Being a perfectionist and a utopian, the ways in which I devised solutions to economic problems was very idealistic. I envisaged a perfect society then fitted an appropriate economic system to that society. As such the vast number of my solutions are not practicable in most, if not all, modern economies. Rather than detail the complete utopian economic system at this stage I will outline a few ways in which we could make moves in that direction and attempt to suggest alternate solutions that my help in our actual economic climate rather than my idealists world. Prior to that I will recap what I consider to be the main problems we observe in the present system.
1. The tendency for capital to aggregate
2. The problems of large companies monopolies and their tendencies to form.
3. Real values being distorted by the existence of multiple currencies
4. The control of the money supply resting mainly in the private sector and thus largely speculative
5. The incentive to use capital rapidly so as to not lose value on it
6. The boom bust economic cycle
1.
The manner in which capital will naturally flow towards large pools of capital has some merits. An argument in it's favour is that it creates the ability to undertake grand projects that may otherwise struggle to gain the required funds. Another is that it creates a demand for goods that are too expensive to be used by everyone, by having a demand those goods will become cheaper over time and subsequently become available to the masses. In purely economic terms the gravity of capital is not too much of a problem, it is in a more general social manner in which I think there is cause for concern. Economically the gravity of capital encourages massive companies and monopolies which are a mixed blessing and will be discussed in turn.
The wealth gap is a social issue and it is exacerbated by allowing capital to aggregate. A great deal of studies have shown that a large wealth gap is linked to high crime rate. Although much harder to measure it is fairly easy to observe for the open minded traveller that the people in areas with narrow wealth gaps tend to be far happier in their lives (it is also worth noting that the areas with narrower wealth gaps tend to be the poorer overall areas yet that does not seem to impact the content of the people). Other social grounds to want to reduce the aggregating properties of capital is the argument that money is power, and by allowing individuals to obtain an incredible degree of power they may reduce the freedoms of others.
Capital will always have a tendency to aggregate because of it's flexible purchasing power and economies of scale. These are aspects of trade we do not wish to eliminate so the solution is to minimise the negative repercussions they cause. There are two well understood routes towards this end, progressive tax systems and restrictions on loans. Both of these routes, as we shall see become a theme in this essay, have pros and cons. A progressive tax system will help to reduce the wealth gap as it takes proportionally more money from those who have more. The downside is it can deter some of the most skilled workers and profitable companies from operating in societies where they will retain less of their profits. A sensible welfare system has a similar effect of reducing the wealth gap and has less economic downsides than heavy progressive taxes, although costs a government rather than funding it.
Restrictions upon loans does not directly reduce the wealth gap but it would reduce the rate at which capital was able to flow over time to larger pools of capital thus serving a similar end. An additional advantage that restrictions upon loans offers, which progressive taxes do not, is that a larger portion of a societies labour and wealth would be put to more productive use as the lending of money would not be as profitable so it would not be able to employ as much labour. This advantage comes at the cost of potentially stifling growth by making necessary capital unobtainable to would-be entrepreneurs.
The correct approach to loans or the sale of capital is a very tricky subject. Restrictions to loans is an ambiguous term and needs some clarification before any advantages it may confer can really be justified. Essentially whenever money is borrowed in return for interest paid on the loan, the interest is all money that is directly flowing to a larger pool of capital. When that money is borrowed so that it may fund productive labour that is good for society but it will still syphon some of the wealth. When people borrow money to fund their private lives it has no benefit to society while syphoning wealth. We have built up around a system where credit is essential for business and for individuals. A house tends to be such a vast investment that a loan is nearly always required in order to purchase one. If we were to move away from the frequent private need of credit it would be to the overall advantage of society to prohibit most forms of private loan. Moving away from a credit orientated economy, even for just the private sector, is no easy feat but there are some easy areas where we could make a start. Credit cards and higher purchase deals on products could be restricted, the latter very easily. Such a move would appear to have damaged the economy initially as less sales would be made and finance companies would be less profitable however many of the sales that were not made would have become bad debt and the money that was not made by the credit card companies would remain in the hands of the people.
A different way to restrict the polarisation of capital via the interest paid on loans is to reduce the profit that the lender is allowed to make from issuing a loan. This has several good effects, firstly it reduces the profits of the lender such that they must asses risk more carefully and therefore avoid acquiring bad debts, a bank could not just charge greater interest to compensate for higher risks. Secondly it stimulates an economy in that capital may be obtained more cheaply for those the lenders deem to not be a risk. Lower interest rates on loans also means the flow of capital towards capital will be slowed. Sadly all these proposed restrictions will likely annoy a lot of people, not least the finance sector who would stand to lose a great deal of profits. The finance sector has already grown to be one of the largest sectors world wide, only challenged by the oil companies, and as such they wield great political power. Forcing restrictions to the ways in which money is loaned for profit is in the interest of society but will be a slow process at best.
The aspect of loans which relate to business transactions and set up are a much more problematic case. While reducing the interest rates that could be charged to businesses would still be beneficial, the matter of implementing restrictions beyond that is very difficult to find an optimal solution for. Ideally capital should be available for would-be and capable entrepreneurs and companies looking to make efficiency improvements, however ideally it would also be free of charge and never fall into the hands of those that would squander it. Presently we place the responsibility of finding those capable of turning capital into profit with the finance sector and in return they take a significant portion of the spoils. Asset allocation is not something I have completely solved in my utopian economy as yet and so offering solutions for our chaotic and speculative economy is well beyond me at this time.
The free market allocating assets does appear to provide a good method of allocation in many respects yet it has its failings beyond that of syphoning wealth. Long term investments are often some of the most beneficial to society, such as the creation of new infrastructure, yet are unappealing to the finance sector for their slow returns and the unpredictable nature of the future. To encourage funding of these forms of investment a government is able to either subsidize those loans or provide the capital themselves. The latter option is appealing but history has repeatedly shown us that governments are not well suited to spending money sensibly and efficiently with satisfactory consistency. A sensible starting place to improve the effect of business loans is to tentatively reduce the allowable profits that may be made on issuing business loans while ensuring this reduction is a dynamic and flexible system. The state could also investigate ways in which it could provide grants and interest free loans that were of comparable usefulness to society as the private sector loans.
A final suggestion on the prevention of aggregating capital is an increased incentive for companies to operate reasonable profit sharing schemes with all employees. Rather than operating profit sharing schemes as a token addition, like a bonus, to a salary one could support themselves on alone, a more equal split between wages and a share of the employers profits is my suggestion. Not only would this be a fair and sensible way to distribute wealth it would encourage workers in all areas of a company, regardless of their prospects within the company to work well as they will be a direct benefactor of the companies successes. Another way to phase it would be to say that it maximises the potential of the division of labour. Governments could offer tax breaks to companies offering profit sharing schemes of this nature and allow differing regulations for minimum wages etc. to encourage profit sharing.
2.
The aggregation of capital helps companies to grow, which has both advantages and disadvantages for society. As companies get larger they are more able to gain advantages from economies of scale which is an advantage that may be conferred to society by reducing the cost of their commodity. This in turn will help that company to grow yet further, a force which is likely much more powerful in the formation of massive companies than the aggregation of capital is. As companies become larger they also have more access to capital and are inclined towards spending it in ways that do not confer and advantage to society, such as advertising. The last issue concerning large companies that I wish to discuss is their ability to deal with competition. The larger a company is the more aggressive it may be with pricing and location selection, in effect increasing it's own costs to force another company out of the market. This is a cost that the public will pay for but that provides them no long term advantage. A smaller company may have a better product and have the potential to serve society better yet a bigger company could spend some capital to neutralize the threat of the smaller company. In doing this the larger company costs the public and denies them the possibility of the alternative.
A monopoly is undesirable even though it may have the best potential to exploit economies of scale for two reasons. First it has no incentive to improve as there is no available alternative and secondly it is able to charge whatever makes it the most profit rather than the price determined by the markets. Companies tend towards these monopolistic conditions as they gain market share. There are ways to prevent companies gaining too great a market share but they are not universally applicable. Firstly it is hard to know where the best compromise in market share is between good economies of scale and good competition, especially as this will vary from industry to industry. Secondly there is little way to tell or prove if a company has gained and retained their market share by producing the best products and serving the public interest best or by adverts, marketing, underhand pricing strategies and so forth. The former kind of company will best serve society it is allowed to grow without hindrance or interference with where as the latter kind of company is best kept smaller and with less power.
An idea that would allow society some control over large companies is giving the state the ability to purchase shares of a company in some proportion to that companies market share. The mechanism to decide when a state purchased part of a company and then if/how it became involved in decision making for that company. Ideally it would be some democratic mechanism so as to reflect the public opinion of the large company in question. I think the first moves towards moderating the more socially dangerous large companies is to concede that it is not just monopolies that break down the efficacy of free markets and allow bodies like the competition commission more scope to investigate any company of significant market share. Interest free state funded worker by-outs or forced franchising are alternate methods by which a government could look to reduce the formation of socially damaging large businesses. I should ultimately like to see a dynamic system where the distinction between a private company and a state funded service is less clear as companies grow in size,
3.
The capacity for altering real values of commodities due to imbalances in exchange rates can allow large economies to take advantage of the labours of others as shown in part II of this series. There are two very simple solutions to get around this each with their own downsides. Firstly there is moving to a single global currency which would be a large undertaking and cause for nations to squabble with one another. As the Euro has shown us recently there are other serious issues with joining currencies that can occur where nations experience rapid changes in costs and the economic chaos start to bankrupt the nation which puts strains on the currency.
The second solution is easier to implement and requires less social changes or agreements between nations. If a nation were to impose import and export duties of a specific value upon goods entering and leaving the country then the effects of altering currency values can be negated. The specific value is unfortunately hard to accurately asses as it requires a value for both nations rates of inflation and an idea of the average lag phase between currencies being exchanged and then returning to the home nation.
If country A sells goods to country B and country A has roughly 1% annual inflation and country B has 3% and the lag phase of the return of currency A from country B to country A is two years then a 4% duty should be levied on the sale of goods from country A to country B at that time.
[The difference between inflation rates ( 3 – 1 = 2 ) times by the lag phase ( 2 x 2 = 4), if the lag phase was 6 months then the duty would be 1% ( 2 x 0.5 = 1 )]
Accurately measuring ones own countries inflation rates is far from an exact science. Measuring lag phases and other nations inflation rates adds further inaccuracy to the solution. This solution may also alienate nations from global trading to an extent as their prices increase and become more variable in nature.
4.
Generally he most relevant factor in assessing the money supply of a nation is by looking to see how much credit the finance sector is issuing. The stronger the economy appears to be the more willing the finance sector will be to issue credit and so the money supply increases thus inflating the currency. Banks are able to issue loans beyond the actual credit they have on their balance sheets because of the returns they are due over time, hence the effect of increasing the amount of money in the system. While increased investment from banks has the effect of stimulating the economy it also helps ensure a boom bust cycle will occur as no significant forces exist that counter this positive feedback effect. Boom bust cycles might well have some economic merits in that growth is as quick as it can be for periods yet there are frequent culling periods where by companies that have not kept pace with the times go bust. Socially however this upheaval is not helpful as people lose jobs and become stressed. The aim is to find a solution where economies and businesses are allowed to rapidly evolve and adapt as with the boom bust cycle but that also provide social stability. It would seem impossible to maximise the benefits of both aspects so an appropriate balance must be found that exists between the two.
Limits on what banks may charge as interest are one of the best solutions for this issue as well as others. As increased investment drives inflation the profits that can be made on loads with fixed interest is reduced and so a negative feedback mechanism would be introduced to the system. Another solution is to impose limits on lending, in the extreme case a bank would only be allowed to loan what it has on it's balance sheets which would limit the rate at which a boom would runaway in to a bust. More reasonable restrictions to limit the issuing of credit where banks are able to put themselves into the negative but to a lesser degree are being considered in light of the most recent bust. This will certainly help the problem and is a good place to start without angering the finance sector too greatly. The main difficulty is making restrictions that are not able to be easily bypassed by banks in a legal sense by achieving the same end but by different means. The complexity of present day economics is largely down to the finance sector inventing new ways to continue to do things that have historically been controlled in some manner. Specific restrictions are hard to keep being useful and eventually just serve to clutter up the industry with needless bureaucracy. More general restrictions that can apply across the board that are difficult to misinterpret are the best approach.
5.
The incentive to use capital quickly is driven by inflation and the knowledge that money loses value over time. The only real way to achieve this is to develop a system that operates under deflation. The reason I view the incentive to use capital quickly as detrimental to society is because it reduces the relevance of actual efficiency in a process. It may well become more efficient in a fiscal sense to immediately do something where as in time and resources terms it may be better to wait. In essence the changes in money cause a divergence between what is best for the individual and what is best for society. Efficient use of labour and resources are best for society where as maximum profitability is best for the individual. These two do go hand in hand for the most part but the closer they are the better, and this is best achieved by minimising the effect of time on the value of money.
In an individual sense I would also argue that inflation encourages consumerism. People would rather buy cheap and often and like to spend the majority of their disposable income, which gives the appearance of boosting the economy. Although money will be circulating faster and there will be a greater demand for goods this does not really advance the condition of society. In fact more labour and resources will be expended than are required and things will tend towards compromising quality for cost. As society improves under an inflating currency the improvements made to labour and production are not used to directly benefit the society but instead fuel a greater demand for consumer goods. Those no longer employed in the improving industries tend to exert their labours on supplying the increasing demand for consumer goods. This creates quite a static environment where peoples situations remain very much the same while they acquire more stuff. I have no problems with people wanting stuff but I should like to see a system set up so that peoples actions were less directly influenced by the economic climate and more by their personal preferences. To create such a climate would require inflation rates and interest rates to be as close to zero as possible, with the latter obviously being less close.
6.
The boom bust cycle exists as a result of the private sector having a great deal of control upon the economy, in particular the money supply as dealt with in section 4. The problem of the boom bust cycle can be controlled to a large extent with some monitoring and the use of controls or restrictions on certain limits. When in the boom period of the cycle inflation wants to be a low as possible while charged interest rates on loans are better off higher. Also in a boom the degree of debt a bank can have and continue lending with should be far lower. In a bust period each of those three factors wishes to be the other way around. This way a depression is alleviated by creating an incentive to spend and invest capital and greater ease of obtaining it which in turn creates jobs and circulates money faster. A boom is likewise stymied from spiralling rapidly our of control and well beyond it's means to self support. Low inflations and high cost on obtaining capital are both factors that will help rein in excessive growth. The factors discussed are all private sector mechanisms but the state can also play an important role in facilitating the required shifts in economic climate to act as a another dampener in the boom bust cycle. When in a depression a state should massively increase public spending and incur debt or mint money to do so, this will increase the money supply and cause inflation stimulating the economy. This must be done reasonably as hyper inflation will cause all manner of social and economic disasters. When in times of strong economic growth the state is best advised to freeze public sector wages, repay all government debts and invest little in new infrastructure. This may seem like a counter intuitive approach but that is because it is pre-emptive, most states are too large to simply go with the economic flow and must act instead to preserve stability. A state can also aid the climate appropriately by increasing progressive taxes in times of a boom and increasing spending in the welfare system in a bust.
If you were to plot a graph of economy strength (in whatever measure you deem best) verses time in a boom bust economy it would be very spiky with rapid increases in strength followed by rapid declines. The aim of imposing variable restriction to interest charges and lender debt levels combined with attempts to control inflation is to act as a negative feedback system so that a graph of economy strength would no longer be spiky but comprised of smooth curves that undulate up and down like gentle waves on the sea.
There are many difficulties with all of these simple solutions, firstly how does one judge the condition of the economy exactly? There are many different ways to do this and many different opinions as to the current state of things and so electing exactly how to behave would be hard. Economies are too chaotic to allow the use of rigid and approximate equations to directly govern state decisions however equations could be designed that would act as a guide and would perhaps suggest a range of appropriate levels that could be set.
That concludes this essay series on economics but it is assuredly not the last time that I shall be touching on the subject. There is due an essay describing my utopian economic system which will refer to much of the content in these essays, both in ways to optimise the positive aspects of trade and different suggestions to avoid the problems that have been highlighted here. Money is a great tool and can be used to create conditions where the optimal fiscal choice for the individual coincides with the best actions for society as a whole which is somewhat of a mantra in my utopian economy yet is is a wise mantra for any economist. People are self interested, which should be used to an economies advantage, but when a flaw exists in a system people will exploit that to their advantage. I hope with this essay series I have shown mechanically where these flaws lie and how they have come to be exploited. I also hope that my proposed solutions are not too ambiguous or optimistic to be of any merit towards the continued improvement of society regardless of the utopian considerations.
No comments:
Post a Comment