly right. That really means there should be gradual transition when weaning someone off a drug.

    In any case, would I be right to gather that we agree as to the base line for a healthy economy is one that is free? If so, our strategy would be to focus on how we can get there from where we are now.

  21. Johan,

    “freedom” in itself pretty much is a vacuous concept. I’ve e.g. seen economists claiming that “I only want to take away people’s freedom to choose non-sustainably produced food”. I am, by now, fairly sure that you could even easily sell any sort of atrocity under the brand name “freedom”. Shouldn’t we, say, give poor nations “more freedom” by allowing them to trade (non-)prosecution of human rights violations for money? (The “justice voucher” idea).

    The key point here is: there is no silver bullet. If you can demonstrate that “freedom” has a precise meaning and amounts to more but a simple rhetoric trick, I’m all ears.

  22. Hello,

    Regarding the nature of gold’s value, Peter Blegvad has a great song (called “Gold”) about that on his 1990 album “King Strut & Other Stories”.

    You can find the lyrics and a nice free cover here: http://www.icompositions.com/music/song.php?sid=77800#


    Gold would be worthless if it didn’t require
    such heartbreak to seek it, to find it and mine it
    Things remain precious as long as they’re rare
    If gold could be found lying ‘round everywhere
    it would be the lowliest of metals, too soft for serious use
    Pretty, of course and warm to the touch
    but no longer alluring when you’ve handled so much
    The lowliest of metals.

Leave a Reply

Your email address will not be published. Required fields are marked *