The Economics Spin-Off Thread!

[danaphanous]

@west india man,

oh and for clarification:

I don't think corruption can be abolished but you can set up a system where it is more difficult for it to occur then in another system. The short list I mention as "improvements" for the American system for instance.

utilitarianism is the idea that something is right if it is in the benefit of the majority. Free markets with open competition are in the benefit of the majority. They give everyone an avenue to improve life for themselves by producing things that other people want and allow buyers and sellers freedom to set their own prices or spending. Who they don't benefit is people that are unable to work for various reasons. The system tries to free each individual to pursue their own welfare insomuch as it does not violate the freedom of others to pursue their welfare. The fact that certain capitalists accumulate more then others is irrelevant because they only do so in the system by providing services or things that other people want. For every dollar they make they are providing a transaction that other people also wanted to make. No one is forcing consumers to buy things, they do so because they want too. Because the choice is free open competition results in quality goods and services. It only doesn't in the presence of collusion or monopolies (not a free market) but it does when companies are competing for customers. This is the basic precept of the free market with competition maintained. I'm not saying everyone has successful businesses, obviously the majority of people won't have this but that this whole system creates value and benefits all participants that buy or sell. Bill Gates for instance. He's made billions but the operating system he sold made the companies and individuals that bought them far more then they spent. He also provides jobs for thousands of employees and the salaries are good. Everyone won in this scenario because computers are a quality product. The pie of resources is not fixed and value is constantly being created in a free market economy by successful companies that transfer or transform goods from one sector or form where they are less valued to another where they are valued more. They aren't taking money from anyone else by force. I think you are operating from the assumption that the system is broken to begin with. That's like me equating all ideas about communism to the Russian system in the 1980's.

You say most work is useless. Perhaps but services and businesses exist because they are filling a desire that people have. No one would buy something they didn't want so what is your definition of "useful"?

It is also not true that before minimum wages or regulation everyone was on starvation wages, please don't imply that they were--the capitalist system has raised living standards significantly for a lot of people over the Feudal system for instance. Those with jobs are free to leave and seek others in the free market system that are better and they definitely will if the wages have them starving. Not to mention no matter what you are free to find a need people have and produce something they want and you can support yourself. Most people don't choose to do this because they like the security of a company paying them and don't like the risk of supporting themselves but it's their choice, no one has forced them to be an employee for that company. And in most practical scenarios there are multiple companies to choose from even if you prefer to work for others.

About the "efficiency" of the free market and your point about surpluses and shortages. A shortage is when many people want a good but they can't get it. A surplus is when there is way too much of something for sale and not a lot of people to buy it. In a free market economy these are handled much better becuase prices are free to meet naturally where supply and demand intersect. If a company does overpredict demand and end up with a surplus they cut their prices till people want to buy what they have so the surplus is erased. If there is a shortage a new company starts to fill the void or existing companies ramp up production. I can't remember the last time there was actually a serious shortage or surplus problem where I live for these reasons. The reason this didn't happen in the USSR was that the government fixed the prices at what they thought they should be leaving companies and buyers helpless to really work with each other in this way. If they set the prices too high lots of a good was made that people wouldn't buy. It couldn't be lowered without a movement by the government though so the problem persisted much longer then it does in a free market. With prices too low the opposite occurs.

 

[metalhead]

@ danaphanous:

The minimum wage cannot cause inflation. Why not? Because MW earners are well under 2% of the labor force, and even further under 1% of the total wage bill and consumer purchasing power. In short, there's just not enough money involved to be a statistically identifiable issue. Statistically speaking, the noise in the system from measurement errors, the margin of error itself, is many times larger than the maximum pressure a change in the MW could possibly apply on prices. And, even where that not true, it's extremely difficult for inflation to ever be larger than what the central bank decides to allow it to be. So if there were inflationary pressure, monetary policy would convert that to higher unemployment instead. But, as I say, the number are just too small to identify cause and effect.

Well, hold on there. I've come around on the idea that even a $15/hr minimum wage will likely not cause significant inflation (mostly), but I think you're greatly underselling it here. In actuality, 42% of American workers make less than $15/hr. So while it may be true that only 2% of people currently make $7.25, raising the minimum wage significantly is going to give an awful lot of people a raise. And that's before you account for raises that other companies will have to give their workers as a result. You'd likely see a pretty large impact on wages across the board. The people whose wages went up would almost certainly see a benefit even if there was some measure of inflation, but there would be both displaced workers, and people whose wages remain the same and lose a bit of purchasing power due to rising costs, whether due to inflation or higher costs of labor for business owners.

Recognizing this potential down side is not a reason to oppose a much higher minimum wage, but it is a reason to try to get there very gradually, so as not to upset the labor market overmuch. In the end, the higher wages will improve vastly more people's lives, than will suffer for it. But still, smart policy accounts for the potential for suffering, and tries to mitigate it as much as possible.

 

[Lexicus]

Higher wages=inflation is an equivalence that only holds at full employment.

 

[metalhead]

Under current conditions, it would probably be beneficial if we could force inflation by raising the minimum wage.

Raising it to $15/hr might not cause actual currency inflation, but prices in some places would have to go up to account for the higher wages across the board, or employers would have to cut staff to keep their labor costs the same.

 

[danaphanous]

Exactly. We are talking price inflation not currency inflation. Prices rise after changes to income in the sectors people spend this new money into. This happens because companies recognize the new demand and bigger consumer base and shift their prices to maximize their profit. Companies aren't concerned with making the most sales, but making the most profit and there is some rigidity to the sales as long as you don't raise prices too much because people have more money to spend. Almost inevitably they do go up some though because this makes companies more money. Now as some people argue, this doesn't matter because companies this new equilibrium usually still allows more people to buy the goods in these sectors, but it's a fact that must be considered in policy and it is pretty much a given.

can you explain your statement about full employment? If you are saying this is not always true because higher MW will unemploy some people this is true but I would consider it a lesser effect and not something that completely cancels the price inflation.

I'm still waiting for inthesomeday to come back and tell me what his dream economy would be. Excited to hear ideas from anarcho-communism! I've always liked the idea I've just never had faith it will work on a large scale so I want to know what the goal would be.

 

[Lexicus]

Er, "currency inflation"? What's that exactly?

Inflation is a sustained rise in price levels across the whole economy, so the notion of a separation between "currency inflation" and "price inflation" seems, at best, suspect...

The full employment question is basically simple, if the economy is not using all available resources there is "slack" to it, such that you can increase spending (which is what wage increases do) and not get inflation, because the additional spending will be "absorbed" by greater production of real goods and services.

 

[danaphanous]

I define currency inflation as the increase in the amount of actual money in the system (from government printing of new money).

Then we have price inflation which is simply increases in the costs of things and can happen simply from people spending more money or loan interest rates being low. This is happening with college tuition right now. It's easy for everyone to get a loan so prices are rising dramatically despite the fact that the actual worth of college is not really changing. You can have the exact same amount of money in the system but have high wages and high prices or you can have low wages and low prices and it be exactly the same buying power. Price inflation doesn't have to result in a change in the standard of living.

 

[metalhead]

Er, "currency inflation"? What's that exactly?

Inflation is a sustained rise in price levels across the whole economy, so the notion of a separation between "currency inflation" and "price inflation" seems, at best, suspect...

Not really, price increases would tend to be localized - the more businesses in an area spend on labor as a percentage of their outlays, the more their prices would have to rise to account for the increase in wages due to the minimum wage going up. There may be some goods - typically those produced domestically by cheap labor - whose prices go up across the board, as wage increases hit the entire supply chain and not just the retail portion of it. But there would also be goods that are imported and sold in large cities that would be completely unaffected by even a large wage increase.

So prices of certain goods in certain markets would go up, but prices would almost certainly not rise across the board. "Price inflation" is probably not a good term to use to explain what I mean, but that's the gist of it.

 

[Lexicus]

I define currency inflation as the increase in the amount of actual money in the system (from government printing of new money).

Er, what? A few questions present themselves: what's "actual money"? Did you know that bankloans create money in the same manner as federal spending?

Then we have price inflation which is simply increases in the costs of things and can happen simply from people spending more money or loan interest rates being low.

This is close to terms I can understand. "Increases in the costs of things" is the only kind of inflation I know about, and it can be caused by too much money creation or too much spending, relative to the amount of real goods and services available for purchase. It can also be caused by supply shocks (like, say, if you were to base the entire global economy on the supply of a single commodity which is controlled by a cartel of autocrats).

 

[Lexicus]

Not really, price increases would tend to be localized - the more businesses in an area spend on labor as a percentage of their outlays, the more their prices would have to rise to account for the increase in wages due to the minimum wage going up. There may be some goods - typically those produced domestically by cheap labor - whose prices go up across the board, as wage increases hit the entire supply chain and not just the retail portion of it. But there would also be goods that are imported and sold in large cities that would be completely unaffected by even a large wage increase.

So prices of certain goods in certain markets would go up, but prices would almost certainly not rise across the board. "Price inflation" is probably not a good term to use to explain what I mean, but that's the gist of it.

Then you aren't talking about inflation. Inflation is a generalized rise in prices, not some things in some places cost more.

 

[danaphanous]

Er, what? A few questions present themselves: what's "actual money"? Did you know that bankloans create money in the same manner as federal spending?

This is close to terms I can understand. "Increases in the costs of things" is the only kind of inflation I know about, and it can be caused by too much money creation or too much spending, relative to the amount of real goods and services available for purchase. It can also be caused by supply shocks (like, say, if you were to base the entire global economy on the supply of a single commodity which is controlled by a cartel of autocrats).

Bankloans don't create money, they increase the availability of money. The effect is similiar, I know but different. Among one difference is that you have to pay loans back so even if you are spending like you have the money in the short term most of the gain, unless you used the loan to start a business more profitable then what you borrowed, goes directly back to the banks. It creates an artificial sense of extra buying power and definitely increases prices where the extra money goes but there actually isn't extra money. Corporations are just lending you their money through banks and will get it back with interest. Loan availability does cause an increase in the amount of new businesses though and entrepreneurship which is one good effect.

I'm fine with using your definition but many people make a distinction. I define inflation not as price increases but as changes in the value of the dollar against an international standard. I know price increases and increasing living costs indicate a falling value of the currency but as the guy above said price increases or decreases can be local whereas inflation is a global phenomenon averaged over the entire nation and often best observed by comparing our cost of living to other countries that have not changed. One downside of increasing wages and rising prices is actually that our exchange rate with other nations goes down. Even though the amount of money in the country hasn't changed the fact that a living costs more means an individual unit of the currency is worth less globally so we suffer losses in international trading making products from out of the country and globalized industries cost more too. Inflation benefits consumers and hurts businesses which have a time-frame over which they make money and have sunk investments. It is like the whole idea of printing money for the economy. You can do it for a long time and since price increases lag behind the new money everyone feels like they are better off and loans become a great deal but that money buys you less and less against a non-changing economy outside of the nation. You can't simply manufacture prosperity by increasing the availability of money, real increases in living standards come from progresses in technology, efficient businesses that create cheaper products and innovate, and a system that employs as many people as possible. This is my opinion.

 

[civvver]

Bank loans do create money because they can 1. borrow it from the government and 2. loan out money they don't have in reserve sometimes. They literally spend money into existence, just like the government does.

 

[danaphanous]

again, that's not "creating" new money. The money was always there. In the case of getting loans from the government, the government either borrowed, got if from taxes, or printed it. In the end only the government can create new money. Fractional reserve loaning is still not loaning money they don't have. It just means they don't keep a big reserve to quickly pay back their own lenders and it's dangerous because if even 10% of the people who lent them money came and asked for it at once they wouldn't have it. Banks are supposed to keep around 10% in reserve but since loaning makes them money they have started to break this rule of thumb and hope they aren't asked to return their money by too many investors at once.

Anyway, You still can't give more loans then you have been given money so the banks have no power to create the money, they only make existing money that is not being used by lenders available to other people. I don't understand why this is not obvious. The money doesn't come out of nowhere and it will eventually go back to the banks with interest. Now this has become less obvious since the government has started to print money and then immediately lend it to banks to invest into the economy. But again, this is the government creating the money, not the bank, the bank is just the distribution agent.

 

[Lexicus]

Bankloans don't create money, they increase the availability of money.

Wrong, bank loans create money in exactly the same manner as federal spending.

Among one difference is that you have to pay loans back so even if you are spending like you have the money in the short term most of the gain, unless you used the loan to start a business more profitable then what you borrowed, goes directly back to the banks. It creates an artificial sense of extra buying power and definitely increases prices where the extra money goes but there actually isn't extra money. Corporations are just lending you their money through banks and will get it back with interest. Loan availability does cause an increase in the amount of new businesses though and entrepreneurship which is one good effect.

No, see...no. This is all wrong. Bank loans create bank deposits, not the other way around. The causal and temporal sequence is bank makes loan --> loan is used for stuff --> the loan ends up as income for third parties --> the third parties deposit it in their banks. It's way more complicated than that in reality but that's the basis of how the process works.

I define inflation not as price increases but as changes in the value of the dollar against an international standard.

That's depreciation, not inflation.

What will ultimately make the dollar weaker than other currencies (and make it more expensive to import things) is if the US suffers sustained economic crisis due to a lack of aggregate demand (insufficient spending).

 

[Lexicus]

again, that's not "creating" new money. The money was always there. In the case of getting loans from the government, the government either borrowed, got if from taxes, or printed it. In the end only the government can create new money. Fractional reserve loaning is still not loaning money they don't have. It just means they don't keep a big reserve to quickly pay back their own lenders and it's dangerous because if even 10% of the people who lent them money came and asked for it at once they wouldn't have it. Banks are supposed to keep around 10% in reserve but since loaning makes them money they have started to break this rule of thumb and hope they aren't asked to return their money by too many investors at once.

Anyway, You still can't give more loans then you have been given money so the banks have no power to create the money, they only make existing money that is not being used by lenders available to other people. I don't understand why this is not obvious. The money doesn't come out of nowhere and it will eventually go back to the banks with interest.

No. No, no, no. No.

So, you're kind of right that 'ultimately only the government can create new money' because while banks create money by originating loans, most of that money is destroyed by loan repayment after a relatively short period of time.

But you've got fractional reserve banking completely wrong. The reserve requirement is actually an ex post facto requirement; it doesn't have any bearing on the actual operational process of loan origination. Banks originate as many loans as they think are going to be profitable, and then they interface with the Fed after this is done to satisfy their reserve requirements.

I would suggest reading Warren Mosler's 7 Deadly Innocent Frauds of Economic Policy as an introduction to these issues. It explains exactly how this works in very simple, non-theoretic, non-academic terms.

 

[civvver]

again, that's not "creating" new money. The money was always there. In the case of getting loans from the government, the government either borrowed, got if from taxes, or printed it. In the end only the government can create new money. Fractional reserve loaning is still not loaning money they don't have. It just means they don't keep a big reserve to quickly pay back their own lenders and it's dangerous because if even 10% of the people who lent them money came and asked for it at once they wouldn't have it. Banks are supposed to keep around 10% in reserve but since loaning makes them money they have started to break this rule of thumb and hope they aren't asked to return their money by too many investors at once.

Anyway, You still can't give more loans then you have been given money so the banks have no power to create the money, they only make existing money that is not being used by lenders available to other people. I don't understand why this is not obvious. The money doesn't come out of nowhere and it will eventually go back to the banks with interest. Now this has become less obvious since the government has started to print money and then immediately lend it to banks to invest into the economy. But again, this is the government creating the money, not the bank, the bank is just the distribution agent.

I don't think you understand how money theory works. The banks loan money that doesn't exist yet. Thus they spend it/loan it into existence. Quick google search dude.

http://positivemoney.org/how-money-works/how-banks-create-money/

Modern money is all electronic and not even real. It's just perception. And then it gets regulated to maintain that perception and have a healthy economy.

 

[danaphanous]

I'm fine with using the word "inflation" to mean price changes. A lot of people in economics use it that way, I'm just telling you I don't think it's as good a standard to measure things since prices can be both local, national, and international. And some can be going up while others go down.

 

[Lexicus]

No one who knows what they're talking about uses 'inflation' to mean localized price changes.

 

[Hygro]

Not really,

yes, really.

 

[danaphanous]

Ok I checked out your link and I'm beginning to see what you are saying. i can see how banks could "create" new accounts out of nothing if all the money was kept virtually in cards or checks and never converted to something like cash. I was imagining there was a cash intermediary at some step that would ensure accountability but in our modern world this is probably only sometimes the case. When the loans are paid back the new money is destroyed, yes, but I guess the inflation comes from the "interest" the bank keeps. And the reserve is federally mandated correct? After the fact? To back the virtual accounts? I actually have never read in detail about modern banking, just classical, so this is interesting to learn.

However, another question comes to mind. the banks had to have a large reserve of actual money to start this process so that other parties would trust that they could pay back what they promised. That is before everyone became so trusting of the system they kept everything virtual. If they are indeed issuing all the loans they think will be profitable and people are slowly defaulting on them when they get too far in debt, then eventually this process means they will own nearly everything with no risk to themselves as long as people keep borrowing from them. I actually don't keep a credit card or borrow money because I've had friends that got in over their head from the process and I just keep a debit account for my spending, however, if this article is right I'm constantly losing money to inflation like this because banks no longer really give much interest to account holders, but instead rely on consumers to keep them open through convenience. They claim prices are going up by 11% every year which is higher then reported by the federal government. From my classes in economics I am under the impression that as long as inflation is happening loans benefit the ones receiving them because the amount they need to pay back is reduced by inflation. Of course if the bubble pops everyone relying on this is screwed. I hope we don't trigger another great depression with this crap.

thanks for the info, now I'm even more jaded. I thought there were laws to prevent this after the Great Depression and control bank behavior because something similar happened then. Did we remove them recently?