måndag 28 januari 2008

Economics is difficult to understand

As the economies of many countries in the world slide into serious economic difficulties, one might be excused for asking how this situation has been allowed to come about? It is not as if similar boom/bust events have never occurred in the past. Governments are advised by experts, the newspapers all employ teams of expert commentators, and throughout the world there are academics and other professionals who are supposed to have an understanding of how the economic system functions. Yet seemingly they have no better grasp of events than fortune-tellers, tarot card readers, and diviners of chicken's entrails. Are these experts mere charlatans? If not, what has gone wrong?

The economic process is in principle simple. Human labour is applied to natural resources to create products that people desire - food, clothing, shelter and artefacts that give pleasure. Very early in human history, those products were transported and exchanged, from places where there was a surplus to places where there were shortages. Very quickly, too, means were discovered for storing surpluses so that they were available at times of scarcity. These technologies also made it possible for people to produce at one time and consume at another - for example, when they were young and fit, so that they could enjoy the fruits of their labour when they were old and infirm.

That is, in essence, pretty much all there is to economics. All the rest is an overlay. For instance, if goods are going to be exchanged, than some medium of exchange is needed. For centuries, precious metals were used. And as the processes of production and exchange became more complex, there was a need for "credit", for example, to cover the cost of construction of a ship and the expenses of a voyage, which would not be repaid until the ship came home and the cargo was sold. The word "credit" comes from the Latin word credo, which means "I believe". The person granting the credit believes in the trustworthiness and competence of the recipient of the credit.

The system proved to have limitations and since the industrial revolution, money has been issued by governments in the form of paper notes.

So where are things going wrong? First, there is the land issue. LAND IS NOT WEALTH. But nobody can do anything without land to do it on. And the supply of land is fixed. Every site is unique. Added demand does not call forth an additional supply. The price can only go up, and if this is happening, land owners may well decide to hold their sites off the market and wait until they can get even more, thereby squeezing the supply further and pushing up prices. If this happens, the entire production process is throttled.

The second issue is moneylending at interest. The Old Testament condemns it. The Koran condemns it. The Catholic Church has condemned it. Repeatedly, as, for example, in the encyclical of Pope Benedict XIV in 1745. What does usury consist of? It is not usurious to charge for credit, for example, to cover the wages of those arranging the credit, and as an insurance for risk. Usury is lending money, these days usually created by the banks themselves, against the security of some collateral, usually land or real estate.

Third is the matter of paper money, which in practice has proved quite unsatisfactory as governments have tended to spend more than they collect in taxes, with the result that the quantity of money has increased at a faster rate than the quantity of goods and services available for purchase. Because money behaves in the same way as any other commodity, if there is a surplus, its value goes down, resulting in a general and all-round increase in prices which is described as "inflation". This is a swindle on people who have chosen to defer their consumption till later, as the value of their "savings" is eaten away. Those savings are, in principle, a debt from the rest of society to the savers, and the inflation is in effect telling the savers that the debt will no longer be honoured in full. This is the dishonesty of inflation.

All the other things that are discussed in the financial pages of the newspapers are structures that have evolved out of the system just described. Shares are merely certificates of ownership, mostly representing the value of the land owned by the company concerned. Futures are promises to purchase or sell at an agreed date. "Securities" are collections of debts, which have a value because they amount to a stream of income. But anyone heeding Pope Benedict XIV would not have touched them with a bargepole, thereby avoiding the troubles that have overtaken most of the banks. But if things are going persistently wrong, part of the reason must surely be the the experts have lost sight of the underlying physical processes whereby goods are produced and exchanged, and instead become over-concerned with the complex overlays.

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