Big economic problems made simple

Let us posit, first of all, that a situation is conceivable in our world in which the entirety of economic output is exactly equal to what people want, and our system is perfectly stable. Even as our bodies emerge from wombs, require constant material replenishment, grow, and then fade again, the entirety of our economic output supports this process precisely, delivering food to decaying bodies (we are always both growing and decaying, and the first cannot happen sustainably without outside input), building materials to decaying buildings, and items of pleasure to decaying minds and spirits. The processes of creation and destruction are precisely balanced.

In this simple form, it is obvious there are two factors: actual production, and actual desire. Necessary production can be reduced according to reduced desires. This is a desirable state, which we might define as pervasive contentment.

Production capacity–and this applies more generally to the creation of any real or imaginary good–is a function of physical capacity, motivation, and information. Let us consider each in turn.

Physical capacity, speaking economically, is the ability to apply motivation and information in such a way that a material good is created. This implies raw physical materials, like coal, plastic, actors for movies, silicon for computers. It further implies a physical setting in which this can happen. In primitive times, a farmer’s field was his setting, and his seeds, his plow, and his ox his physical materials. In our age, it is of course a factory, but it can also be a movie studio, or even the street, for example for a documentary.

Work–which I am here equating with motivation–can increase this capacity in one of two ways. First, through work alone, qualitatively equal production capacity can be expanded. The farmer can pull out the roots and rocks of a second field, giving him more room to plow. A second industrial plant–say, to make cars–can be built.

Note here as well that the production of raw materials is, too, a type of production. If you are mining gold, you can open a second gold mine. This may or may not work, since gold is finite, as are all physical materials.

Secondly, work can be applied to creating more information, which is to say better techniques for making things. The wood plow can give way to the bronze then the iron plow, then eventually to the modern tractor. Factories can introduce labor saving devices, such that one worker can produce over time more and more material with the same amount of physical work.

Laborers provide the physical capital which is invested, whereas the Capitalist determines the precise form of that investment, which is to say his job is to inject information into the system, as an inventor, systems engineer, or businessman. As I will show, this job amounts to increasing the wages of the laborers, not decreasing them.

We can now make some general mathematical abstractions:

Actual production of material and “informational” goods (movies, books, etc.) is equal to (physical materials plus physical plant plus physical and mental labor). This is potentially a steady state situation, in conditions in which people are contented with the quantities and qualities involved.

Growth, on the other hand, requires more. The following applies to a modern, industrial economy:

A (physical materials plus physical plant plus physical and mental labor) times

B (physical labor to increase raw materials or improve the physical plant) plus

C (money “labor”/Capital to increase raw materials or improve the physical plant) plus

D (Creative labor to qualitatively restructure the search for raw materials or the efficiency of the production of goods), all divided by

E (the desire or need to have more things/experiences). This is a function of generalized cultural considerations and physical population. The first is a variable that can be operated on by increased efficiencies in the “production” of contentment. This is the realm of moral improvement, of what I term “qualitative power”, in my essay on Goodness.

In terms of physical population, obviously the amount of material goods needed to maintain minimual levels of nutrition, shelter, and the like will go up and down as the number of mouths to feed goes up and down.

A and B are multiplied, since both are necessary. Logically, you can’t have growth if you don’t keep doing what you were doing to begin with. Further, you cannot have growth if you don’t put in extra work, at least in terms of building something bigger, like a second factory.

Quantity C is a factor of the conversion of labor into money then back into labor (through investment in efficiency–which gets more work done per worker–or added physical capacity–which employs more workers in that industry, at a detriment to some other industry, or to accommodate increasing population), in a continuing cycle. Money is made, by both “workers” and “capitalists” (a very fluid and inexact delineation for the last 50 years), saved, and then invested.

In a condition of fixed money supply and increases in efficiency, the cost of the output of that capacity–the material goods produced–will drop steadily. The costs of material goods will decrease, and the value of the money paid will increase.

(Note here, too, that unions are an integral aspect of Capitalism. They are the counterpart to the corporation.)

This is the same as saying that the capacity of labor to generate material sufficiency will steadily increase, absent changes in either perceived need, or the money supply. This means all workers receive steadily more “money” in terms of what they can buy, per hour worked. This in turn means increased capacity to save their money for further investment and consumption.

In conditions of expansion through simple duplication (without increases in information deployed as increases in efficiency), where one factory is simply duplicated across the railroad tracks, the purchasing power of the workers will NOT increase.

This type of expansion is necessary where people are growing more numerous, but not smarter. This would be a growing population putting more land under cultivation. At some point, it is quite possible for resources to be unequal to the task of feeding everyone, since resources are finite, and potential human beings are not. This was the dystopia of Malthus, who figured that the Industrial Revolution would cause less people to die, and more people to be born. This, in turn, would cause more people to need to be fed, in a cycle which outpaced potential growth in material production, leading to famine and pervasive poverty, absent government coercion in the direction of reducing population growth.

Malthusianism might be defined as Capitalism denuded of information. It presumes both that individuals are incapable of rationally limiting their own reproduction, and that Capitalists are incapable of increases in efficiency, which is to say the material form the means of production take.

Creative Labor, D, is the sole means of increasing the standard of living for a fixed population. It is a necessary component of true Capitalism, which is based on the simultaneous increase in material goods up to the point of satiation, and a corresponding increase in the value of money.

This is the counterbalance to the potential that natural resources could be exhausted. It involves the capacity to plan, and to innovate. An obvious example is the invention by American Norman Borlaug of seeds with far greater yields than those used before. Many doomsday scenarios of overpopulation were put forth by apparently serious academics throughout the 20th Century, of which none have come true. In conditions of increasing prosperity, people naturally control their birth rates, and science increased the efficiency and hence capacity of production.

The equation can be written thus: [(A*B)+C+D]/E=Rate of Growth.

As long as this overall fraction is less than one, growth will happen. Once it reaches one, which is to say what we want equals what we are making, then growth will cease, and the system will go into equilibrium.

At equilibrium, no one will be hungry, unclothed, or unsheltered–unless they want it that way, as have many religious ascetics over the years. Poverty will be gone. Malcontentment will be gone.

Note that even at equilibrium “growth” is still happening, in that things are being grown and produced. As long as human life endures on Earth this can never be a static system.

In a non-Capitalist system, which is what we have, and which I have proposed we term “Monetary Mercanilism”, C is equal not just to the money in existence, but that money plus whatever is created by entities with the power to do so, most notably central banks, and the institution of fractional reserve banking. Note that the production of money is completely external to the production of material goods.

A key point is that the value of C remains constant. If we double the money supply, the purchasing power of that money is cut in half, yet the entirety, the whole, is the same. If I print enough money to turn the purchasing power of $1 million into $500,000, what I have done is take that value for myself.

Thus, money creation does not affect the rate of growth, so much as the value of labor, and distribution of ownership. The rate of growth can be enormous over huge chunks of time, but the actual benefits to workers will be substantially less than it would be in true Capitalism. Further, Capitalists CAN benefit from Monetary Mercantilism, since they can borrow such money, which in effect gets given to them for free, but the fact is that they lose much of the value of their own property in so doing. They, too, transfer value to the banks.

Two points need to be underscored. First, that the amount of industrial growth that is necessary is affected by our cultural/moral system. Second, that the satisfaction of material wants is best done generally without fiat money, which enriches a few at the expense of the many.

Keynesianism is refuted by pointing out, first, that severe misallocations of capital production only happen in command economies; and second, that when the value of money is increasing, the value of savings is rising with each step, such that money invested is in the end always worth more than what was saved. There is no demand side problem. Let us say that when paid it is worth $1, and after investment it is worth $2 in the old goods. In the short term this may lead to greater consumption of goods. In the long run, it will lead to greater savings, enhanced financial security, and more generalized wealth and freedom.

Marxism consists in the argument that resources are limited, and innovation is zero. Given this, no real increase in the purchasing power for workers can happen. Those who have excess money will invest it, gain profits, reinvest those, and in a cycle of wealth building cause the actual buying power of workers to steadily decrease, such that at some point a very few own everything, and revolution happens organically. (He made, incidentally, no plan for professional revolutionaries, whose existence falsifies his economic theory, as of course have the events of the last 150 years.)

He made two primary errors. First, ignoring the ability of science to reorganize the means of production such that real increases in the purchasing power of everyone in society, top to bottom, steadily increased.

Second, and more critically, he did not account for money creation. His basic thesis is in fact accurate, but only in regard to bankers, who must for that reason be distinguished from “Capitalists”, per se, who actually make things people can use.

As we saw with respect to C, those who create money transfer ownership to themselves in so doing. If X amount of money is in existence, and someone prints and loans another X to Capitalists and consumers, then the purchasing power of those who did not borrow money is cut in half. Yet, the bankers who lent the money can buy with that money .5X worth of goods. To earn this priviledge, they did NO productive physical or creative labor.

What confuses people is they don’t look at the long term. In fractional reserve banking, most of the money that is “loaned” is actually created. Yet, it is paid back in real dollars. This alone would make money for banks, but they add to it interest, which helps among other things keep pace with the inflation they themselves create.

What we need is a financial revolution, not a political revolution. Logically, poverty is best cured by wealth, and not by retaining the poverty while tearing down the rich. Inequality of outcome is best dealt with through counter-resentment cultural systems.

Let us look at several outcomes.

First, if in our formula C and D equal 0, and A=E, we are in a steady state. As an example, this is the N’avi of Avatar. This is “Dances with Wolves”. This is “The Last Samurai”. This is whatever pastoral or other evocation works for you, in which people have stable social and economic lives.

You cannot create this through the cultivation of resentment. Resentment is not about building, but tearing down. It is not about creation but destruction.

Socialism eradicates C by eradicating money. In pure socialism, no money is needed, since all production and transfer of material goods are done by bureaucratic elites. It is, in effect, a managed barter system, where the same people decide what each side of the transaction is worth, and what the demand will be. Since the amount of information in that system is reduced by the number of people who are not empowered to make decisions–which is to say substantially everyone–this process is necessarily less efficient than one with more information. This is clear theoretically, and clear in the actual historical record.

Socialism reduces D greatly by eradicating the free flow of information through constrictions of free speech, and through centralizing the decision making process. People outside the Party cannot simply have ideas and try them without permission.

Practically, Socialist economies–such as the Soviet Union, Cuba, North Korea, and Vietnam–contract until they again allow freer movements of money and information, as for example China has done.

The intent of such systems is to artificially alter E through propaganda and political repression. People cannot demand more than they are getting, and they are told constantly how wonderful their lives are. Since their lives are not wonderful–since the system invariably leads to the concentration of whatever wealth there is in the hands of the bureaucratic elites–what this leads to is silence, and pessimistic resignation. This is not a better way of living.

My vision is something like the social order of Denmark, implemented around the world. The Danish model is not Socialist. It is a liberal order, in which people voted what they got, and continue to vote for it. I don’t know if they can actually afford it, but the reality is that if we fix our financial system, so much money will flow from it, that things like one year maternity leaves become imaginable. Further: they could be self-funded, such that the government would not even have to provide the money, so that could be eradicated as a political problem.

In a just, intelligent system, we would work roughly one tenth as much as we do, and live as well or better. There would be no unemployment, no poverty, and substantially no political problems to solve domestically. Were the same model deployed internationally, the same results would occur there.

Here is a fairly detailed proposal for a good revolution