The traditional beginnings of a philosophical treatise on topics in government features a section in which a thought experiment is carried out in order to justify later assertions regarding the social order. This "state of nature" experiment determines which issues will be of primary concern to the treatise at hand. In more modern times it is called by different names, but it seems necessary in one form or another. It provides a focal question or set of questions which the philosopher can then answer, allowing him to transform his work from exposition into argumentation.
The essential question in economics relate to wealth. If and only if levels of wealth are sufficient are economic concerns abated. Failures of economy are always confined to insufficiencies of total production and failures of adequate distribution. The consequences of this failure are deficits of wealth.
If economic regulation is seen as a part of the function of government, it is possible for a state of nature based argument to spawn policy suggestions. As one would expect, economic ramifications are presented by virtually every political philosophy. For some, such as Marx, economic considerations dominate all others. In other words, the production and distribution of wealth is a legitimate concern of the individual in the state of nature, whatever these terms mean.
In order to better understand wealth, visualize the society most adversarial to it. Imagine a communal society having no formal currency or meaningful accumulations of persistent goods, no agreements on ownership of property or rights to land or its use. More precisely, this is is a society where differences in the individuals' physical and mental capacity and social standing are the only measures of these individuals' wealth. Goods acquired are consumed rapidly. Well being is describable only in terms of quality of food, sexual prowess (in the sense of having desirable sexual roles), and amicable social relations within the society. Wealth is thus the descriptor for the situation in which a greater or more secure stream of these goods flows toward a particular individual or group. Furthermore wealth has two other properties that will become important later in this discussion: it may have a conspicuous aspect but it is not bound to be conspicuously presented; and wealth need not be deliberately pursued or even understood in order for an individual to have it or accumulate it.
The philosophers at the base of the economic tradition have typically emphasized the state of nature as being one in which freedom reigns in a more or less unrestricted sense. The function of the state of nature within a philosophy was to serve as some basic state in which man's true nature is clear, or in which action could be analyzed in some pure sense to draw out a basic concept (e.g. Locke's concept of property through labor). The conditions described were not typically representative of any existing cultures, nor were the availability of various resources accurately represented. This - in and of itself - is not problematic because the state of nature is merely a thought experiment, after all. What makes these descriptions problematic is that they don't genuinely escape the culture from which they are conceived: they are given an essence of freedom and assumptions of motivation that are artificially copied from the motivational framework of the author into the thought experiment. The point need not be labored that such a beginning will eventually misguide the entire discipline built upon it.
Individual motivations generally take a highly cultural character. This is a point not easily grasped by philosophy, even eastern philosophies that ostensibly place less emphasis on the individual. The motivation for even selfish acts that we engage in alone is part of a conscious stream the primary function of which is to monitor and develop our social position. To posit humans outside of culture is to separate them from a part of themselves, being that a significant portion of our neurological wiring is dedicated to the perception of others, and that any state of affairs in which this wiring is engaged will have a cultural character. There is no basis that defines what types of interactions are noncultural, nor can the actions of an individual in isolation be seen as natural. Our observations of thought process and motivation all come from within our cultural paradigm. Therefore there is no cause to believe that an individual outside of society will have any particular pattern of thought, or a pattern of thought at all.
Freedom is an object of contrast. It is definable in part because its absence is possible. Supposing a person were living in a state of nature, he would not be any more (or less) free from the laws of nature than any of us. This person would have no cause to define or experience freedom unless he engaged with other individuals who were capable of limiting it. However, in the course of interaction, culture develops, and whatever division comes to exist between individuals is immediately subjected to the very cultural concepts that the state of nature is supposedly filtering out.
Locke gives an example of a person who picks an apple, and who therefore has the apple now as his property. Were another individual present, that individual would have a relationship with the apple-picker that is cultural in nature. It would not be possible to discount cultural considerations offhand, because they might very well define the apple in a way that made it not property of the apple-picker. Conversely, if there were not another individual present, the concept of property is meaningless because it cannot be contrasted with any idea of "not property". The "individual" that Locke has envisioned, having no claim to a thought process or any notions of freedom, can't be viewed as anything but a creature artificially inserted from Locke's own cultural realm, robotically acting out a set of instructions it does not in any way understand.
John Rawls defines the Orginal Position as a thought experiment in which people are separated from their knowledge of their own identity within the society, forcing them to weigh the risk of poverty against the rewards of opulence. In this more modern approach, the culture of the individuals and indeed the very thought processes of the automatons into which the individuals are injected remain and may be subjected to criticism. This thought experiment is far superior to Locke's because it does not rest on an artificial notion of the individual. However, it does rest on an artificial notion of wealth. Since wealth is merely a culturally defined property of individuals, this is a less serious problem.
With the proper lumping, all wealth can be placed into two categories. The first category is connected to the productive talents and abilities of the individual. This is not merely their skills, but their traits that make them interesting or uninteresting to the other members of the society (physical traits like attractiveness, gender, age, etc.). The second category is connected to the standing within the society that the individual has - through money, connections, caste, marriage, legal conveyances, etc. The wealth is not these objects, for instance the money itself, but what it can bring on demand. In other words, wealth is the capacity to bring a thing on demand, and it is talents and privilege that tend to do so (and don't forget that in this schema, pecuniary wealth is merely a privilege).
Returning to the state of nature question, the proper way to begin a description of the state of nature, with regard to economic questions, is to posit a situation where a person has no wealth. This is obviously not possible, as the person must have some talent or ability that can be used to some avail. Nevertheless, this schema is still very useful, as it shows immediately that wealth, in some fashion or other, is needed merely to secure more wealth. It also captures the fate of a human in the "state of nature": starvation, hypothermia, death by exposure, possibly being eaten by a wild animal or perhaps being killed by the actions of another human. At an even more primitive level, a person in a state of nature must not merely be deprived of his ability to survive but of his very ability to enjoy his remaining days. Surely, this is a form of wealth. A person need not have much to enjoy the natural beauty of the earth. This beauty is the most fundamental form of wealth, and all people posessing any of the five senses can demand it at any time.
To measure wealth, in one way or another, is to create a criterion for valuing some demands above others, for the ranking of distributions of privilege (note that educational training, although increasing skills that can't be transferred, is still a privilege in this schema. This is not an altogether accurate description but in the end it will not affect the conclusion). Wealth cannot be measured in any other way. To value only dollars is to value dollar demands and no other demand types. A person in any kind of society obviously has wealth in some form or another. Even a very small group of people, having nobody else to depend on, is capable of survival and even happiness. So long as there are a fair number of hearty women and fertile men, it is possible for this group to survive indefinitely, provided that the natural world continues to supply the necessary resources.
The other aspect of wealth is the existence of resources to which society can apply labor and technology in order to meet demands. The presence of these resources depends on 1) the development and use of technology and 2) the ecology of the environment in which the individual is situated. Together, these two concerns encapsulate the strategy for maximizing the total wealth of a society, at least prior to a more detailed consideration of distributions.
The development of technology is not dependent on any particular or regular factors. It is often erroneously asserted that technological development depends in some way on savings or investment. This is an unsatisfactory and overly abstract, nonmechanistic answer. The real mechanism that motivates technology is the provision of resources to those both interested and capable of developing technologies, and there are myriad ways to allocate resources in this way. In any event, there is a level of privilege that must be assigned to the scientist or the tinkerer to allow him to dedicate a portion of his time to his passions and to make requests for the necessary resources.
Technology is not merely instruments or machines, but the means of using these machines. It is internalized in individuals to a great degree. In truth, the pursuit of knowledge itself is a technology that has unlocked what is best described as "new ways of thinking." Technology should rightfully have a high priority in the valuing of demands - meaning that societal configurations that invest more in technology are generally higher in the ranking of privilege distributions. Technology is also the social structure, institutions, and various public goods that have undergone increasingly beneficial metamorphoses from one age to the next.
Ecological science, itself a product of the pursuit of knowledge as a technology, must be vigorously applied to any question of economic impact. For instance, even if he is starving, a hunter should not be allowed to shoot the last of a species of animal. Ample ecological evidence supports the thesis that species extinction impoverishes future generations. There are many types of ecological damage other than biodiversity loss, but their effect is always to impoverish. The problem is never monetary in nature; it is in changes to the types of demands that future people can make. In fact, it is folly to measure ecological damage in dollars, because the ecological damage hasn't changed the money supply in any way! It merely diminishes what is available for us to enjoy. It follows that distributions of privilege that preserve the natural world to a high degree will also tend to be favored. Preventing every extinction is not possible, of course.
Turning now to the question of distribution of wealth within a society, we can venture back to our minimal wealth village. Supposing that a calamity of some kind struck, and a shortage of food were to suddenly materialize. Would the person who does some other craft without producing food of his own, instead trading for it, be one of the first to be fed, or would he be lucky to be fed at all? It seems that in this case, absent some privilege that allows him to take the bread from the hands of his fellow villager, he would have no means of obtaining food. In other words, there is an order of importance to production. The goods most important are those necessary to survival. Those least important are the ones we can do without. This in turn imposes an order of importance to privileges: those that can be used to obtain the most important resources are the most important. Finally, the importance of each thing is always dependent on context and the subjective tastes of the individual. However, this dependence on subjective taste becomes stronger only as one progresses away from the necessities: all people have similar physical and emotional needs.
The arrangements of labor that are common in my culture are really agglomerations of privileges. Many people who are highly paid are doing work that others would do for very little pecuniary compensation. Furthermore, as Galbraith noted in The Affluent Society, we value our pay much more than we value the products that we produce at our jobs. But, he hasn't quite pierced deeply enough. When the actual material needs of the society can be provided through a small amount of labor, in which the labor itself is not distributed equally through the society, there must be a system of privileges in place to entice the few to work for the welfare of the many. Our society takes two approaches: taxation and consumerism. Marx suggested land reform. This, of course, would undermine our very beneficial economies of scale.
Taxation is a form of coercion when seen in this light. It is justified by the existence of life enriching public goods that game theory has definitively demonstrated cannot be effectively provided by the private sector. In particular, we have benefitted from those that enhance our level of technology and safeguard our environment, ensuring a high level of production in the future. Even so, it is a necessary evil.
Consumerism is a blight. It serves few purposes. Its historical source was conspicuous consumption and the confusion of happiness with luxury. It is perpetuated by ignorance, for a person who consumes heavily must be ignorant of cause and effect. In no way does a person who watches a movie rather than volunteering at a soup kitchen benefit themself. In fact, I would go so far to say that a person who dedicates themself to selfless acts is happier than a selfish consumer. In fact, a person's intake of consumer goods, in a purely maximizing fashion, would be minimal, only enough to allow him or her to appear "normal". He or she would be better off saving the rest. This critique applies sufficient force to argue against consumerism on the basis that it is a mental disease, even as its environmental impacts pause within my pen.
If political debates center around taxation, I support them. That is because the trade off is typically between taxation and consumerism. Americans are not on the verge of starvation (though that could change in 2010...)
But there is an alternative to either taxation or consumerism, and it centers on our culture. Marx was not altogether wrong in his utopian vision. In a sense, he hearkened back to the time of the peasantry in Europe. In those otherwise grim conditions, humans toiled in a way that brought them together. Without trinkets and salesmen to corrupt them, without the financial markets and sophisticated business models to swindle them, they each led a diverse life that exercised every part of the human instinct, just as the life of a hunter-gatherer might. When we walked the path of technology, we were enamoured with the noncontroversial and therefore the nonpolitical, and so our ability to regulate our own creation fell behind our ability to produce. But, now I feel the pendulum has swung back the other way. It is time to truly assess what we are capable of.
What I speak of is a cultural unification of sorts. It is not at all what Marx planned. It is the replacement of consumer goods with local crafts. It is the use of and evolution of art as currency, as a thing of value, and as a meaningful pursuit. It is the wholesale endorsement of science. Our precious class of farmers and laborers should be paid very well, so that there will be no shortage of them. After all, they are the most important members of the society. Working hours will not be long. The rest of us will live frugally, surviving through our arts and through the public system of welfare, but we will make the world rich with philosophy, political activism, art, and literature. The government will be within our control, as we are the ones available to work for it. And its main function will be to ensure that everyone's basic needs are met.
This vision is not inevitable. It is, however, possible, and more equitable than any government existing today.
Thursday, December 31, 2009
Tuesday, December 29, 2009
Myth and fact in antibiotic resistant bacteria
Following the big expose on drug resistant bacteria posted by MSNBC today, I'd like to outline the probable distribution of causes of resistant strain evolution between the broad categories of physician over-prescription, informal antibiotic use by individuals, and agricultural feed-mixing. The most serious form of resistance is the multiple antibiotic resistance, which generally means the infection is untreatable. Individual drug resistances, though dangerous, are not so serious, and so the causes of the two types should be distinguished.
Resistance arises through the presence of random genetic mutants. Typically the mutant genes confer resistance by encoding for a slightly different enzyme shape for an enzyme needed in the absorption of the antibiotic. Resistance is conferred between different strains of bacteria through the processes of plasmid exchange and bacterial transformation. Generally, this leads to an evolutionary selection process for bacteria where the possibility of genetic exchange with similar bacteria moderates the factors influencing individual, genetically identical colonies.
Before venturing further into this topic, let us refine the parameters by which resistance is measured, to dispell some common misperceptions. The natural selection model implies that bacteria do not respond to antibiotics by reactively evolving defenses, but rather have these defenses before exposure (and are therefore selected for) or do not have such defenses (and are therefore selected against). Furthermore, bacteria face constant pressure from immune systems when invading a host. Therefore, the antibiotics don't need to (and most certainly aren't) completely effective in the sense of killing all the bacteria. All the antibiotics need to do to be effective is kill off a large enough percentage of the bacteria to allow the body's immune system to gain the upper hand.
When people take antibiotics as prescribed, they suddenly introduce them in large quantities. There simply is not enough time for the entire evolutionary process to occur. It follows that the evolutionary process can't realistically happen during a particular infection in a person. Thus, there are two scenarios where a person can suffer from an antibiotic resistant infection.
1. The person is infected with a strain that is entirely resistant to the given antibiotic
2. The person is infected with a strain where the resistance is not prevalent, but has a similar, begnin strain posessing accessible resistance-conferring DNA. This DNA is assimilated into the infecting strain in significant quantities prior to the application of antibiotics.
This second scenario is unlikely for two reasons. First, though the bacteria that cause infections are similar to bacteria found on the human body, they generally occupy different parts of the body. Thus, they will not come into frequent contact. Secondly, there is no selection pressure in the individual to lead begnin strains to have such resistance meaning that the resistance must by chance be given by a mutant and that the mutant will have some other mechanism that propagated the DNA across the colony. This same mechanism would then need to be effective at introducing the resistance DNA into the invader.
If antibiotics are taken in an irresponsible manner, it is possible for them to be introduced in insufficient quantities to constitute a spike, or to be taken frequently enough to represent a more regular selection pressure.
In these cases, the majority of individuals do not end up in the hospital, dying. So we can reasonably assume that they have recovered from their infections. It is likely that the infection has been passed on in some cases, but passing the infection on after antibiotic use is not altogether too likely, because even improper antibiotic use does dramatically reduce the incidence of bacteria, making a person much less contagious. Even though such an event is rare, it is feasible for it to promote one or another particular mutants. But, unless multiple antibiotic resistance is conferred by a single mutation, it could only occur through a long series of such improper exposures, something that seems impossible, considering that even when exposure occurs it does not guarantee that resistance genes are present.
However, if antibiotics are applied in constant, low doses to an entire population of creatures, this is tantamount to effecting an environmental change. Populations of bacteria are continuously being introduced to an environment where antibiotics are present, and the selection pressure is in the "just right" range where it overrides the force of random mutations but is not strong enough to destroy entire populations before adaptation can occur.
In particular, the constant presence of the antibiotics makes it more likely that transferrable resistances are developed. Various strains may each have one or two antibiotic resistances, but multiple resistance would represent several mutations that would surely compromise the viability of the bacteria in the absence of the antibiotics. Though I have read nothing that supports this idea experimentally, I believe that Multiple Resistances are in fact expressed as plasmids or some other transferrable DNA that is exchanged through bacteria populations as a cooperative survival strategy. In this way, no members of the populace must exhibit all the resistances at any one time, but all the various genetic material is associated with every resistance in aggregate, guaranteeing the survival of the genes against the antibiotics.
Regardless of the characteristics of multiple resistance, it is agreed and established that there must be constant selection pressure for bacteria to maintain resistance over the long term, especially multiple resistances, because it reduces their viability when antibiotics are absent. Multiple resistance can only be the result of a constant regime of multiple antibiotics, either simultaneously or in series, something done only in agriculture.
For each multiply resistant strain, there are many less broadly resistant strains that constitute the genetic pool from which the multiply resistant strains develop. Multiple resistance must arise in a combination of the following ways:
1. Series mutation of strains, with each mutation conferring additional resistance.
2. DNA exchange through environmental cohabitation of different strains
3. Bacteria that becomes supersaiyan
The temporal requirements of the first case are only met in an agricultural environment with constant antibiotic use. The second case is less likely in humans (who have relatively good hygeine) than it is in animals, particularly ones raised in filthy conditions. Open sores, lack of space in which to engage in instinctive cleaning, and a maximally fattening, hormone enhanced diet all combine to compromise the immune system and blur the line between environment and host. This is an ideal breeding environment for all types of infectious bacteria. It is also a decidedly unnatural environment where many selection pressures are reduced, replaced by antibiotics.
The final question is how often and in what way are resistant strains passed from animals to people. This is a much more empirical question, requiring knowledge of the sanitary practice of slaughterhouses and the like. But even in our enlightened society we know that there are people all around us that work with raw meat on a regular basis. If the plasmids or other transferrable DNA is preserved in the meat that we eat, these resistances could pass into us, waiting for the unlikely exchange with a nonresistant strain, leading to a random and otherwise difficult to explain pattern of resistance appearing.
It is also possible that small amounts of the antibiotics are simply passed into people who eat meat, making us each a walking training camp for bacterial resistance. This would mean that over and above all the analysis provided thus far, agricultural use of antibiotics creates a selection pressure in individual meat eaters that requires no exposure to the resistant strains that develop in livestock.
The amount of antibiotics used in agriculture is very large. The amount of meat eaten by Americans is equally large. On the basis of the description of these mechanisms alone, it seems likely that Agricultural use of antibiotics is the dominant cause of all antibiotic resistances. The comparable possibility of prescription and informal antibiotic use causing any resistance to develop is very low, given the mechanisms involved.
Why is it then that first there was a long and vigorous campaign to get people to use fewer antibiotics, before any attention was paid to the agricultural practices? Is the industrial capture of biological science simply this far progressed?
Resistance arises through the presence of random genetic mutants. Typically the mutant genes confer resistance by encoding for a slightly different enzyme shape for an enzyme needed in the absorption of the antibiotic. Resistance is conferred between different strains of bacteria through the processes of plasmid exchange and bacterial transformation. Generally, this leads to an evolutionary selection process for bacteria where the possibility of genetic exchange with similar bacteria moderates the factors influencing individual, genetically identical colonies.
Before venturing further into this topic, let us refine the parameters by which resistance is measured, to dispell some common misperceptions. The natural selection model implies that bacteria do not respond to antibiotics by reactively evolving defenses, but rather have these defenses before exposure (and are therefore selected for) or do not have such defenses (and are therefore selected against). Furthermore, bacteria face constant pressure from immune systems when invading a host. Therefore, the antibiotics don't need to (and most certainly aren't) completely effective in the sense of killing all the bacteria. All the antibiotics need to do to be effective is kill off a large enough percentage of the bacteria to allow the body's immune system to gain the upper hand.
When people take antibiotics as prescribed, they suddenly introduce them in large quantities. There simply is not enough time for the entire evolutionary process to occur. It follows that the evolutionary process can't realistically happen during a particular infection in a person. Thus, there are two scenarios where a person can suffer from an antibiotic resistant infection.
1. The person is infected with a strain that is entirely resistant to the given antibiotic
2. The person is infected with a strain where the resistance is not prevalent, but has a similar, begnin strain posessing accessible resistance-conferring DNA. This DNA is assimilated into the infecting strain in significant quantities prior to the application of antibiotics.
This second scenario is unlikely for two reasons. First, though the bacteria that cause infections are similar to bacteria found on the human body, they generally occupy different parts of the body. Thus, they will not come into frequent contact. Secondly, there is no selection pressure in the individual to lead begnin strains to have such resistance meaning that the resistance must by chance be given by a mutant and that the mutant will have some other mechanism that propagated the DNA across the colony. This same mechanism would then need to be effective at introducing the resistance DNA into the invader.
If antibiotics are taken in an irresponsible manner, it is possible for them to be introduced in insufficient quantities to constitute a spike, or to be taken frequently enough to represent a more regular selection pressure.
In these cases, the majority of individuals do not end up in the hospital, dying. So we can reasonably assume that they have recovered from their infections. It is likely that the infection has been passed on in some cases, but passing the infection on after antibiotic use is not altogether too likely, because even improper antibiotic use does dramatically reduce the incidence of bacteria, making a person much less contagious. Even though such an event is rare, it is feasible for it to promote one or another particular mutants. But, unless multiple antibiotic resistance is conferred by a single mutation, it could only occur through a long series of such improper exposures, something that seems impossible, considering that even when exposure occurs it does not guarantee that resistance genes are present.
However, if antibiotics are applied in constant, low doses to an entire population of creatures, this is tantamount to effecting an environmental change. Populations of bacteria are continuously being introduced to an environment where antibiotics are present, and the selection pressure is in the "just right" range where it overrides the force of random mutations but is not strong enough to destroy entire populations before adaptation can occur.
In particular, the constant presence of the antibiotics makes it more likely that transferrable resistances are developed. Various strains may each have one or two antibiotic resistances, but multiple resistance would represent several mutations that would surely compromise the viability of the bacteria in the absence of the antibiotics. Though I have read nothing that supports this idea experimentally, I believe that Multiple Resistances are in fact expressed as plasmids or some other transferrable DNA that is exchanged through bacteria populations as a cooperative survival strategy. In this way, no members of the populace must exhibit all the resistances at any one time, but all the various genetic material is associated with every resistance in aggregate, guaranteeing the survival of the genes against the antibiotics.
Regardless of the characteristics of multiple resistance, it is agreed and established that there must be constant selection pressure for bacteria to maintain resistance over the long term, especially multiple resistances, because it reduces their viability when antibiotics are absent. Multiple resistance can only be the result of a constant regime of multiple antibiotics, either simultaneously or in series, something done only in agriculture.
For each multiply resistant strain, there are many less broadly resistant strains that constitute the genetic pool from which the multiply resistant strains develop. Multiple resistance must arise in a combination of the following ways:
1. Series mutation of strains, with each mutation conferring additional resistance.
2. DNA exchange through environmental cohabitation of different strains
The temporal requirements of the first case are only met in an agricultural environment with constant antibiotic use. The second case is less likely in humans (who have relatively good hygeine) than it is in animals, particularly ones raised in filthy conditions. Open sores, lack of space in which to engage in instinctive cleaning, and a maximally fattening, hormone enhanced diet all combine to compromise the immune system and blur the line between environment and host. This is an ideal breeding environment for all types of infectious bacteria. It is also a decidedly unnatural environment where many selection pressures are reduced, replaced by antibiotics.
The final question is how often and in what way are resistant strains passed from animals to people. This is a much more empirical question, requiring knowledge of the sanitary practice of slaughterhouses and the like. But even in our enlightened society we know that there are people all around us that work with raw meat on a regular basis. If the plasmids or other transferrable DNA is preserved in the meat that we eat, these resistances could pass into us, waiting for the unlikely exchange with a nonresistant strain, leading to a random and otherwise difficult to explain pattern of resistance appearing.
It is also possible that small amounts of the antibiotics are simply passed into people who eat meat, making us each a walking training camp for bacterial resistance. This would mean that over and above all the analysis provided thus far, agricultural use of antibiotics creates a selection pressure in individual meat eaters that requires no exposure to the resistant strains that develop in livestock.
The amount of antibiotics used in agriculture is very large. The amount of meat eaten by Americans is equally large. On the basis of the description of these mechanisms alone, it seems likely that Agricultural use of antibiotics is the dominant cause of all antibiotic resistances. The comparable possibility of prescription and informal antibiotic use causing any resistance to develop is very low, given the mechanisms involved.
Why is it then that first there was a long and vigorous campaign to get people to use fewer antibiotics, before any attention was paid to the agricultural practices? Is the industrial capture of biological science simply this far progressed?
Saturday, December 19, 2009
Comments on meaning in language
Our very social fabric is composed of the network of commitments and agreements by which culture is given forceful authority in our daily life. These commitments and agreements are sacrosanct objects which typically exist in a latent form that shields them from criticism, known in detail by small groups of specialists whose knowledge asymmetry serves to cement them against change. Our conscious awareness of culture exists within our cognition not of the present or past but of the future, as it interacts with and defines our planned course of action.
The philosopher and the revolutionary should not forget, however, that despite the grand vistas of social theory, most of which focus on some or other aspect of the rational design of societies, the world in which we live is very much the product of a mindless process that lacks telos, namely evolution. Evolution expresses itself through every dynasty; it is not a phenomenon restricted to genetics. A perfect illustration of the failure of rationality-based descriptors is in the simple act of commitment.
Supposing Alex asks Beth to do some action. Beth then responds with the assurance "I will". In common usage, this phrase amounts to a pledge that entails some level of commitment to the course of action under discussion. It represents an agreement between Alex and Beth as to some future action by Beth. Commonly, "I will" is said with different words: "OK", "You betcha", "For sure", "A'ight", etc.
The agreement describes a future event. When presented with choices, Beth will choose a course of action that fulfills her agreement. The state of affairs can be characterized in one of two ways.
1) Beth has free will. Therefore her choice is free and she cannot meaningfully commit to or predict her future action. Since the statement is a prediction of a future action, it becomes meaningless.
2) Beth does not have free will. Therefore she has no choice, so she cannot choose to do a particular thing. Since the statement is a declaration of a particular choice, it becomes meaningless.
A nonsensical statement is completely devoid of meaningful content. Philosopher Robert Solokowski ranks these statements below false statements (he feels that semantics are the basis of meaning). He gives an example: "My cat is a filibuster" as being something that cannot even be evaluated as false. In a processing sense, what this and other nonsensical statements do is simply feed data from one function into another function that normally takes a different data class.
Similarly, "I will" seems to contain data from two mutually exclusive worldviews, free will and determinism. Therefore, it is a nonsensical statement. Furthermore, this argument holds without loss of generality for any commitment by any individual within a society. This is symptomatic of a grave error in certain approaches to social theory that seek to describe activities in terms of rational telos.
Of course, people in their daily lives are only troubled by the difficulties of theory insofar as political leaders attempt to use theories to solve real world problems.
It is likely, and perhaps best, that the scientist (or the scientific philosopher) will need to abandon the futile search for meaning in and through language and settle for a more structural and functional understanding of our culture. This example, at least, indicates to me that languages are a great deal more subtle and abstract than commonly believed, and that our philosophy is grossly inadequate and probably best developed not through analysis within historically established modes of thought but through the collaborative and experimental development of completely new ways of thinking.
The philosopher and the revolutionary should not forget, however, that despite the grand vistas of social theory, most of which focus on some or other aspect of the rational design of societies, the world in which we live is very much the product of a mindless process that lacks telos, namely evolution. Evolution expresses itself through every dynasty; it is not a phenomenon restricted to genetics. A perfect illustration of the failure of rationality-based descriptors is in the simple act of commitment.
Supposing Alex asks Beth to do some action. Beth then responds with the assurance "I will". In common usage, this phrase amounts to a pledge that entails some level of commitment to the course of action under discussion. It represents an agreement between Alex and Beth as to some future action by Beth. Commonly, "I will" is said with different words: "OK", "You betcha", "For sure", "A'ight", etc.
The agreement describes a future event. When presented with choices, Beth will choose a course of action that fulfills her agreement. The state of affairs can be characterized in one of two ways.
1) Beth has free will. Therefore her choice is free and she cannot meaningfully commit to or predict her future action. Since the statement is a prediction of a future action, it becomes meaningless.
2) Beth does not have free will. Therefore she has no choice, so she cannot choose to do a particular thing. Since the statement is a declaration of a particular choice, it becomes meaningless.
A nonsensical statement is completely devoid of meaningful content. Philosopher Robert Solokowski ranks these statements below false statements (he feels that semantics are the basis of meaning). He gives an example: "My cat is a filibuster" as being something that cannot even be evaluated as false. In a processing sense, what this and other nonsensical statements do is simply feed data from one function into another function that normally takes a different data class.
Similarly, "I will" seems to contain data from two mutually exclusive worldviews, free will and determinism. Therefore, it is a nonsensical statement. Furthermore, this argument holds without loss of generality for any commitment by any individual within a society. This is symptomatic of a grave error in certain approaches to social theory that seek to describe activities in terms of rational telos.
Of course, people in their daily lives are only troubled by the difficulties of theory insofar as political leaders attempt to use theories to solve real world problems.
It is likely, and perhaps best, that the scientist (or the scientific philosopher) will need to abandon the futile search for meaning in and through language and settle for a more structural and functional understanding of our culture. This example, at least, indicates to me that languages are a great deal more subtle and abstract than commonly believed, and that our philosophy is grossly inadequate and probably best developed not through analysis within historically established modes of thought but through the collaborative and experimental development of completely new ways of thinking.
Friday, December 18, 2009
Measures of the availability of money
It remains important for the development of the money cycle framework for the relative scarcity of money from the perspective of individual actors to be described. The meaning of various measures relating to this scarcity and the relationship between individual perspectives must be flushed out. In turn, this will allow, among other things, the use of empirical tools to establish the position of a given economy and to assess the relative effectiveness of various policy tools in practice.
It is tempting to immediately equate money with the objects that would be acquired through it, to value a currency only on the basis of what it can be exchanged for. However, a functioning currency that has value as an object of exchange acquires additional value as the desired object of others. In other words, individuals will acquire a currency even without having a clear set of objects that they desire to acquire through the spending of that currency. In fact, currency can take value as a collector's object, just as any trinket might, that fluctuates as a cultural object independent of its value in exchange for the typical goods bundles purchased by consumers. Therefore, the value of money is as much a cultural object as it is an economic one, and it is dangerous to make adjustments to 'real' currency value in the formulation of economic theories.
As described previously, money moves through the economy along many paths and capillaries connected together in a complex lattice that has no single central gateway of exchange. The availability of money to any point within the economy can be described as the flow at that point. While it is possible that an individual may horde cash received, the great bulk of received income is placed in accounts, that is transferred to the financial services sector. Typically, the bulk of this income is then paid out again in the form of payments for various goods and services through the period between paychecks, with little or no surplus and even deficits from time to time. Income constrains spending; it is the natural constraint in this formula. Velocity of money is a misleading term, as this essay will show that it is not the number of linkages so much as the quantity of movement that determines the amount of flow.
Assume an economy had a single, central bank. All the accounts in the economy are administered by this bank. All accumulations of money in accounts at this bank will be the result of business profits and individual savings.
If the availability of money is limited to positive account values, such that a person who has no money available is unable to take any loans for the purpose of further withdrawals, a shortage can only occur if the total cash withdrawals comes to exceed what is deposited into the bank. This is impossible if printed cash is kept on hand for every supposed dollar in existence. Note that this situation only makes sense when bank overhead costs are considered zero. Furthermore, under such a limitation, increasingly large quantities of currency will come to remain within the bank as individual savings and business profits. The dollars available will need to be stretched further and further, leading to deflation. It is not the fact that this currency takes any particular form, but that a greater portion of economic activity, when measured in goods production and exchange, must make do with a smaller portion of the actual dollars within the economy. I'll call this phenomenon the currency shortage.
When loans are allowed with a given reserve level, a bank's total obligation in demand accounts (those that can be withdrawn as cash) comes to exceed the actual quantity of cash held by that bank. Assuming that the loans are made without interest, the total amount in loans will be repaid over their course, with each term payment being a reassociation of dollars loaned with dollars pledged to accounts. Though the reserve requirement generally allows a series of progressively smaller loans to spawn from each initial loan, the repayment of these loans ultimately follow the same rule, since there is still an initial actual deposit serving as the seed for all later activity. An individual repaying a loan will typically have a lower level of consumption than one free of debt. The economic effect of the loan is therefore the creation of an initial jump in demand for goods, followed by a suppressed demand as repayment occurs. If economic activity is to remain at the same levels, it must therefore occur at lower prices over time or with a constantly increasing level of average debt.
Now, assume that bank overhead costs are not zero, the bank will secure an income stream from the collections taken on loan interest. Assuming that interest rates merely cover operating costs, total interest collected in each term will therefore be offset by the total paid, with any savings by bank employees being the expression of "profits". This generally represents a steepening of the effect described above.
In other words, the rate of accumulation of wealth must be offset by the government creation of additional currency. If this currency is given to banks in one form or another, it will manifest through the creation of loans, which can only function to extend the amount of consumer debt that the economy can sustain.
The above is written under the assumption that bankruptcies and defaults do not occur. In situations where debt is not repayed by borrower, the bank has a proportional diminishment in profits, meaning a certain level of default will only serve to limit the rate of accumulation and therefore delay instability in currency supply. In the long run, the bank will adjust down their level of borrowing either through increases in interest rates or avoiding of lending to risky buyers, accelerating the rate of accumulation again and leading to monetary shortages faster. A sudden spike in default rates can also bring about a rapid money shortage as the bank becomes unable to cover these losses except through tapping into reserve funds, forcing the bank to suddenly curtail lending. If such an event has a large enough impact, the bank could be unable to meet demand deposit obligations. As this type of crisis is not the topic of this essay, I'll leave the details of such a situation to another time, and probably a different model.
The existence of several banks rather than a single central bank complicates matters in certain ways. It becomes possible for one bank to loan to another bank. This allows for patterns of default to spread from one bank to another. Generally speaking, the risk of local shortages becomes greater as the number of banks proliferate. The network of banks means that money is constantly bouncing from one bank's accounts to another's. However, the specter of poor managment at a central bank leads me to believe that a network of properly regulated small banks is a superior method of organizing a banking industry. Having many banks does not impact the smooth flow of electronic transactions except when one or another bank behaves with deliberate belligerence.
In any event, this model of money availability indicates that the essential relationship is not between total money and prices but between the concentration of wealth and prices. Therefore, the equation that MV = PQ could probably best be reimagined to replace the quantity V with something else. On the basis of this and my previous blog posts, I would recommend V be a value between 0 and 1, expressing the portion of money "positioned to be spent".
It is tempting to immediately equate money with the objects that would be acquired through it, to value a currency only on the basis of what it can be exchanged for. However, a functioning currency that has value as an object of exchange acquires additional value as the desired object of others. In other words, individuals will acquire a currency even without having a clear set of objects that they desire to acquire through the spending of that currency. In fact, currency can take value as a collector's object, just as any trinket might, that fluctuates as a cultural object independent of its value in exchange for the typical goods bundles purchased by consumers. Therefore, the value of money is as much a cultural object as it is an economic one, and it is dangerous to make adjustments to 'real' currency value in the formulation of economic theories.
As described previously, money moves through the economy along many paths and capillaries connected together in a complex lattice that has no single central gateway of exchange. The availability of money to any point within the economy can be described as the flow at that point. While it is possible that an individual may horde cash received, the great bulk of received income is placed in accounts, that is transferred to the financial services sector. Typically, the bulk of this income is then paid out again in the form of payments for various goods and services through the period between paychecks, with little or no surplus and even deficits from time to time. Income constrains spending; it is the natural constraint in this formula. Velocity of money is a misleading term, as this essay will show that it is not the number of linkages so much as the quantity of movement that determines the amount of flow.
Assume an economy had a single, central bank. All the accounts in the economy are administered by this bank. All accumulations of money in accounts at this bank will be the result of business profits and individual savings.
If the availability of money is limited to positive account values, such that a person who has no money available is unable to take any loans for the purpose of further withdrawals, a shortage can only occur if the total cash withdrawals comes to exceed what is deposited into the bank. This is impossible if printed cash is kept on hand for every supposed dollar in existence. Note that this situation only makes sense when bank overhead costs are considered zero. Furthermore, under such a limitation, increasingly large quantities of currency will come to remain within the bank as individual savings and business profits. The dollars available will need to be stretched further and further, leading to deflation. It is not the fact that this currency takes any particular form, but that a greater portion of economic activity, when measured in goods production and exchange, must make do with a smaller portion of the actual dollars within the economy. I'll call this phenomenon the currency shortage.
When loans are allowed with a given reserve level, a bank's total obligation in demand accounts (those that can be withdrawn as cash) comes to exceed the actual quantity of cash held by that bank. Assuming that the loans are made without interest, the total amount in loans will be repaid over their course, with each term payment being a reassociation of dollars loaned with dollars pledged to accounts. Though the reserve requirement generally allows a series of progressively smaller loans to spawn from each initial loan, the repayment of these loans ultimately follow the same rule, since there is still an initial actual deposit serving as the seed for all later activity. An individual repaying a loan will typically have a lower level of consumption than one free of debt. The economic effect of the loan is therefore the creation of an initial jump in demand for goods, followed by a suppressed demand as repayment occurs. If economic activity is to remain at the same levels, it must therefore occur at lower prices over time or with a constantly increasing level of average debt.
Now, assume that bank overhead costs are not zero, the bank will secure an income stream from the collections taken on loan interest. Assuming that interest rates merely cover operating costs, total interest collected in each term will therefore be offset by the total paid, with any savings by bank employees being the expression of "profits". This generally represents a steepening of the effect described above.
In other words, the rate of accumulation of wealth must be offset by the government creation of additional currency. If this currency is given to banks in one form or another, it will manifest through the creation of loans, which can only function to extend the amount of consumer debt that the economy can sustain.
The above is written under the assumption that bankruptcies and defaults do not occur. In situations where debt is not repayed by borrower, the bank has a proportional diminishment in profits, meaning a certain level of default will only serve to limit the rate of accumulation and therefore delay instability in currency supply. In the long run, the bank will adjust down their level of borrowing either through increases in interest rates or avoiding of lending to risky buyers, accelerating the rate of accumulation again and leading to monetary shortages faster. A sudden spike in default rates can also bring about a rapid money shortage as the bank becomes unable to cover these losses except through tapping into reserve funds, forcing the bank to suddenly curtail lending. If such an event has a large enough impact, the bank could be unable to meet demand deposit obligations. As this type of crisis is not the topic of this essay, I'll leave the details of such a situation to another time, and probably a different model.
The existence of several banks rather than a single central bank complicates matters in certain ways. It becomes possible for one bank to loan to another bank. This allows for patterns of default to spread from one bank to another. Generally speaking, the risk of local shortages becomes greater as the number of banks proliferate. The network of banks means that money is constantly bouncing from one bank's accounts to another's. However, the specter of poor managment at a central bank leads me to believe that a network of properly regulated small banks is a superior method of organizing a banking industry. Having many banks does not impact the smooth flow of electronic transactions except when one or another bank behaves with deliberate belligerence.
In any event, this model of money availability indicates that the essential relationship is not between total money and prices but between the concentration of wealth and prices. Therefore, the equation that MV = PQ could probably best be reimagined to replace the quantity V with something else. On the basis of this and my previous blog posts, I would recommend V be a value between 0 and 1, expressing the portion of money "positioned to be spent".
Thursday, December 17, 2009
The effect of loans in my alternative money supply model
As outlined in the previous post, the flow of money through the economy has a complex structure that can be described as two large cycles with a limited number of flows between the two. That description is obviously a simple one, and in this and possibly later posts I will flesh this idea out with more detailed descriptions of phenomena occurring within these cycles. This post will focus on loans made to wage earners.
Consumers typically hold their wealth in bank accounts. The bank accounts are highly secure, allowing the consumer to claim with certainty that the money they have deposited will remain available to them unless it is spent, even though the bank will loan out the vast majority of its deposits. A bank with a large pool of depositors combines the statistical predictability of withdrawals, FDIC insurance, and simple rules limiting withdrawal to ensure that sufficient funds are always on hand to to meet the withdrawal demands. Moreover, Federal rules require an even larger reserve be kept than what banks would probably prefer.
Of any given paycheck received by a wage earner, that wage earner is likely to deposit the majority of the check at the beginning of the month. By the end of the month, the wage earner will have spent most of what was earned, perhaps even all or more than what was earned. Thus, the wage earner who deposits money seems to treat this money as part of his "budget" for goods in that time frame. Other individuals who receive a portion of the original paycheck are likely to deal with the same or a different bank and deposit what was just withdrawn. As the aggregate of all banking activity is large, this creates a space in which banks and their clients interact in a way that is best described as the rearrangement of funds from one account to another.
Those funds which are deposited are available to the bank to lend out to other entities for various purposes. The way the loan interacts with the rest of the money supply depends on what the loan is spent on, but all loans also have common properties. It should be noted that because of the certainty of withdrawal outlined above, funds used to create loans do not alter the behavior of the many small consumer accounts from which the loan money is drawn. The money in the account may not actually be there, but because of the certainty described above, the consumer acts as if the money is still there.
All loans alter the behavior of the individuals receiving them in two key ways. First, it allows large purchases to occur in the absence of large savings accounts. Therefore, the demand for these goods is increased by the existence of loans. These demand increases will tend to increase prices as well, especially in markets that are naturally scarce (such as real estate). Second, loans have a repayment requirement, which places a long term debt burden on the borrower. This burden is expressed through a reduction in available income. As these loans are taken by consumers, the drag that repayment creates on purchasing power reduces G (see my previous post for a definition of G).
Loans can be differentiated into two categories based on the type of good that was purchased with the loan. A purchase of real property with money from a bank represents an injection from one part of the financial services sector to another. A purchase of some consumer good or capital equipment represents an injection from the financial services sector into the wage sector. When loans are available for these purchases, they also occur earlier and with greater frequency.
Take LC as loans for capital or large consumer purchases, G as the change in flow from the financial services sector to the wage sector, and IL as the total of payments on loans outstanding. In a given time period the following relationship holds:
LC = IL + G
Absent is the amount in loans for purchasing of real estate, LR. Because this quantity of money does not cross sector, it is not represented. However, the volume of these loans still contribute to the interest paid function.
A salient question is then to ask the question: Under what conditions is LC greater than IL?
For sake of simplicity, I'll treat each loan as a fixed interest rate (i) loan with the same number of total payments (n) and not compound interest. In a given period, t, the new obligations for repayment are given as (1 + i)(LC + LR). Thus, assuming for accounting purposes that the first payment is taken immediately, we can see the total obligations represented by IR as the sum of term payments on all loans still outstanding:
[1 + i(t)] * [LC(t) + LR(t)] / n + [1 + i(t-1)] * [LC(t-1) + LR(t-1)] / n + ... + [1 + i(t-n+1)] * [LC(t-n+1) + LR(t-n+1)] / n = IL
(This function counts from 0 to n-1, but I could just as easily set it up to be from 1 to n. At this juncture I haven't found any compelling reason for either).
The two factors that determine whether IL is greater than LC are the rate of growth of total loans and the ratio of LC to LR. At any given loan growth rate, there exists a corresponding ratio of LC to LR that gives IL = LC. From this point, if LC/LR increases, LC exceeds IL; if LC/LR decreases, IL exceeds LC. Similarly, a higher rate of loan growth will push LC above IL.
In order to conjecture as to the extent that loans are beneficial to the society, the above results can be analyzed in the context of the business disincentive/shortage spectrum outlined previously. Loans only contribute to G so long as the quantity of lending is increasing. Even when the lending quantity is increasing, G can be negative when the LC/LR ratio is low. Therefore, in a system experiencing shortage, LR should be encouraged and/or the quantity of lending should be decreased or braked. Similarly, in a system experiencing disincentive, LC should be encouraged and/or the quantity of lending should be increased or accelerated.
Consumers typically hold their wealth in bank accounts. The bank accounts are highly secure, allowing the consumer to claim with certainty that the money they have deposited will remain available to them unless it is spent, even though the bank will loan out the vast majority of its deposits. A bank with a large pool of depositors combines the statistical predictability of withdrawals, FDIC insurance, and simple rules limiting withdrawal to ensure that sufficient funds are always on hand to to meet the withdrawal demands. Moreover, Federal rules require an even larger reserve be kept than what banks would probably prefer.
Of any given paycheck received by a wage earner, that wage earner is likely to deposit the majority of the check at the beginning of the month. By the end of the month, the wage earner will have spent most of what was earned, perhaps even all or more than what was earned. Thus, the wage earner who deposits money seems to treat this money as part of his "budget" for goods in that time frame. Other individuals who receive a portion of the original paycheck are likely to deal with the same or a different bank and deposit what was just withdrawn. As the aggregate of all banking activity is large, this creates a space in which banks and their clients interact in a way that is best described as the rearrangement of funds from one account to another.
Those funds which are deposited are available to the bank to lend out to other entities for various purposes. The way the loan interacts with the rest of the money supply depends on what the loan is spent on, but all loans also have common properties. It should be noted that because of the certainty of withdrawal outlined above, funds used to create loans do not alter the behavior of the many small consumer accounts from which the loan money is drawn. The money in the account may not actually be there, but because of the certainty described above, the consumer acts as if the money is still there.
All loans alter the behavior of the individuals receiving them in two key ways. First, it allows large purchases to occur in the absence of large savings accounts. Therefore, the demand for these goods is increased by the existence of loans. These demand increases will tend to increase prices as well, especially in markets that are naturally scarce (such as real estate). Second, loans have a repayment requirement, which places a long term debt burden on the borrower. This burden is expressed through a reduction in available income. As these loans are taken by consumers, the drag that repayment creates on purchasing power reduces G (see my previous post for a definition of G).
Loans can be differentiated into two categories based on the type of good that was purchased with the loan. A purchase of real property with money from a bank represents an injection from one part of the financial services sector to another. A purchase of some consumer good or capital equipment represents an injection from the financial services sector into the wage sector. When loans are available for these purchases, they also occur earlier and with greater frequency.
Take LC as loans for capital or large consumer purchases, G as the change in flow from the financial services sector to the wage sector, and IL as the total of payments on loans outstanding. In a given time period the following relationship holds:
LC = IL + G
Absent is the amount in loans for purchasing of real estate, LR. Because this quantity of money does not cross sector, it is not represented. However, the volume of these loans still contribute to the interest paid function.
A salient question is then to ask the question: Under what conditions is LC greater than IL?
For sake of simplicity, I'll treat each loan as a fixed interest rate (i) loan with the same number of total payments (n) and not compound interest. In a given period, t, the new obligations for repayment are given as (1 + i)(LC + LR). Thus, assuming for accounting purposes that the first payment is taken immediately, we can see the total obligations represented by IR as the sum of term payments on all loans still outstanding:
[1 + i(t)] * [LC(t) + LR(t)] / n + [1 + i(t-1)] * [LC(t-1) + LR(t-1)] / n + ... + [1 + i(t-n+1)] * [LC(t-n+1) + LR(t-n+1)] / n = IL
(This function counts from 0 to n-1, but I could just as easily set it up to be from 1 to n. At this juncture I haven't found any compelling reason for either).
The two factors that determine whether IL is greater than LC are the rate of growth of total loans and the ratio of LC to LR. At any given loan growth rate, there exists a corresponding ratio of LC to LR that gives IL = LC. From this point, if LC/LR increases, LC exceeds IL; if LC/LR decreases, IL exceeds LC. Similarly, a higher rate of loan growth will push LC above IL.
In order to conjecture as to the extent that loans are beneficial to the society, the above results can be analyzed in the context of the business disincentive/shortage spectrum outlined previously. Loans only contribute to G so long as the quantity of lending is increasing. Even when the lending quantity is increasing, G can be negative when the LC/LR ratio is low. Therefore, in a system experiencing shortage, LR should be encouraged and/or the quantity of lending should be decreased or braked. Similarly, in a system experiencing disincentive, LC should be encouraged and/or the quantity of lending should be increased or accelerated.
Wednesday, December 16, 2009
Money Cycle
Among the many "laws" of Economics, the one standard that transcends all others in its unshakable nature is the law relating levels of market exchange to the flow of money: MV=PQ; this constraint relates two rates of flow to each other - one is the quantity of money (M) and total velocity (V, the number of times it changes hands), while the other is the average price of goods (P) and the quantity of goods exchanged (Q). The equation holds true, in part, because it requires a commitment of good faith from those who test it: That they will dutifully take into account advance deliveries and payments and count the supply of money in a certain way. The equation also holds true in part because it is directly derived from a simpler assumption: The collection of data related to this equation requires first that the total dollar value of all goods sold within a given period be estimated, which I'll label Y. Y then becomes both the products MV and PQ, with any advance or late payments considered minimal, and the various types of credit and currency treated as equivalent. Being nothing more than two parallel decompositions of the same equation Y = Y, the equation MV = PQ becomes nothing more than a truism.
The four variables, M, V, P, and Q bear a nominal connotation that can betray the casual observer of the economic discipline. If one imagines that the prices and quantity of goods exchanged are restricted to services of value and material goods, the equation becomes an object that relates monetary policy to economic output. Unfortunately, this cannot be the case, as financial objects, when exchanged on the market, no doubt increase the flow of money but contribute to P and Q only by being treated as an element of Q. Similarly, increases in GDP come as a result of the inclusion of traded financial assets.
It is possible to visualize the flow of money within the economy by tracking a uniformly distributed sample of dollars (from real cash, accounts, and credit). Though I am not aware of such a study, it is likely to reveal that many paths of various length and velocity are followed. Unlike a real river, the paths of these dollars will require a third dimension, as some cross above or below each other, splitting off and joining up in complex patterns.
Individual incomes will each be a small trickle from the large revenue stream of the employer firm. Each paycheck will be split into several streams, but only over the course of the time period from one paycheck to the next. Paychecks will first have taxes and union dues siphoned off. Next, rents, mortgage payments, and car payments take a huge draft that will vary from most of what remains down to about 1/6th. All the rest will go out in tiny disbursements for various consumer products, services, and financial products.
The stream of taxes will be paid out by Government to Government employees and contractors, but will first be placed into a receiving account. The stream of rental and mortgage incomes will be processed by property management firms and banks before being returned to investors. The stream of other goods and services will largely be paid out to employees and other businesses, with investors taking a cut from some profitable firms but not others. In the case of large businesses, the upper-level management will often receive very large compensation packages. These packages will be wage-type streams but are worth noting because they have atypical size and compositions.
Though much money swirls about in the wage cycle, moving from one wage earner's hands to the next, some dollars from this cycle are pulled into a different area, the financial products sector. This sector is similar in composition to the wage cycle sector but has invert composition - a small amount of the money exchanged is channeled into wage streams, while the remainder is moved from one financial product to the next. Presumably, these financial products represent investments in the non-financial service sector - investments in capital equipment and advance wage payments. However, the financial products can also be composed of other financial products and real estate, both objects which do not channel the dollars back into the wage cycle. Thus, the degree to which dollars are channeled back to the wage cycle depends on the distribution of financial-services dollar flow between the two channels of either production (capital equipment and wages) and finance (financial services and real estate).
There seems to be a relationship, of sorts, between the production level of the society and the interplay between the wage and financial service cycles. Let G be the net increase (or decrease) in dollars flowing into the wage cycle. Then if R is the part of rent and mortgage payments flowing into the financial services sector, S is the part of consumer spending entering the financial services sector (e.g. through the purchase of financial products), C is the part of financial services dollar flow that goes toward capital equipment purchases, and W is is the part of financial services dollar flow that goes toward wages, we have:
R + S + G = C + W
Broadly speaking, there are five sources of G:
1. The increase in worker spending on things other than R or S, as a result of either increases in wages or the extension of credit.
2. The decrease in R (lowered rents and mortgage payments).
3. The decrease in S (less investment in financial services).
4. The increase in C (more capital equipment, which is generally built and produced by wage workers).
5. The increase in W (direct conversion of financial service dollars to paychecks).
This G is not a representation of economic growth. It is merely an expression of nominal dollar balance. Growth is more intimately related to investment levels in C and W, which are dependent on the existence of consumer demand that can only exist while consumers have the necessary surpluses in their budgets. G expresses the change in these surpluses. In the absence of regulatory response, too much flow toward financial services pushes consumer budgets down too far, disincentivizing the financial services sector to invest in C or W (disincentive). Conversely, too much flow toward wages deprives the financial services sector of the capital it needs to make effective investments in new machinery and skilled workers (shortage). Thus, there is a difficult balance between the financial services cycles and the wage cycles that tends to fall farther out of balance rather than move toward an equilibrium - it is a repulsive fixed point.
The initial or casual regulatory response would depend on the proper reading of the indicators of whether disincentive or shortage is occuring. The disincentive condition is indicated by a high degree of concentration of wealth. The shortage condition is indicated by a highly equal distribution of wealth. However, if faith was placed in the theory, it could be used to track the accumulations through the measurement of G over time to constantly preserve the balance even when outward symptoms had not started to manifest.
Policies that regulate this relationship can take many forms.
Most straightforward would be a tax that simply redistributed earnings from the wealthy to the poor. Such a system, however, would necessitate that the economy remain on the disincentive side of the distribution. A fixed point would be reached in this zone, so long as the tax is not too severe. If such a policy were implemented when the economy was in shortage, it would simply make matters worse.
A tax used to purchase real estate and invest in financial services would allow an economy that is in the range of shortage to reach a fixed point in that range. However, such a policy would be ineffective when the economy is in disincentive.
A minimum wage, depending on what portion of workers are affected and how high the wage is, pushes the economy toward the shortage direction. The minimum wage is not neutral from the investor perspective because it makes wage and capital investments less attractive relative to real estate and financial investments. However, it is beneficial in the disincentive range so long as the increases in worker pay give a sufficient increase in demand for products to counteract that decrease.
The four variables, M, V, P, and Q bear a nominal connotation that can betray the casual observer of the economic discipline. If one imagines that the prices and quantity of goods exchanged are restricted to services of value and material goods, the equation becomes an object that relates monetary policy to economic output. Unfortunately, this cannot be the case, as financial objects, when exchanged on the market, no doubt increase the flow of money but contribute to P and Q only by being treated as an element of Q. Similarly, increases in GDP come as a result of the inclusion of traded financial assets.
It is possible to visualize the flow of money within the economy by tracking a uniformly distributed sample of dollars (from real cash, accounts, and credit). Though I am not aware of such a study, it is likely to reveal that many paths of various length and velocity are followed. Unlike a real river, the paths of these dollars will require a third dimension, as some cross above or below each other, splitting off and joining up in complex patterns.
Individual incomes will each be a small trickle from the large revenue stream of the employer firm. Each paycheck will be split into several streams, but only over the course of the time period from one paycheck to the next. Paychecks will first have taxes and union dues siphoned off. Next, rents, mortgage payments, and car payments take a huge draft that will vary from most of what remains down to about 1/6th. All the rest will go out in tiny disbursements for various consumer products, services, and financial products.
The stream of taxes will be paid out by Government to Government employees and contractors, but will first be placed into a receiving account. The stream of rental and mortgage incomes will be processed by property management firms and banks before being returned to investors. The stream of other goods and services will largely be paid out to employees and other businesses, with investors taking a cut from some profitable firms but not others. In the case of large businesses, the upper-level management will often receive very large compensation packages. These packages will be wage-type streams but are worth noting because they have atypical size and compositions.
Though much money swirls about in the wage cycle, moving from one wage earner's hands to the next, some dollars from this cycle are pulled into a different area, the financial products sector. This sector is similar in composition to the wage cycle sector but has invert composition - a small amount of the money exchanged is channeled into wage streams, while the remainder is moved from one financial product to the next. Presumably, these financial products represent investments in the non-financial service sector - investments in capital equipment and advance wage payments. However, the financial products can also be composed of other financial products and real estate, both objects which do not channel the dollars back into the wage cycle. Thus, the degree to which dollars are channeled back to the wage cycle depends on the distribution of financial-services dollar flow between the two channels of either production (capital equipment and wages) and finance (financial services and real estate).
There seems to be a relationship, of sorts, between the production level of the society and the interplay between the wage and financial service cycles. Let G be the net increase (or decrease) in dollars flowing into the wage cycle. Then if R is the part of rent and mortgage payments flowing into the financial services sector, S is the part of consumer spending entering the financial services sector (e.g. through the purchase of financial products), C is the part of financial services dollar flow that goes toward capital equipment purchases, and W is is the part of financial services dollar flow that goes toward wages, we have:
R + S + G = C + W
Broadly speaking, there are five sources of G:
1. The increase in worker spending on things other than R or S, as a result of either increases in wages or the extension of credit.
2. The decrease in R (lowered rents and mortgage payments).
3. The decrease in S (less investment in financial services).
4. The increase in C (more capital equipment, which is generally built and produced by wage workers).
5. The increase in W (direct conversion of financial service dollars to paychecks).
This G is not a representation of economic growth. It is merely an expression of nominal dollar balance. Growth is more intimately related to investment levels in C and W, which are dependent on the existence of consumer demand that can only exist while consumers have the necessary surpluses in their budgets. G expresses the change in these surpluses. In the absence of regulatory response, too much flow toward financial services pushes consumer budgets down too far, disincentivizing the financial services sector to invest in C or W (disincentive). Conversely, too much flow toward wages deprives the financial services sector of the capital it needs to make effective investments in new machinery and skilled workers (shortage). Thus, there is a difficult balance between the financial services cycles and the wage cycles that tends to fall farther out of balance rather than move toward an equilibrium - it is a repulsive fixed point.
The initial or casual regulatory response would depend on the proper reading of the indicators of whether disincentive or shortage is occuring. The disincentive condition is indicated by a high degree of concentration of wealth. The shortage condition is indicated by a highly equal distribution of wealth. However, if faith was placed in the theory, it could be used to track the accumulations through the measurement of G over time to constantly preserve the balance even when outward symptoms had not started to manifest.
Policies that regulate this relationship can take many forms.
Most straightforward would be a tax that simply redistributed earnings from the wealthy to the poor. Such a system, however, would necessitate that the economy remain on the disincentive side of the distribution. A fixed point would be reached in this zone, so long as the tax is not too severe. If such a policy were implemented when the economy was in shortage, it would simply make matters worse.
A tax used to purchase real estate and invest in financial services would allow an economy that is in the range of shortage to reach a fixed point in that range. However, such a policy would be ineffective when the economy is in disincentive.
A minimum wage, depending on what portion of workers are affected and how high the wage is, pushes the economy toward the shortage direction. The minimum wage is not neutral from the investor perspective because it makes wage and capital investments less attractive relative to real estate and financial investments. However, it is beneficial in the disincentive range so long as the increases in worker pay give a sufficient increase in demand for products to counteract that decrease.
Monday, December 14, 2009
Goldstone vs. HR867.EH
I'm saddened by the circumstances behind the condemnation of the Goldstone Report, because these condemnations amount to the suppression of information. The report is a very well developed and conducted investigation that gives us a snapshot of current events in Palestine. Rather than recognizing the value of this report as a source of information, the House of Representatives (and the Obama Administration) have condemned it merely because it is associated with political forces that clash with some of our country's more hawkish foreign policy goals. If we had endorsed the report, it would have given credibility to the UN's efforts to establish an accurate record of the human rights violations committed by the various groups operating in and around the Occupied Territories.
The reasoning behind the strategy of suppression of facts is not explicitly stated anywhere, so one can only guess ath the justification. I understand that Israel is our ally, but that does not justify our shielding them from scrutiny. Nor does the House of Representatives offer any rationale for the suppression of the wealth of information the Goldstone Report offers about the complexities of Palestinian Politics and the relative involvement of various terrorist groups in particular events.
HR867:
But, even beyond this, the House Resolution makes no mention of the vast majority of the report's contents. Israel and to a lesser degree various factions within Palestine have destroyed the economy and quality of life of Palestine, creating a humanitarian crisis.
Goldstone (p. 17-19):
HR867:
An Israeli counter-strikes arriving minutes or hours after the rockets have been fired by the militants can't hope to strike the actual perpetrators. Any impartial analysis should see this as nothing more than a reprisal. When all the evidence is considered, it is clear that Israel thinks of Palestinians as nothing more than animals. Without the international community's watchful gaze, these animals would be exterminated.
If anything, Goldstone's report is biased against the Palestinian people. Goldstone had to work with what was available. He addresses these concerns in his discussion of Obligation to take Feasible Precautions.
Moving on...
HR867:
Hamas is the closest thing to a legitimate government of Palestine. Civilians, terrorists, and militant palestinians alike are opposed to Israeli occupation. Since they have no democratic rights to vote as equal citizens of Israel, the only alternative is for them to form their own government. That government's attitude toward foreign powers is not a factor in its legitimacy.
In order to understand the context of various claims and to see what crimes are really being alleged, one must assume some stance of impartiality. There are basically two options: either recognize the Palestinans as deserving equal rights in the nation of Israel or recognize them as having the same claim to legitimate government that Israel does, having a national will that stands on equal footing with the goals of the Israeli state. Israel has no more right to destroy that Government in response to terrorist incidents than Hamas - or any other militant group - has the right to destroy the Government of Israel in response to Israel's terroristic activity.
Overall, this report has been a good read, although somewhat too exhaustive at times to be much of a casual romp.
The reasoning behind the strategy of suppression of facts is not explicitly stated anywhere, so one can only guess ath the justification. I understand that Israel is our ally, but that does not justify our shielding them from scrutiny. Nor does the House of Representatives offer any rationale for the suppression of the wealth of information the Goldstone Report offers about the complexities of Palestinian Politics and the relative involvement of various terrorist groups in particular events.
HR867:
Whereas the resolution pre-judged the outcome of its investigation, by one-sidedly mandating the `fact-finding mission' to `investigate all violations of international human rights law and International Humanitarian Law by * * * Israel, against the Palestinian people * * * particularly in the occupied Gaza Strip, due to the current aggression'Goldstone (p. 11):
11. To implement its mandate, the Mission determined that it was required to consider any actions by all parties that might have constituted violations of international human rights law or international humanitarian law. The mandate also required it to review related actions in the entire Occupied Palestinian Territory and Israel.HR867:
Whereas the mandate of the `fact-finding mission' makes no mention of the relentless rocket and mortar attacks, which numbered in the thousands and spanned a period of eight years, by Hamas and other violent militant groups in Gaza against civilian targets in Israel, that necessitated Israel's defensive measuresGoldstone (p. 31, 79-80):
103. Palestinian armed groups have launched about 8000 rockets and mortars into southern Israel since 2001 (Chapter XIII).HR867:
...
257. Palestinian armed groups fired rockets and mortars into Israel throughout November 2008. According to Israeli sources, 125 rockets were fired into Israel during November 2008 (compared to one in October) and 68 mortars shells were fired (also compared to one in October).(133)
...
259. Rocket and mortar fire by Palestinian armed groups continued unabated throughout December 2008.(136) According to Israeli sources, 71 rockets and 59 mortars were fired into Israel between 1 and 18 December.(137)
Whereas the report repeatedly made sweeping and unsubstantiated determinations that the Israeli military had deliberately attacked civilians during Operation Cast LeadGoldstone (p. 15):
43. The Mission investigated eleven incidents in which Israeli forces launched direct attacks against civilians with lethal outcome (Chapter XI). The cases examined in this part of the report are, with one exception, all cases in which the facts indicate no justifiable military objective pursued by the attack. The first two incidents are attacks against houses in the Samouni neighbourhood south of Gaza City, including the shelling of a house in which Palestinian civilians had been forced to assemble by the Israeli forces. The following group of seven incidents concern the shooting of civilians while they were trying to leave their homes to walk to a safer place, waving white flags and, in some of the cases, following an injunction from the Israeli forces to do so. The facts gathered by the Mission indicate that all the attacks occurred under circumstances in which the Israeli forces were in control of the area and had previously entered into contact with or at least observed the persons they subsequently attacked, so that they must have been aware of their civilian status. In the majority of these incidents, the consequences of the Israeli attacks against civilians were aggravated by their subsequent refusal to allow the evacuation of the wounded or to permit access to ambulances.These cases are each investigated in detail in section XI of the report (p. 198)
But, even beyond this, the House Resolution makes no mention of the vast majority of the report's contents. Israel and to a lesser degree various factions within Palestine have destroyed the economy and quality of life of Palestine, creating a humanitarian crisis.
Goldstone (p. 17-19):
50. The Mission investigated several incidents involving the destruction of industrialBeyond that, the rhetoric of the House Resolution is stilted, to say the least. Check out this gem:
infrastructure, food production, water installations, sewage treatment and housing (Chapter XIII). Already at the beginning of the military operations, the Al Bader flour mill was the only flour mill in the Gaza Strip still operating. The flour mill was hit by a series of air strikes on 9 January 2009 after several false warnings had been issued on previous days. The Mission finds that its destruction had no military justification. The nature of the strikes, in particular the precise targeting of crucial machinery, suggests that the intention was to disable the factory in terms of its productive capacity. From the facts it ascertained, the Mission finds that there has been a violation of the grave breaches provisions of the Fourth Geneva Convention. Unlawful and wanton destruction which is not justified by military necessity amounts to a war crime. The Mission also finds that the destruction of the mill was carried out for the purposes of denying sustenance to the civilian population, which is a violation of customary international law and may constitute a war crime. The strike on the flour mill further constitutes a violation of human rights provisions regarding the right to adequate food and means of subsistence.
51. The chicken farms of Mr. Sameh Sawafeary in the Zeitoun neighbourhood south of Gaza City reportedly supplied over 10 per cent of the Gaza egg market. Armoured bulldozers of the Israeli forces systematically flattened the chicken coops, killing all 31,000 chickens inside, and destroyed the plant and material necessary for the business. The Mission concludes that this was a deliberate act of wanton destruction not justified by any military necessity and draws the same legal conclusions as in the case of the destruction of the flour mill.
52. Israeli forces also carried out a strike against a wall of one of the raw sewage lagoons of the Gaza Waste Water Treatment Plant, which caused the outflow of more than 200,000 cubic metres of raw sewage into neighbouring farmland. The circumstances of the strike on the lagoon suggest that it was deliberate and premeditated. The Namar Wells complex in Jabalya consisted of two water wells, pumping machines, a generator, fuel storage, a reservoir chlorination unit, buildings and related equipment. All were destroyed by multiple air strikes on the first day of the Israeli aerial attack. The Mission considers it unlikely that a target the size of the Namar Wells could have been hit by multiple strikes in error. It found no grounds to suggest that there was any military advantage to be had by hitting the wells and noted that there was no suggestion that Palestinian armed groups had used the wells for any purpose. Considering that the right to drinking water is part of the right to adequate food, the Mission makes the same legal findings as in the case of the Al Bader flour mill.
53. During its visits to the Gaza Strip, the Mission witnessed the extent of the destruction of residential housing caused by air strikes, mortar and artillery shelling, missile strikes, the operation of bulldozers and demolition charges. In some cases, residential neighbourhoods were subjected to air-launched bombing and to intensive shelling apparently in the context of the advance of Israeli ground forces. In other cases, the facts gathered by the Mission strongly suggest that the destruction of housing was carried out in the absence of any link to combat engagements with Palestinian armed groups or any other effective contribution to military action. Combining the results of its own fact finding on the ground with UNOSAT imagery and the published testimonies of Israeli soldiers, the Mission concludes that, in addition to the extensive destruction of housing for so-called “operational necessity” during their advance, the Israeli forces engaged in another wave of systematic destruction of civilian buildings during the last three days of their presence in Gaza, aware of the imminence of withdrawal. The conduct of the Israeli forces in this respect violated the principle of distinction between civilian and military objects and amounted to the grave breach of “extensive destruction … of property, not justified by military necessity and carried out unlawfully and wantonly”. Israeli forces further violated the right to adequate housing of the families concerned.
54. The attacks on industrial facilities, food production and water infrastructure investigated by the Mission are part of a broader pattern of destruction, which includes the destruction of the only cement packaging plant in Gaza (the Atta Abu Jubbah plant), the Abu Eida factories for ready-mix concrete, further chicken farms and the Al Wadia Group’s foods and drinks factories. The facts ascertained by the Mission indicate that there was a deliberate and systematic policy on the part of the Israeli armed forces to target industrial sites and water installations.
HR867:
If these civilians are being used unwillingly as shields, then we could say they were forced. Unfortunately for the most part they aren't being forced. They just happen to be where the militants choose to attack from. There is a broad base of support for the militants. If Israel cared at all about the lives of these civilians, they wouldn't use such indiscriminate forms of retaliation. Protecting the lives of Israeli soldiers at the cost of lives of Palestinian civilians is only justifiable as part of a regime that treats Palestinians as less than human. Soldiers and Police are not a noble caste more deserving of life than others. Therefore, they are not justified to indiscriminately kill merely to maximize the chance of preserving their own lives. But this observation and its competitors in the arena of justification for deadly force are really beside the point.Whereas, notwithstanding a great body of evidence that Hamas and other violent Islamist groups committed war crimes by using civilians and civilian institutions, such as mosques, schools, and hospitals, as shields, the report repeatedly downplayed or cast doubt upon that claim;
Whereas in one notable instance, the report stated that it did not consider the admission of a Hamas official that Hamas often `created a human shield of women, children, the elderly and the mujahideen, against [the Israeli military]' specifically to `constitute evidence that Hamas forced Palestinian civilians to shield military objectives against attack.'
An Israeli counter-strikes arriving minutes or hours after the rockets have been fired by the militants can't hope to strike the actual perpetrators. Any impartial analysis should see this as nothing more than a reprisal. When all the evidence is considered, it is clear that Israel thinks of Palestinians as nothing more than animals. Without the international community's watchful gaze, these animals would be exterminated.
If anything, Goldstone's report is biased against the Palestinian people. Goldstone had to work with what was available. He addresses these concerns in his discussion of Obligation to take Feasible Precautions.
Moving on...
HR867:
Whereas even though Israel is a vibrant democracy with a vigorous and free press, the report of the `fact-finding mission' erroneously asserts that `actions of the Israeli government * * * have contributed significantly to a political climate in which dissent with the government and its actions * * * is not tolerated';Goldstone (p. 6, 35, 65, 482, 489):
8. The Mission repeatedly sought to obtain the cooperation of the Government of Israel. After numerous attempts had failed, the Mission sought and obtained the assistance of the Government of Egypt to enable it to enter the Gaza Strip through the Rafah crossing.
116. The Government of Israel imposed a ban on media access to Gaza following 5 November 2008. Further, access was denied to human rights organizations and the ban continues for some international and Israeli organizations. The Mission can find no justifiable reason for this denial of access. The presence of journalists and international human rights monitors aides the investigation and wide public reporting of the conduct of the parties to the conflict and their presence can inhibit misconduct. The Mission observes that Israel, in its actions against political activists, NGOs and the media, has attempted to reduce public scrutiny of its conduct both during its military operations in Gaza and the consequences that these operations had for the residents of Gaza, possibly seeking to prevent investigation and public reporting thereon.
207. The two-tiered civil status under Israeli law, favouring “Jewish nationals” (le’om yehudi) over persons holding Israeli citizenship (ezrahut), has been a subject of concern under the International Covenant on Economic, Social and Cultural Rights, particularly those forms of discrimination carried out through Israel’s parastatal agencies (World Zionist Organization/Jewish Agency, Jewish National Fund and their affiliates), which dominate land use, housing and development.(59) The Committee on Economic, Social and Cultural Rights also has recognized that Israel’s application of a “Jewish nationality” distinct from Israeli citizenship institutionalizes discrimination that disadvantages all Palestinians, in particular, refugees.(60)
1755. The Mission received reports of 20 prominent activists and political figures within the Palestinian community being called in for interrogation by the Shabak and being questioned about their political activities.(1106) It has also received reports of younger political activists having been taken for interview and asked to collaborate with the Israeli authorities. In the case of student activists, the offer of collaboration was accompanied by the threat of arrest or of future difficulties in continuing their studies.(1107)
1784. To date, Amnesty International, Human Rights Watch and B’Tselem have been denied access to Gaza to collect data for their independent investigations into allegation of war crimes committed by both the Israeli forces and Palestinian armed groups.
Hamas is the closest thing to a legitimate government of Palestine. Civilians, terrorists, and militant palestinians alike are opposed to Israeli occupation. Since they have no democratic rights to vote as equal citizens of Israel, the only alternative is for them to form their own government. That government's attitude toward foreign powers is not a factor in its legitimacy.
In order to understand the context of various claims and to see what crimes are really being alleged, one must assume some stance of impartiality. There are basically two options: either recognize the Palestinans as deserving equal rights in the nation of Israel or recognize them as having the same claim to legitimate government that Israel does, having a national will that stands on equal footing with the goals of the Israeli state. Israel has no more right to destroy that Government in response to terrorist incidents than Hamas - or any other militant group - has the right to destroy the Government of Israel in response to Israel's terroristic activity.
Overall, this report has been a good read, although somewhat too exhaustive at times to be much of a casual romp.
Friday, November 13, 2009
Ethical Goals of Government
Government is an entity the existence of which can only be justified on an ethical basis. More precisely, some argument must be made either in a consequentialist sense or in a deontological schema, to argue that a given government should exist. It is not an entity with any epistemological difficulties - none deny its existence as a physical object, or seek a metaphysical essence that defines it in accordance with profound deterministic laws. In fact, government seems to have inalienable presense. It is not in absolute question except among the minority who argue that it is possible for it to not exist. Instead, the argument for government is an argument for a particular kind of government as compared to another.
That being said, the argument for government is inseparable from the nature of the government. Since any government is nothing more than structural relationships and human personalities, these factors at a given point in history, real or theoretical, shape the argument, ruling out some forms of Government and making others more appealing. Because it is so human, Government ends up being more than what is official, inseparable from the society it is embedded in and responding in part to the political power of unofficial individuals and organizations.
From the available alternatives for making ethical evaluation as given at the outset, the deontological schema does not seem sufficient. In the absence of profound religious belief, it is hard to imagine a set of dictates that form the transcendental rules needed to make evaluations of government on a deontological basis. The process oriented arguments such as arguments for democracy, the use of principles like the categorical imperative or the veil of ignorance are not sufficient because though they define criteria for evaluating governments in terms of the means by which decisions are made, there is still another step of logical immediacy that must be taken by whomever is tasked with the decision. This step is to turn the deontological principle into a consequentialist policy goal so that policy consequences can be evaluated as either in accordance or dischordance with the governing principle.
The consequence value of anything that can be evaluated ethically is the sum of all future possibilities multiplied by their probability. Though the metric by which consequences are valued against each other need not be known absolutely, if consequences are to be ranked against each other, the entirety of the consequence space, when assigned values in the chosen metric, must be bounded. This is because any given consequence that gives more than zero probability to any unbounded point would cause the future possibilities sum for its corresponding region to diverge.
Ethical evaluations are a property of actions. Anything that is evaluated ethically must be turned into a bundle of actions. Thus, to judge an individual, that person must be reduced to their action history and or future; to judge a policy or even a government as a whole, is to reduce each policy to a bundle of action predictions. Since the action bundle abandons its source prior to evaluation, any two governments are essentially evaluated by the same underlying criteria.
So, if possible governments are to be ranked against each other for purposes of determining public policy, this amounts to ranking policies against each other. In turn, the policies are evaluated based on the action bundles that they contain. Action bundles are evaluated based on consequence values that in turn define policy goals. Thus, governments are ranked against each other according to the degree to which they achieve the defined policy goals.
Therefore, a government considering new laws is not constrained by the spirit of its existing laws. Existing laws are valuable as objects to be reverse engineered in an effort to determine previous policy goals and improve the consequence value functions. However, existing laws are not deontological principles constraining government legislation. Rights as defined by government do not create, of themselves, arguments against legislation that would curtail them. Tiered legal systems, such as those with constitutional procedure restrictions, exert force through their restrictions on policies and action bundles, not through any alteration to the consequence value function.
This confusion is felt throughout contemporary government systems, in which the policy goal itself is often erroneously defined down in scope to meet available resources. When government sets about to address some social issue, such as poverty, it is best to declare the total level of need, prior to the determination of how much of that need can be addressed. In this way, it is easy to evaluate the policy trade-offs of providing more resources to a given program.
As mentioned above, many aspects of government are informal. The Government in the United States has a responsibility - just as sacred as its guarantee of freedom of the press - to ensure that mass starvation does not occur. However, this responsibility is left entirely to privately operating farmers, with some level of regulation. Such arrangements are typical for many sectors of the US economy. When such a sector is confronted by its own inadequacy according to some policy goal such as an unmet level of need, the Government has more than simply the right to intervene in that sector of the private market, but an obligation to do so. These "private markets" are merely delegations of control by government, to achieve policy goals of that government in an efficient manner.
The history of economic consensus in the academic discipline is entirely radical in nature. Those who are convinced that the free market is superior are, by and large, relying on ridiculous metrics. In actuality, the radical position has won not through demonstration of superior benefit, but through the disproof of fantastical harms arising from proposed types of market intervention by government. For instance, were the government to provide 1000 meals for the needy, it would be the duty of the opponent of such a policy to argue that moral equivalent of more than 1000 hungry mouths will be deprived through such an action. The same holds true for all manner of comparable criteria or interrelations of different values. Those that fear nebulous reductions of efficiency or freedom through such a trade off are guilty of a certain kind of vanity, the roots of which can probably be traced to dystopian novels.
By directing an agency to limit services through revisions of the very definition of need is to obfuscate the very goal that justifies the existence of that agency. The goals of Government should be to meet everyone's basic needs, to have no unpleasant labor, to provide for the safety of all, to ensure the total preservation of the environment, to further education among all members of society, etc. This is the only way to see the trade offs behind policy proposals for what they truly are. To decry such metrics as Utopian is simply an admission of a lack of understanding of the process of thought itself. To argue that taxation is theft is to invite ridicule. To say that the Government cannot afford to provide a service is merely to say that this service is on the margin and therefore the least important of all things on which money is currently being spent in the entirety of the society, a situation that almost never occurs in substantive policy discussions.
For sake of clarity, I'll now describe a few of the most effective policies for our current malaise.
1) Curtailment of the workweek. This policy is effective for reducing unemployment. Reduction to the workweek creates an incentive for employers to increase the number of employees. This of course represents a loss of income to existing workers, but it reduces the unemployment rate. Clearly it is better to have jobs for those without them than to have more money for those who already have jobs, so from an ethical standpoint this is an excellent policy. Furthermore, when France reduced its workweek, it actually had the effect of reducing the budget deficit as well, because it took so many people off of the unemployment rolls.
2) Lowering (not raising) the retirement age. Many, many individuals who are currently working in their 60s should be allowed to retire with the full benefits. A significant portion of these people have spent much more than 25 years of their lives working. Not only do they deserve a break, but younger people deserve to take the reins. Such a policy will help to alleviate so many social problems, it is really a shame that congress cannot find the money for such a program.
3) Free State undergraduate college with equivalent vouchers for private institutions. Once again, the crippling effect that the buildup of college debt has had on consumer spending and the quality of life of younger Americans should justify the creation of a free college system. The money for it could come from rich.
When a politician argues that there is no funding left in the budget, he does not realize the meanings of what he speaks. When he speaks to the populace, both speaker and audience proceed under the medieval notion that money is so tight that none is left to go around, that all of society is going without any luxury, that outcomes cannot be improved. None of these individuals know the first shred of economics. Their pride will not allow them to admit this when pressed, but in the end they cannot escape their own unclear train of thought. How else is such deference toward wealth in the face of chronic poverty to be explained?
That being said, the argument for government is inseparable from the nature of the government. Since any government is nothing more than structural relationships and human personalities, these factors at a given point in history, real or theoretical, shape the argument, ruling out some forms of Government and making others more appealing. Because it is so human, Government ends up being more than what is official, inseparable from the society it is embedded in and responding in part to the political power of unofficial individuals and organizations.
From the available alternatives for making ethical evaluation as given at the outset, the deontological schema does not seem sufficient. In the absence of profound religious belief, it is hard to imagine a set of dictates that form the transcendental rules needed to make evaluations of government on a deontological basis. The process oriented arguments such as arguments for democracy, the use of principles like the categorical imperative or the veil of ignorance are not sufficient because though they define criteria for evaluating governments in terms of the means by which decisions are made, there is still another step of logical immediacy that must be taken by whomever is tasked with the decision. This step is to turn the deontological principle into a consequentialist policy goal so that policy consequences can be evaluated as either in accordance or dischordance with the governing principle.
The consequence value of anything that can be evaluated ethically is the sum of all future possibilities multiplied by their probability. Though the metric by which consequences are valued against each other need not be known absolutely, if consequences are to be ranked against each other, the entirety of the consequence space, when assigned values in the chosen metric, must be bounded. This is because any given consequence that gives more than zero probability to any unbounded point would cause the future possibilities sum for its corresponding region to diverge.
Ethical evaluations are a property of actions. Anything that is evaluated ethically must be turned into a bundle of actions. Thus, to judge an individual, that person must be reduced to their action history and or future; to judge a policy or even a government as a whole, is to reduce each policy to a bundle of action predictions. Since the action bundle abandons its source prior to evaluation, any two governments are essentially evaluated by the same underlying criteria.
So, if possible governments are to be ranked against each other for purposes of determining public policy, this amounts to ranking policies against each other. In turn, the policies are evaluated based on the action bundles that they contain. Action bundles are evaluated based on consequence values that in turn define policy goals. Thus, governments are ranked against each other according to the degree to which they achieve the defined policy goals.
Therefore, a government considering new laws is not constrained by the spirit of its existing laws. Existing laws are valuable as objects to be reverse engineered in an effort to determine previous policy goals and improve the consequence value functions. However, existing laws are not deontological principles constraining government legislation. Rights as defined by government do not create, of themselves, arguments against legislation that would curtail them. Tiered legal systems, such as those with constitutional procedure restrictions, exert force through their restrictions on policies and action bundles, not through any alteration to the consequence value function.
This confusion is felt throughout contemporary government systems, in which the policy goal itself is often erroneously defined down in scope to meet available resources. When government sets about to address some social issue, such as poverty, it is best to declare the total level of need, prior to the determination of how much of that need can be addressed. In this way, it is easy to evaluate the policy trade-offs of providing more resources to a given program.
As mentioned above, many aspects of government are informal. The Government in the United States has a responsibility - just as sacred as its guarantee of freedom of the press - to ensure that mass starvation does not occur. However, this responsibility is left entirely to privately operating farmers, with some level of regulation. Such arrangements are typical for many sectors of the US economy. When such a sector is confronted by its own inadequacy according to some policy goal such as an unmet level of need, the Government has more than simply the right to intervene in that sector of the private market, but an obligation to do so. These "private markets" are merely delegations of control by government, to achieve policy goals of that government in an efficient manner.
The history of economic consensus in the academic discipline is entirely radical in nature. Those who are convinced that the free market is superior are, by and large, relying on ridiculous metrics. In actuality, the radical position has won not through demonstration of superior benefit, but through the disproof of fantastical harms arising from proposed types of market intervention by government. For instance, were the government to provide 1000 meals for the needy, it would be the duty of the opponent of such a policy to argue that moral equivalent of more than 1000 hungry mouths will be deprived through such an action. The same holds true for all manner of comparable criteria or interrelations of different values. Those that fear nebulous reductions of efficiency or freedom through such a trade off are guilty of a certain kind of vanity, the roots of which can probably be traced to dystopian novels.
By directing an agency to limit services through revisions of the very definition of need is to obfuscate the very goal that justifies the existence of that agency. The goals of Government should be to meet everyone's basic needs, to have no unpleasant labor, to provide for the safety of all, to ensure the total preservation of the environment, to further education among all members of society, etc. This is the only way to see the trade offs behind policy proposals for what they truly are. To decry such metrics as Utopian is simply an admission of a lack of understanding of the process of thought itself. To argue that taxation is theft is to invite ridicule. To say that the Government cannot afford to provide a service is merely to say that this service is on the margin and therefore the least important of all things on which money is currently being spent in the entirety of the society, a situation that almost never occurs in substantive policy discussions.
For sake of clarity, I'll now describe a few of the most effective policies for our current malaise.
1) Curtailment of the workweek. This policy is effective for reducing unemployment. Reduction to the workweek creates an incentive for employers to increase the number of employees. This of course represents a loss of income to existing workers, but it reduces the unemployment rate. Clearly it is better to have jobs for those without them than to have more money for those who already have jobs, so from an ethical standpoint this is an excellent policy. Furthermore, when France reduced its workweek, it actually had the effect of reducing the budget deficit as well, because it took so many people off of the unemployment rolls.
2) Lowering (not raising) the retirement age. Many, many individuals who are currently working in their 60s should be allowed to retire with the full benefits. A significant portion of these people have spent much more than 25 years of their lives working. Not only do they deserve a break, but younger people deserve to take the reins. Such a policy will help to alleviate so many social problems, it is really a shame that congress cannot find the money for such a program.
3) Free State undergraduate college with equivalent vouchers for private institutions. Once again, the crippling effect that the buildup of college debt has had on consumer spending and the quality of life of younger Americans should justify the creation of a free college system. The money for it could come from rich.
When a politician argues that there is no funding left in the budget, he does not realize the meanings of what he speaks. When he speaks to the populace, both speaker and audience proceed under the medieval notion that money is so tight that none is left to go around, that all of society is going without any luxury, that outcomes cannot be improved. None of these individuals know the first shred of economics. Their pride will not allow them to admit this when pressed, but in the end they cannot escape their own unclear train of thought. How else is such deference toward wealth in the face of chronic poverty to be explained?
Sunday, November 8, 2009
Expectation theory and the ethics of exchange
In his General Theory of Employment, Money and Interest (Harcourt & Brace, 1964), Keynes described the relationship between the actions of market actors, taken based on their knowledge of nominal data and ability to reason rationally, and the economic results of these actions, as being mediated by a system of expectations. The expectation represents the inevitable planning process that any actor must engage in some time before the market transactions themselves, thus allowing for uncertainty to be represented as the market's deviation from these expectations.
Properly speaking, Keynes distinguishes between "short term", dealing with the degree of utilization of existing capital, and "long term", dealing with the purchase or development of new capital (p 47). These terms can at times be misleading - a "short term" expectation can take quite a while to be realized. When evaluated in a purely rational way, long term expectations are almost always based on knowledge that is "very slight and often negligible" (p 149).
In my experience of the typical attitudes that individuals take toward economic realities, among the many unexamined vistas of everyday life, is the belief in some conceptual ethics of the exchange. It is typically assumed that the comparative value of that which each party acquires from the market in a given transaction gives a certain ethical character to that transaction. This ethical character is a function of six (3 pairs of 2) variables: some calculation of value of goods received by each party, an assessment of the character and social function of each party, and an assessment of the method by which the transaction was undertaken that describes a set of actions both parties should undertake. A transaction is generally ethical if it meets two criteria that are composed from these variables.
First, a transaction is either fair or unfair depending on whether what is exchanged is distributed in proper accord with the social function and character of the participants. This is the fairness criterion. For instance, society would typically frown on a million dollar gift to a convicted murderer. Similarly, society condemns the shortsightedness of its own collective past, when great men such as Van Gogh and Poe were forced to live in poverty, this being the result of market failures whereby their genius went unrecognized and unrewarded.
Secondly, a transaction is either proper or improper depending on whether the transaction itself is undertaken in accordance with agreed upon rituals and methodologies. This is the propriety criterion. These rituals and methods are practically designed to ensure that formal (legal) and informal (customary) rules of procedure are followed. Generally, these are justified through a philosophic appeal to principles such as rights, duties, and virtues, but for numerous reasons it is probably better to treat the propriety criterion as a cultural object rather than a philosophic absolute. Most participants do not have a rigorous or conscious formulation of these principles and the realization of such principles depends on arbitrary rituals designed to prevent all manner of trickery. An example of an improper transaction that is otherwise fair might be a starving person stealing bread from a supermarket that throws some quantity of unsold bread loaves away at the end of each day. The propriety of economic transactions is an interesting matter, but I will not take it up further in this essay.
Though the analysis so far has already delved far beyond what the typical person thinks in conscious ethical evaluation, I feel that this captures the essence of what the typical person thinks intuitively when making ethical evaluations. Typically, when a person is asked to give reasons for their judgment, it will fall into one of these two criteria, based on the variables given. That my assessment is complete and accurate is of critical importance because I must now critique this system and draw a criticism of economic metrics from it; thus any weakness in the above will bias the conclusion.
Expectation in fact plays a crucial role in the formation of these ethical attitudes about our economic life. Speaking in general and imprecise terms, all accumulations of wealth (credits) are the result of agreements that goods and services will be provided to the wealth holders at some later date. Similarly, accumulations of debt are agreements that goods and services will be provided by the debtors at some later date. Here, I am not using these two terms in the exact conventional sense because even transactions taken in positive money terms can have these factors present. This might seem counter intuitive, but I will show that credit and debt as commonly understood - contracts between individuals with explicit terms - is in fact just one of many credit-debt arrangements that exist in the typical economy. Since most transactions in an economy feature money as one of the goods exchanged, and because goods-for-goods exchange is a less interesting case than goods-for-money, from this point forward the essay will focus on goods-for-money exchanges. The fairness of a transaction is determined by the expectation of future value of the goods produced or acquired relative to the future value of money received in exchange. Generally, when a person receives money as part of an agreement, he expects that money to have a certain value; however, nobody is bound to honor that money at the given value at the future date of spending.
This whole idea, rather labyrinthine in nature, can be illustrated by a thought experiment that shows two things: 1) that the quantity of a currency does influence its value; 2) that natural ethical assumptions cannot be separated from economic realities.
Suppose the economy features just two individuals, person A and person B. They have an economy of sorts where person A gives pieces of scrip to person B in exchange for goods (G) provided by person B. Without G, these individuals will starve; person B, in addition to offering some of these goods up for trade, produces enough G for himself. Given that person A has quantity Q of scrip, what price, in scrip, should person B demand in exchange for G?
In part, this thought experiment depends on the history of the economy. If, for instance, person A accumulated this scrip from person B over a period of 10 years prior to the start of the thought experiment through a reversal of the current roles, one might wish to set the payment such that it will take another 10 years for the scrip to be exhausted. Alternatively, suppose that person A accumulated this scrip while caring for a sick and dying person C. But now that person C has passed away, is it morally acceptable for person A to receive nothing in exchange for his efforts? In any case, the number of units of scrip is insignificant; only the portion of Q demanded counts.
This experiment is essentially ethical in nature. There is no other way to resolve the system except ethically. In fact, the scrip (money) only has value as an ethical tool to track (account for) the relative economic contributions of the participants. The social status and character of the individuals is significant. Supposing person A is Hitler, maybe it is best to let him starve (I can't believe I just said this)? Typically, though, it is clearly wrong to exclude person A on the basis that "scrip is arbitrary and worthless". From this, I deduce that person A has a economic right to participate. In time period zero, he must receive G for scrip even if scrip is worthless and he is expected to bootstrap tomorrow. Assuming that there is no other production source for G than what is controlled by B, it seems there is no option but to allow A to share access to the production source.
An economy with more that two people is really no different from this one. It only appears different because there is a proliferation of goods and people, creating many alternatives for each possible situation, and making the calculation of fairness more complex. Essentially, though, the situation remains that every type of money (scrip), gets its value from the desire of others to labor in order to obtain it. Furthermore, the dictates of fairness can compel a person to adjust their habits: spend more or less, labor more or less, or ask for a different wage. It falls upon the government to ensure that these adjustments take place, because having a large economy does not ensure that a fair market comes about.
Before continuing, it is worth describing labor as it is used here, and what its product is for those involved. Typically, the laborer produces some good for a customer and receives a wage in nominal money. This money is usually converted immediately to goods that cover the cost of living of the laborer and his family. Thus, the laborer works with an expectation of the value of his wage. The wage is only valuable insofar as it is capable of being exchanged for the goods that the laborer expects to purchase. But the laborer cannot do any more than expect that he will be able to use his surplus in this fashion because he has negligible control over the availability of goods and their prices.
Rather than being an endless bounty of goods at smoothly increasing prices, the market is truly a discrete bundle of goods, the composition of which is relatively inflexible at any specific time. Over a series of expectation periods, the market adjusts in a fashion that can be described as "supply and demand" but within any given period, supply cannot adjust production levels at all. A manager may increase prices on a suddenly popular item in an effort to capture more profits, but he cannot magically make his factory larger. The typical arrangement is for only a portion of the total money to come to market at any given time period and exchange for the total quantity of new production. Though all dollars up to the spending threshold are worth a given amount, each dollar beyond that is only expected to have some value for future consumption. The actual value of this currency cannot be included in the current calculations of credit and debit because for the vast majority of this money it is really not possible for it to be spent - current production levels cannot absorb it and thus it is worthless in the current period. This is of tantamount importance for the nominal credits accumulated by workers. If, for instance, every worker had some credit and decided simultaneously to use their credits as substitutes for work, these credits would be worthless because only other laborers could complete that work. But we know that there must be a credit-debt pair created for each wage unit, or that wage unit is worthless, and the typical expectation is that it is not. The quantity of wages given out in the economy is very large, and there is no coordinated effort to ensure that all of this accounting balances out; faith is placed instead in the market.
Therefore, in the creation of both credits and debts there is typically the absence of systematic agreements as to when these services will be rendered, principally because the majority of savings will continue to be saved, allowing for smooth changes in consumption that the production level can adjust to. Furthermore, there is usually the absence of the explicit statement of conjunction: if a person is said to have credit, someone else must have debt. This is truly a statement of expectation, since the imprecise nature of credit and debt mean that individuals are both 1) looking at personal future consumption and labor rather than the present; and 2) depending on economic conditions to allow them to either acquire a sufficient level of goods or provide a sufficient level of labor value.
Note also that in order for this system to maintain clarity, credit and debt must pass through and cancel out. Pass through describes the notion that when A, who has a unit of credit from B, acquires a unit of debt to C, that unit of credit passes to C, such that now B has a unit of debt to C. Cancel out means that if as a result of pass through a person can be said to owe to himself, that unit of debt is canceled. The important corollary here is that at any given time, debtors only owe creditors.
Note also that individuals have a psychological drive to accumulate money to a certain point. This is due to the desire to have economic status, security, and provide for retirement. I shall call this the threshold of comfort. In one sense, it is wrong for people to be uncomfortable, but in the way it is used here it means only that the individual has an active drive to earn money in excess of what he spends.
The most counter-intuitive aspect of this model is the existence of these credit-debt pairs in an economy where all the members may hold positive quantities of money. In order to understand this, suppose that the money system was one that depended in the vast majority of transactions on specie - literal coins or paper money - rather than checks, bills of exchange, etc. Furthermore, assume that the quantity of this specie is constant. Even in this system, the "effective" supply of money is not constant. The velocity of the money (the rate it moves through the economy) will determine the incomes of each member and their consumption level. However, in this system, the only way to save any money is to remove it from circulation. Thus, any individuals who are creditors in this system will have accumulated currency beyond their threshold of comfort, and any individuals who are debtors will have injected currency into the system from their initial store of currency beyond their point of comfort, or who started at a low level and have not yet reached an acceptable level of comfort. Because the initial state of the system features a positive quantity of money, and because this money is associated with individuals, the credit-debt system reflects changes in specie level from some initial position. The quantities of specie held by each person gain their value from the existence of individuals willing to work to earn that specie. In order for this to occur, some individuals must be below their threshold of comfort.
Rather than further diverging into a complex discussion of money, it is probably best to simply summarize the way this is represented in more typical money markets. Since money supply is increasing steadily in most economies, money is somewhat easier to acquire. Therefore many people feel they are better off. This does good things for psychological reasons, and it prevents the economic harms that result from too little or too much savings.
There are two general situations which fail the fairness criterion that individuals may freely achieve through an unregulated market.
The first is overaccumulation, the acquisition of an unusually large amount of savings by a portion of the population. Though conditions vary from one economy to another, there is always a threshold beyond which the mere accumulation of wealth by one group will hurt other groups. As individuals become involved in market activity, they essentially enter into agreements that whatever debts are created can be paid back. Unbounded accumulation is a tacit violation of this agreement. Recall that as shown above, credit must correspond to debt, and debt can only be paid off through exchange of the products of labor for wealth. Thus, the "free market" as a social structure allows individuals to shirk their responsibility to allow others to participate.
The second is the debt trap, as seen everywhere in America these days. In this situation, a group of individuals end up acquiring literal debts and are then denied the participation opportunities that would allow them to pay down these debts. Those who have truly been wronged are those who expected to be able to pay these debts off, but either through misunderstanding of the terms of debt acquisition or through a lack of economic opportunity found that their expectations were wrong. This situation risks moral hazard for social policies that might be designed to correct it, because some people could truly be irresponsible about this, but not attempting to address the issue seems like throwing the baby out with the bath water.
The call for regulation then follows along several strands:
It is not merely enough to ensure that a person is adequately compensated for his labor today. It is necessary to also ensure that the economic state tomorrow is such that he will receive his due when he spends what he has earned. In particular, he wants to be able to live comfortably off of his earnings at a time when he can no longer work. For this reason, a system like social security is brilliant. It would be impossible, following from the uncertain nature of nominal accounts, to ensure that future prices and production levels will be sufficient to allow a person to live off of his savings in retirement, regardless of the arbitrary savings level that is designated "sufficient". In a more general sense, the government is responsible for ensuring that the economy maintains some level of stability, and everyone expects the economy to be stable.
Taxation and wealth redistribution seem like the most straightforward alternatives by which individuals can be pulled out of debt traps and pushed down from positions of overaccumulation. Taxes on total assets are the best kind. It is not how much a person earns in any given period that mark them as overaccumulative, but their total position. Furthermore, many individuals are involved in economic schemes that depend on high wealth levels to secure unreasonable incomes. In keeping with the credit-debt theory, such schemes are nothing but impoverishments for everyone else. Aside from the necessary financial regulations, the best way to diffuse such schemes is to use wealth taxes to counteract such accumulations.
It seems that our economic reality ought be determined almost completely by human psychology. To look at economic objects and ask "what kind of thing is this?", to pierce to the semantic veil, is to reveal that ultimately an economic rule is a description of a human psychological bias. There is no other way to describe the choices we make as part of our efforts to produce and distribute goods, and because of the arbitrary points of determination that the above model takes, it is one that accommodates, to a great degree, our particular desire for fairness that must not be denied. It is a truth that has confronted the philosopher.
Properly speaking, Keynes distinguishes between "short term", dealing with the degree of utilization of existing capital, and "long term", dealing with the purchase or development of new capital (p 47). These terms can at times be misleading - a "short term" expectation can take quite a while to be realized. When evaluated in a purely rational way, long term expectations are almost always based on knowledge that is "very slight and often negligible" (p 149).
In my experience of the typical attitudes that individuals take toward economic realities, among the many unexamined vistas of everyday life, is the belief in some conceptual ethics of the exchange. It is typically assumed that the comparative value of that which each party acquires from the market in a given transaction gives a certain ethical character to that transaction. This ethical character is a function of six (3 pairs of 2) variables: some calculation of value of goods received by each party, an assessment of the character and social function of each party, and an assessment of the method by which the transaction was undertaken that describes a set of actions both parties should undertake. A transaction is generally ethical if it meets two criteria that are composed from these variables.
First, a transaction is either fair or unfair depending on whether what is exchanged is distributed in proper accord with the social function and character of the participants. This is the fairness criterion. For instance, society would typically frown on a million dollar gift to a convicted murderer. Similarly, society condemns the shortsightedness of its own collective past, when great men such as Van Gogh and Poe were forced to live in poverty, this being the result of market failures whereby their genius went unrecognized and unrewarded.
Secondly, a transaction is either proper or improper depending on whether the transaction itself is undertaken in accordance with agreed upon rituals and methodologies. This is the propriety criterion. These rituals and methods are practically designed to ensure that formal (legal) and informal (customary) rules of procedure are followed. Generally, these are justified through a philosophic appeal to principles such as rights, duties, and virtues, but for numerous reasons it is probably better to treat the propriety criterion as a cultural object rather than a philosophic absolute. Most participants do not have a rigorous or conscious formulation of these principles and the realization of such principles depends on arbitrary rituals designed to prevent all manner of trickery. An example of an improper transaction that is otherwise fair might be a starving person stealing bread from a supermarket that throws some quantity of unsold bread loaves away at the end of each day. The propriety of economic transactions is an interesting matter, but I will not take it up further in this essay.
Though the analysis so far has already delved far beyond what the typical person thinks in conscious ethical evaluation, I feel that this captures the essence of what the typical person thinks intuitively when making ethical evaluations. Typically, when a person is asked to give reasons for their judgment, it will fall into one of these two criteria, based on the variables given. That my assessment is complete and accurate is of critical importance because I must now critique this system and draw a criticism of economic metrics from it; thus any weakness in the above will bias the conclusion.
Expectation in fact plays a crucial role in the formation of these ethical attitudes about our economic life. Speaking in general and imprecise terms, all accumulations of wealth (credits) are the result of agreements that goods and services will be provided to the wealth holders at some later date. Similarly, accumulations of debt are agreements that goods and services will be provided by the debtors at some later date. Here, I am not using these two terms in the exact conventional sense because even transactions taken in positive money terms can have these factors present. This might seem counter intuitive, but I will show that credit and debt as commonly understood - contracts between individuals with explicit terms - is in fact just one of many credit-debt arrangements that exist in the typical economy. Since most transactions in an economy feature money as one of the goods exchanged, and because goods-for-goods exchange is a less interesting case than goods-for-money, from this point forward the essay will focus on goods-for-money exchanges. The fairness of a transaction is determined by the expectation of future value of the goods produced or acquired relative to the future value of money received in exchange. Generally, when a person receives money as part of an agreement, he expects that money to have a certain value; however, nobody is bound to honor that money at the given value at the future date of spending.
This whole idea, rather labyrinthine in nature, can be illustrated by a thought experiment that shows two things: 1) that the quantity of a currency does influence its value; 2) that natural ethical assumptions cannot be separated from economic realities.
Suppose the economy features just two individuals, person A and person B. They have an economy of sorts where person A gives pieces of scrip to person B in exchange for goods (G) provided by person B. Without G, these individuals will starve; person B, in addition to offering some of these goods up for trade, produces enough G for himself. Given that person A has quantity Q of scrip, what price, in scrip, should person B demand in exchange for G?
In part, this thought experiment depends on the history of the economy. If, for instance, person A accumulated this scrip from person B over a period of 10 years prior to the start of the thought experiment through a reversal of the current roles, one might wish to set the payment such that it will take another 10 years for the scrip to be exhausted. Alternatively, suppose that person A accumulated this scrip while caring for a sick and dying person C. But now that person C has passed away, is it morally acceptable for person A to receive nothing in exchange for his efforts? In any case, the number of units of scrip is insignificant; only the portion of Q demanded counts.
This experiment is essentially ethical in nature. There is no other way to resolve the system except ethically. In fact, the scrip (money) only has value as an ethical tool to track (account for) the relative economic contributions of the participants. The social status and character of the individuals is significant. Supposing person A is Hitler, maybe it is best to let him starve (I can't believe I just said this)? Typically, though, it is clearly wrong to exclude person A on the basis that "scrip is arbitrary and worthless". From this, I deduce that person A has a economic right to participate. In time period zero, he must receive G for scrip even if scrip is worthless and he is expected to bootstrap tomorrow. Assuming that there is no other production source for G than what is controlled by B, it seems there is no option but to allow A to share access to the production source.
An economy with more that two people is really no different from this one. It only appears different because there is a proliferation of goods and people, creating many alternatives for each possible situation, and making the calculation of fairness more complex. Essentially, though, the situation remains that every type of money (scrip), gets its value from the desire of others to labor in order to obtain it. Furthermore, the dictates of fairness can compel a person to adjust their habits: spend more or less, labor more or less, or ask for a different wage. It falls upon the government to ensure that these adjustments take place, because having a large economy does not ensure that a fair market comes about.
Before continuing, it is worth describing labor as it is used here, and what its product is for those involved. Typically, the laborer produces some good for a customer and receives a wage in nominal money. This money is usually converted immediately to goods that cover the cost of living of the laborer and his family. Thus, the laborer works with an expectation of the value of his wage. The wage is only valuable insofar as it is capable of being exchanged for the goods that the laborer expects to purchase. But the laborer cannot do any more than expect that he will be able to use his surplus in this fashion because he has negligible control over the availability of goods and their prices.
Rather than being an endless bounty of goods at smoothly increasing prices, the market is truly a discrete bundle of goods, the composition of which is relatively inflexible at any specific time. Over a series of expectation periods, the market adjusts in a fashion that can be described as "supply and demand" but within any given period, supply cannot adjust production levels at all. A manager may increase prices on a suddenly popular item in an effort to capture more profits, but he cannot magically make his factory larger. The typical arrangement is for only a portion of the total money to come to market at any given time period and exchange for the total quantity of new production. Though all dollars up to the spending threshold are worth a given amount, each dollar beyond that is only expected to have some value for future consumption. The actual value of this currency cannot be included in the current calculations of credit and debit because for the vast majority of this money it is really not possible for it to be spent - current production levels cannot absorb it and thus it is worthless in the current period. This is of tantamount importance for the nominal credits accumulated by workers. If, for instance, every worker had some credit and decided simultaneously to use their credits as substitutes for work, these credits would be worthless because only other laborers could complete that work. But we know that there must be a credit-debt pair created for each wage unit, or that wage unit is worthless, and the typical expectation is that it is not. The quantity of wages given out in the economy is very large, and there is no coordinated effort to ensure that all of this accounting balances out; faith is placed instead in the market.
Therefore, in the creation of both credits and debts there is typically the absence of systematic agreements as to when these services will be rendered, principally because the majority of savings will continue to be saved, allowing for smooth changes in consumption that the production level can adjust to. Furthermore, there is usually the absence of the explicit statement of conjunction: if a person is said to have credit, someone else must have debt. This is truly a statement of expectation, since the imprecise nature of credit and debt mean that individuals are both 1) looking at personal future consumption and labor rather than the present; and 2) depending on economic conditions to allow them to either acquire a sufficient level of goods or provide a sufficient level of labor value.
Note also that in order for this system to maintain clarity, credit and debt must pass through and cancel out. Pass through describes the notion that when A, who has a unit of credit from B, acquires a unit of debt to C, that unit of credit passes to C, such that now B has a unit of debt to C. Cancel out means that if as a result of pass through a person can be said to owe to himself, that unit of debt is canceled. The important corollary here is that at any given time, debtors only owe creditors.
Note also that individuals have a psychological drive to accumulate money to a certain point. This is due to the desire to have economic status, security, and provide for retirement. I shall call this the threshold of comfort. In one sense, it is wrong for people to be uncomfortable, but in the way it is used here it means only that the individual has an active drive to earn money in excess of what he spends.
The most counter-intuitive aspect of this model is the existence of these credit-debt pairs in an economy where all the members may hold positive quantities of money. In order to understand this, suppose that the money system was one that depended in the vast majority of transactions on specie - literal coins or paper money - rather than checks, bills of exchange, etc. Furthermore, assume that the quantity of this specie is constant. Even in this system, the "effective" supply of money is not constant. The velocity of the money (the rate it moves through the economy) will determine the incomes of each member and their consumption level. However, in this system, the only way to save any money is to remove it from circulation. Thus, any individuals who are creditors in this system will have accumulated currency beyond their threshold of comfort, and any individuals who are debtors will have injected currency into the system from their initial store of currency beyond their point of comfort, or who started at a low level and have not yet reached an acceptable level of comfort. Because the initial state of the system features a positive quantity of money, and because this money is associated with individuals, the credit-debt system reflects changes in specie level from some initial position. The quantities of specie held by each person gain their value from the existence of individuals willing to work to earn that specie. In order for this to occur, some individuals must be below their threshold of comfort.
Rather than further diverging into a complex discussion of money, it is probably best to simply summarize the way this is represented in more typical money markets. Since money supply is increasing steadily in most economies, money is somewhat easier to acquire. Therefore many people feel they are better off. This does good things for psychological reasons, and it prevents the economic harms that result from too little or too much savings.
There are two general situations which fail the fairness criterion that individuals may freely achieve through an unregulated market.
The first is overaccumulation, the acquisition of an unusually large amount of savings by a portion of the population. Though conditions vary from one economy to another, there is always a threshold beyond which the mere accumulation of wealth by one group will hurt other groups. As individuals become involved in market activity, they essentially enter into agreements that whatever debts are created can be paid back. Unbounded accumulation is a tacit violation of this agreement. Recall that as shown above, credit must correspond to debt, and debt can only be paid off through exchange of the products of labor for wealth. Thus, the "free market" as a social structure allows individuals to shirk their responsibility to allow others to participate.
The second is the debt trap, as seen everywhere in America these days. In this situation, a group of individuals end up acquiring literal debts and are then denied the participation opportunities that would allow them to pay down these debts. Those who have truly been wronged are those who expected to be able to pay these debts off, but either through misunderstanding of the terms of debt acquisition or through a lack of economic opportunity found that their expectations were wrong. This situation risks moral hazard for social policies that might be designed to correct it, because some people could truly be irresponsible about this, but not attempting to address the issue seems like throwing the baby out with the bath water.
The call for regulation then follows along several strands:
It is not merely enough to ensure that a person is adequately compensated for his labor today. It is necessary to also ensure that the economic state tomorrow is such that he will receive his due when he spends what he has earned. In particular, he wants to be able to live comfortably off of his earnings at a time when he can no longer work. For this reason, a system like social security is brilliant. It would be impossible, following from the uncertain nature of nominal accounts, to ensure that future prices and production levels will be sufficient to allow a person to live off of his savings in retirement, regardless of the arbitrary savings level that is designated "sufficient". In a more general sense, the government is responsible for ensuring that the economy maintains some level of stability, and everyone expects the economy to be stable.
Taxation and wealth redistribution seem like the most straightforward alternatives by which individuals can be pulled out of debt traps and pushed down from positions of overaccumulation. Taxes on total assets are the best kind. It is not how much a person earns in any given period that mark them as overaccumulative, but their total position. Furthermore, many individuals are involved in economic schemes that depend on high wealth levels to secure unreasonable incomes. In keeping with the credit-debt theory, such schemes are nothing but impoverishments for everyone else. Aside from the necessary financial regulations, the best way to diffuse such schemes is to use wealth taxes to counteract such accumulations.
It seems that our economic reality ought be determined almost completely by human psychology. To look at economic objects and ask "what kind of thing is this?", to pierce to the semantic veil, is to reveal that ultimately an economic rule is a description of a human psychological bias. There is no other way to describe the choices we make as part of our efforts to produce and distribute goods, and because of the arbitrary points of determination that the above model takes, it is one that accommodates, to a great degree, our particular desire for fairness that must not be denied. It is a truth that has confronted the philosopher.
Friday, October 16, 2009
Plutonomy, and the bliss cycle
This morning, Economist Andrew Jackson posted to the Progressive Economic Forum a brief article about the idea of Plutonomy. This is defined as an increase in spending resulting from extreme concentration of wealth.
He writes:
Jackson goes on to argue that it is the Keynesian view (n.b - It isn't really something Keynes thought up but an older idea) that the savings rate increases with wealth, and that the low savings rate of countries with high wealth stratification (US, UK, Canada) "would seem to be at odds" with this. He then asks:
There is no contradiction here between the savings theory and the low rate of savings in stratified economies. A careful assessment of the definitions involved reveals that the entire discussion is one of apples and oranges. The theory of savings is not a relative income theory. It does not argue that those who are at the top save more by virtue of their position, but rather by their income relative to the cost of living. Thus, measuring stratification alone does not provide an argument for some level of savings. Aggregate consumption can increase without reducing savings in aggregate, so long as all the new consumption comes from economic growth. The same holds true for aggregate savings, and for decreases in consumption or savings during recession. The savings rate may change while holding one of the variables fixed.
In particular, this is relevant in the USA, where real wages have been on the decline. If we posit a cost of living in the United States that has gone up moderately over the decades, and then concentrate all the gains in GDP in the hands of the few, it becomes clear how the average savings level can decline. The increased savings of the relatively small class of the wealthy could very easily be eclipsed by the decreased savings of the very large class who are now saving much less due to declining real income.
No modern theory argues that savings habits are uniquely determined by income. There are always a variety of factors. Government inducements to save (such as tax credits or penalties), lending and investment regulations, cultural attitudes, market conditions, etc. all play a part in determining the savings rate of a society. These factors are not uniform either - they can be different for the wealthy than the poor. The U.S. has particular inducements to invest, reinvest, purchase property, etc. written all over in its tax code, so it is logical to see a lower level of savings here. Also, these three nations are toward the more capitalist end of the economic spectrum when compared to other westernized nations, adding another factor of differentiation: savings is also a function of economic security, which is arguably in a long term crisis in these countries (savings is a rate, thus it is more strongly correlated with gains in economic security and vice versa due to fewer social safety nets in more laissez-faire economies).
There is also the question of what constitutes savings - it seems that a proper definition of savings will include long term appreciating assets purchased with loans as savings. A middle class person's house is that person's net worth. (S)he is clearly saving by paying money toward the home loan. But, when measuring consumer debt and savings rates, mortgage debt counts against savings.
So, from an experimental/empirical perspective the problems of measurement make the question difficult to answer given the typical methods of economic measurement. It is not so much that these measurements are inadequate, but that they are conceived from a perspective that is too limited in time, context, and incidental economic conditions. Thus, the methods of measure fail to achieve the universality that is necessary for them to be used for analysis outside of the evidence from which they were conceived. They are objects which only exist "in situ" but depend too much on unexamined assumptions to ever exist as general metrics. This is itself evidence of the limits that our naive doxic modalities place on the development of nondynamic social sciences. We suffer acutely from this in the United States because our idea of tradition in the political sphere is skeptical and static.
The question, of course, can still be answered in a theoretical sense even when the facts are elusive. Unfortunately this theoretical issue requires a critique of the concept of productivity that illustrates the economic trade-offs that technology poses. The final result of the critique will show that productivity gains cannot be expected to drive economic growth beyond a certain threshold. For sake of brevity, I will not include natural resource limitations or negative externalities like pollution or anomie. When general economic growth stops, the owners of the firms will continue to grow their own incomes through the same process of productivity increase, only now the result is no longer positive for the economy as a whole, meaning a period of stratification begins. Eventually the owners will also begin to lose money, and a period of random behavior follows. Hyper-income inequality only occurs during these last two periods, and it is relieved only by programs of wealth redistribution or failures of massive asset classes owned by the wealthy. The consumption and spending behavior of the masses during these two periods depends on the presence and efficacy of various social programs. The implication of hyper-income inequality to aggregate consumption and savings patterns is therefore not causative, but rather a symptomatic relationship.
Since income is a portion of the value of production, with the total income equal to total cost, the principal question of income distribution seems to be the distribution of the income from each unit sold. The individual cannot maintain the same level of income at the same level of productivity if his share of the unit price declines. From a single-firm perspective, the individuals employed may still have increasing incomes so long as the gains from increased productivity are distributed between workers and owners. The lot of the many does not improve when productivity gains are not matched by incremental increases in wages. Prices may fall, but price decreases cannot make up the difference beyond small shifts. A person's bills, rent and car payment will not decrease, nor can services not subject to productivity gains become more affordable. A steady increase of wages in parity with productivity gains is appealing, in part because it satisfies the basic definition of sharing that we learn in Kindergarten.
However, if one analyzes productivity gains from a macroeconomic perspective, this amelioration proves insufficient. Assume a market that perfectly clears. Now, consider that one additional good is produced in that market through a productivity gain. This event must necessarily lead to one of three changes:
To a certain degree, we are assuming that the gains in productivity are shared with the workers. This implies that the additional profits from production will produce a demand stimulus. However, this demand stimulus is limited to less than the revenue gain of the firm (because the remainder of increased revenue must go toward the owner). This quantity is also reduced by any decreases in price. The demand stimulus is therefore always insufficient to absorb the higher quantity of goods - therefore savings decrease and/or other parts of the market experience reduced sales.
Through various mechanisms the profits of the owner become investments into industry. The degree to which these new investments become sources of economic growth depends on the existence of new or possible industries which would compete favorably for consumer dollars with the existing industry. For our purposes, these industries pay wages but do not produce any competing goods yet - they are "start ups". In combination with the other sources of stimulus thus far, we have an equation (in dollars):
Increase in wages + reductions in savings + reductions in sales of other goods + wages from new industry = increase in sales of a given good.
Here I will posit a few constraints in the form of bliss points toward which consumers trend. Consumers have a "variety of goods" bliss point which determines the degree to which new industries will eventually succeed. Consumers have a "total goods" bliss point which determines that eventually the equation trends toward "Reductions in sales of other goods = Increase in sales of a given good", i.e. good substitution. When wages increase, increases tend to affect less than the entire workforce, and so create increases in savings that in turn cause a drag on sales increases. So long as the entirety of productivity gains express themselves through wage increases and new industries, these constraints will eventually come into full effect.
The corresponding situation when sales of a given good are not increasing is given by the same equation. We simply set the right side to zero or a negative. In this situation, gains in productivity lead only to decreases in the total labor utilized on a particular good, and possibly increases in other goods production, wages from new industry, or savings.
Eventually, however, the aggregate of all of these markets for particular goods will "zero out" (with balanced levels of increase and decrease typical of any equilibrium situation). Thus, economic growth is culturally limited by the bliss points - the accepted level and variety of consumption within the society. Therefore, the transformation toward a consumer culture is necessary as part of the package of long term economic growth. However, such a culture is not necessarily a more pleasant one to live in; and it is likely that there is a limit to any possible bliss point in terms of quantity and variety. Thus, the first stage of "growth" comes to an end.
The onset of stagnation gives rise to (and is accelerated by) the accumulation of wealth by the richest classes. Wealth becomes concentrated at the stagnation point because from this point forward, productivity gains lead to no further economic growth, and thus there is no sales growth to divide between worker and owner. The entirety of the productivity gain is thus expressed through the cost saving, i.e. the reduction in labor utilization. Thus, the productivity gain leads only to profits. These profits will see limited expression through new goods that have narrow or nonexistent profit windows. This is the second stage, the "stagnation" period.
This can only occur if the tax rates on the wealthiest classes actually permit the unlimited concentration of wealth. Where tax rates are progressive, they can slow this process, but can't really halt it. Only where there is no incentive whatsoever to acquire wealth beyond a certain point (either a 100% threshold on income tax or a wealth tax that creates an effective maximum wealth) will this process not occur.
In any event, the lack of meaningful investment opportunities for the newly accumulated profits leads the wealthy to behave erratically after some time has passed within the stagnation period. All manner of investment schemes will be invented in the vain hope of providing some means of profit. A stiff competition will arise that drives competitors to many tricks in an effort to gain advantages over each other without resorting to the horrors of the price war. This is the "erratic" stage.
In most economic situations (and I am still speaking theoretically here, even though this is virtually a statement of obvious fact), the system of competition is not perfect or "pure". Typically, the producers have a certain degree of agreement between each other on production levels. A complex system of laws always accompanies economies for the purpose of enforcing against unfair trade practices and other abuses. Systems also exist to protect workers and consumers. The economy is therefore managed synthetically or "by design". During the worst of times, blame is passed around like a hot potato and it is no wonder that systems of prediction break down - they were based on what politicians, corporations, and other power players wanted people to believe but they were never the whole truth. Of course, the people involved in these simplifications do not have a total awareness of what they have done, and so are somewhat helpless when real objectivity is needed. Ergo, amok.
At this juncture the various economic stages can be expressed as the growth stage, the stagnation stage, and the erratic stage. The cycle is allowed to repeat as a new generation rises up with a new set of consumerist indoctrinations, allowing the entire system to achieve a higher degree of consumption. It is not a business cycle, but a bliss cycle. The driving factor is the revolution in consumer purchasing patters enabled by the development of higher degrees of dependence on material objects for quality of life. In particular, the ideas that are lost in this material transformation are self-sufficiency, charisma, and spirituality. It is also worth noting that as these things develop, new levels of productivity are realized, creating "better" goods than what was available before. But are they really "better"?
The loss of self-sufficiency is the loss of knowledge and skill in daily crafts, routines, and handiwork, and the dependence on various material objects that cannot be readily produced by the individual or immediate community. The person becomes dependent on distant parts of the economy for his very existence. A person cannot survive in much of America without a car, and this dependence on automobiles ensures a much higher level of total economic output than what we would otherwise have. But the individual cannot produce his own food, clothing, grooming products, bedding, housing, or virtually any other thing in the modern economy. Therefore, these must all be purchased. This is a major source of growth.
The loss of charisma is the loss of the appreciation of other humans in our daily lives. It is the loss of free or inexpensive means of entertainment rooted in the appreciation of the beauty of other humans. Storytelling is replaced by live theater. Live theater is replaced by books, radio, eventually movies and television. Even the idea of beauty is replaced: it is no longer a particular girl or boy in the village, town, or city, but the digitally retouched famous person. Ideas discussed between individuals are instead only read about (and ultimately become politically irrelevant) because now individuals perceive each other as being stupid or ignorant in comparison with the polished and vetted non-fiction media that is marketed to every demographic. A person cannot be free without drugs or alcohol. A person cannot make love without condoms, birth control, batteries of tests, their own apartment, fantasies, etc. And there is no time for (annoying) children in the careers of busy professionals. This includes what one might think of as mass media, but it is not caused by any particular actor or institution.
When speaking of a loss of spirituality, it is easy to step on toes. So I will be brief in this regard: the way that people live today is one in which they are utterly unaware of their own effect on the world and are disinvested from their own feeling of potency. So long as the individual depends on external, market sources for self esteem, he is hopelessly committed to spending.
These transformations are brought about through the collective effect of the marketing efforts of the producers of the various products that become integrated into our material existence. The individual marketing firms use advertising, product placements, promotions, salesmen, etc. to increase sales of their particular products, but the collective effect is the transformation of social values and norms and the increased susceptibility of the general populace to any and all new products or technologies. Utilizing hooks that draw the individual into the belief that the purchase is necessary is the essential means by which the prospect is turned into the sale. In so doing, the marketing force constantly convinces the individual of his or her own insufficiency.
In connection with the thesis proper, the very presence of hyper-stratification is evidence of economic mismanagement. It only occurs through the accumulation of wealth by the richest for which no similar accumulation occurs in other classes. It takes a unique political sphere for this to even come about. Welcome to America.
He writes:
The core of the argument is that countries which have shown an extreme concentration of income and wealth at the very top of the distribution - the US, Canada and the UK are the examples - also have, as a result, very low national savings rates.The Citigroup report itself argues that it is high spending by the wealthiest that drives this low savings rate, as the wealthiest acquire larger debts to support their lifestyles. But Jackson cites economic studies that seem to contradict this: A Goldman Sachs (why is this the best sauce?) report that the wealthiest actually have an 11% savings rate (while the Average American doesn't have a positive savings rate).
Jackson goes on to argue that it is the Keynesian view (n.b - It isn't really something Keynes thought up but an older idea) that the savings rate increases with wealth, and that the low savings rate of countries with high wealth stratification (US, UK, Canada) "would seem to be at odds" with this. He then asks:
So the question is - what are the implications of hyper income inequality for aggregate consumption and savings?By way of answering this question, a discussion of measurements and implications is warranted before discussion of broader theoretical questions.
There is no contradiction here between the savings theory and the low rate of savings in stratified economies. A careful assessment of the definitions involved reveals that the entire discussion is one of apples and oranges. The theory of savings is not a relative income theory. It does not argue that those who are at the top save more by virtue of their position, but rather by their income relative to the cost of living. Thus, measuring stratification alone does not provide an argument for some level of savings. Aggregate consumption can increase without reducing savings in aggregate, so long as all the new consumption comes from economic growth. The same holds true for aggregate savings, and for decreases in consumption or savings during recession. The savings rate may change while holding one of the variables fixed.
In particular, this is relevant in the USA, where real wages have been on the decline. If we posit a cost of living in the United States that has gone up moderately over the decades, and then concentrate all the gains in GDP in the hands of the few, it becomes clear how the average savings level can decline. The increased savings of the relatively small class of the wealthy could very easily be eclipsed by the decreased savings of the very large class who are now saving much less due to declining real income.
No modern theory argues that savings habits are uniquely determined by income. There are always a variety of factors. Government inducements to save (such as tax credits or penalties), lending and investment regulations, cultural attitudes, market conditions, etc. all play a part in determining the savings rate of a society. These factors are not uniform either - they can be different for the wealthy than the poor. The U.S. has particular inducements to invest, reinvest, purchase property, etc. written all over in its tax code, so it is logical to see a lower level of savings here. Also, these three nations are toward the more capitalist end of the economic spectrum when compared to other westernized nations, adding another factor of differentiation: savings is also a function of economic security, which is arguably in a long term crisis in these countries (savings is a rate, thus it is more strongly correlated with gains in economic security and vice versa due to fewer social safety nets in more laissez-faire economies).
There is also the question of what constitutes savings - it seems that a proper definition of savings will include long term appreciating assets purchased with loans as savings. A middle class person's house is that person's net worth. (S)he is clearly saving by paying money toward the home loan. But, when measuring consumer debt and savings rates, mortgage debt counts against savings.
So, from an experimental/empirical perspective the problems of measurement make the question difficult to answer given the typical methods of economic measurement. It is not so much that these measurements are inadequate, but that they are conceived from a perspective that is too limited in time, context, and incidental economic conditions. Thus, the methods of measure fail to achieve the universality that is necessary for them to be used for analysis outside of the evidence from which they were conceived. They are objects which only exist "in situ" but depend too much on unexamined assumptions to ever exist as general metrics. This is itself evidence of the limits that our naive doxic modalities place on the development of nondynamic social sciences. We suffer acutely from this in the United States because our idea of tradition in the political sphere is skeptical and static.
The question, of course, can still be answered in a theoretical sense even when the facts are elusive. Unfortunately this theoretical issue requires a critique of the concept of productivity that illustrates the economic trade-offs that technology poses. The final result of the critique will show that productivity gains cannot be expected to drive economic growth beyond a certain threshold. For sake of brevity, I will not include natural resource limitations or negative externalities like pollution or anomie. When general economic growth stops, the owners of the firms will continue to grow their own incomes through the same process of productivity increase, only now the result is no longer positive for the economy as a whole, meaning a period of stratification begins. Eventually the owners will also begin to lose money, and a period of random behavior follows. Hyper-income inequality only occurs during these last two periods, and it is relieved only by programs of wealth redistribution or failures of massive asset classes owned by the wealthy. The consumption and spending behavior of the masses during these two periods depends on the presence and efficacy of various social programs. The implication of hyper-income inequality to aggregate consumption and savings patterns is therefore not causative, but rather a symptomatic relationship.
Since income is a portion of the value of production, with the total income equal to total cost, the principal question of income distribution seems to be the distribution of the income from each unit sold. The individual cannot maintain the same level of income at the same level of productivity if his share of the unit price declines. From a single-firm perspective, the individuals employed may still have increasing incomes so long as the gains from increased productivity are distributed between workers and owners. The lot of the many does not improve when productivity gains are not matched by incremental increases in wages. Prices may fall, but price decreases cannot make up the difference beyond small shifts. A person's bills, rent and car payment will not decrease, nor can services not subject to productivity gains become more affordable. A steady increase of wages in parity with productivity gains is appealing, in part because it satisfies the basic definition of sharing that we learn in Kindergarten.
However, if one analyzes productivity gains from a macroeconomic perspective, this amelioration proves insufficient. Assume a market that perfectly clears. Now, consider that one additional good is produced in that market through a productivity gain. This event must necessarily lead to one of three changes:
- The good is sold at listed price and so aggregate savings decrease.
- Prices decrease, stimulating demand to sell that one additional good.
- The good goes unsold (or is expected to not sell and therefore never produced).
To a certain degree, we are assuming that the gains in productivity are shared with the workers. This implies that the additional profits from production will produce a demand stimulus. However, this demand stimulus is limited to less than the revenue gain of the firm (because the remainder of increased revenue must go toward the owner). This quantity is also reduced by any decreases in price. The demand stimulus is therefore always insufficient to absorb the higher quantity of goods - therefore savings decrease and/or other parts of the market experience reduced sales.
Through various mechanisms the profits of the owner become investments into industry. The degree to which these new investments become sources of economic growth depends on the existence of new or possible industries which would compete favorably for consumer dollars with the existing industry. For our purposes, these industries pay wages but do not produce any competing goods yet - they are "start ups". In combination with the other sources of stimulus thus far, we have an equation (in dollars):
Increase in wages + reductions in savings + reductions in sales of other goods + wages from new industry = increase in sales of a given good.
Here I will posit a few constraints in the form of bliss points toward which consumers trend. Consumers have a "variety of goods" bliss point which determines the degree to which new industries will eventually succeed. Consumers have a "total goods" bliss point which determines that eventually the equation trends toward "Reductions in sales of other goods = Increase in sales of a given good", i.e. good substitution. When wages increase, increases tend to affect less than the entire workforce, and so create increases in savings that in turn cause a drag on sales increases. So long as the entirety of productivity gains express themselves through wage increases and new industries, these constraints will eventually come into full effect.
The corresponding situation when sales of a given good are not increasing is given by the same equation. We simply set the right side to zero or a negative. In this situation, gains in productivity lead only to decreases in the total labor utilized on a particular good, and possibly increases in other goods production, wages from new industry, or savings.
Eventually, however, the aggregate of all of these markets for particular goods will "zero out" (with balanced levels of increase and decrease typical of any equilibrium situation). Thus, economic growth is culturally limited by the bliss points - the accepted level and variety of consumption within the society. Therefore, the transformation toward a consumer culture is necessary as part of the package of long term economic growth. However, such a culture is not necessarily a more pleasant one to live in; and it is likely that there is a limit to any possible bliss point in terms of quantity and variety. Thus, the first stage of "growth" comes to an end.
The onset of stagnation gives rise to (and is accelerated by) the accumulation of wealth by the richest classes. Wealth becomes concentrated at the stagnation point because from this point forward, productivity gains lead to no further economic growth, and thus there is no sales growth to divide between worker and owner. The entirety of the productivity gain is thus expressed through the cost saving, i.e. the reduction in labor utilization. Thus, the productivity gain leads only to profits. These profits will see limited expression through new goods that have narrow or nonexistent profit windows. This is the second stage, the "stagnation" period.
This can only occur if the tax rates on the wealthiest classes actually permit the unlimited concentration of wealth. Where tax rates are progressive, they can slow this process, but can't really halt it. Only where there is no incentive whatsoever to acquire wealth beyond a certain point (either a 100% threshold on income tax or a wealth tax that creates an effective maximum wealth) will this process not occur.
In any event, the lack of meaningful investment opportunities for the newly accumulated profits leads the wealthy to behave erratically after some time has passed within the stagnation period. All manner of investment schemes will be invented in the vain hope of providing some means of profit. A stiff competition will arise that drives competitors to many tricks in an effort to gain advantages over each other without resorting to the horrors of the price war. This is the "erratic" stage.
In most economic situations (and I am still speaking theoretically here, even though this is virtually a statement of obvious fact), the system of competition is not perfect or "pure". Typically, the producers have a certain degree of agreement between each other on production levels. A complex system of laws always accompanies economies for the purpose of enforcing against unfair trade practices and other abuses. Systems also exist to protect workers and consumers. The economy is therefore managed synthetically or "by design". During the worst of times, blame is passed around like a hot potato and it is no wonder that systems of prediction break down - they were based on what politicians, corporations, and other power players wanted people to believe but they were never the whole truth. Of course, the people involved in these simplifications do not have a total awareness of what they have done, and so are somewhat helpless when real objectivity is needed. Ergo, amok.
At this juncture the various economic stages can be expressed as the growth stage, the stagnation stage, and the erratic stage. The cycle is allowed to repeat as a new generation rises up with a new set of consumerist indoctrinations, allowing the entire system to achieve a higher degree of consumption. It is not a business cycle, but a bliss cycle. The driving factor is the revolution in consumer purchasing patters enabled by the development of higher degrees of dependence on material objects for quality of life. In particular, the ideas that are lost in this material transformation are self-sufficiency, charisma, and spirituality. It is also worth noting that as these things develop, new levels of productivity are realized, creating "better" goods than what was available before. But are they really "better"?
The loss of self-sufficiency is the loss of knowledge and skill in daily crafts, routines, and handiwork, and the dependence on various material objects that cannot be readily produced by the individual or immediate community. The person becomes dependent on distant parts of the economy for his very existence. A person cannot survive in much of America without a car, and this dependence on automobiles ensures a much higher level of total economic output than what we would otherwise have. But the individual cannot produce his own food, clothing, grooming products, bedding, housing, or virtually any other thing in the modern economy. Therefore, these must all be purchased. This is a major source of growth.
The loss of charisma is the loss of the appreciation of other humans in our daily lives. It is the loss of free or inexpensive means of entertainment rooted in the appreciation of the beauty of other humans. Storytelling is replaced by live theater. Live theater is replaced by books, radio, eventually movies and television. Even the idea of beauty is replaced: it is no longer a particular girl or boy in the village, town, or city, but the digitally retouched famous person. Ideas discussed between individuals are instead only read about (and ultimately become politically irrelevant) because now individuals perceive each other as being stupid or ignorant in comparison with the polished and vetted non-fiction media that is marketed to every demographic. A person cannot be free without drugs or alcohol. A person cannot make love without condoms, birth control, batteries of tests, their own apartment, fantasies, etc. And there is no time for (annoying) children in the careers of busy professionals. This includes what one might think of as mass media, but it is not caused by any particular actor or institution.
When speaking of a loss of spirituality, it is easy to step on toes. So I will be brief in this regard: the way that people live today is one in which they are utterly unaware of their own effect on the world and are disinvested from their own feeling of potency. So long as the individual depends on external, market sources for self esteem, he is hopelessly committed to spending.
These transformations are brought about through the collective effect of the marketing efforts of the producers of the various products that become integrated into our material existence. The individual marketing firms use advertising, product placements, promotions, salesmen, etc. to increase sales of their particular products, but the collective effect is the transformation of social values and norms and the increased susceptibility of the general populace to any and all new products or technologies. Utilizing hooks that draw the individual into the belief that the purchase is necessary is the essential means by which the prospect is turned into the sale. In so doing, the marketing force constantly convinces the individual of his or her own insufficiency.
In connection with the thesis proper, the very presence of hyper-stratification is evidence of economic mismanagement. It only occurs through the accumulation of wealth by the richest for which no similar accumulation occurs in other classes. It takes a unique political sphere for this to even come about. Welcome to America.
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