Ideas about «The Economy»

THEE’s framework of inquiry-PH2 distinguishes between L2-concepts (i.e. ideas, abstractions, constructs) and L1-observations (i.e. things, phenomena, realities). THEE is based on identifying and organizing L1-observations; while academic disciplines, by contrast, are built on L2-concepts.

Economic activity is real—we can see individuals buying, selling, making, investing, saving, &c. everyday, but «the economy» is a pure abstraction (i.e. not real). Prices are real and knowable—while «inflation» is an idea about which learned people argue and disagree endlessly.

Example Study—Not by an Economist: David Hackett Fischer: The Great Wave: Price Revolutions and the Rhythm of History (1999), Oxford University Press, USA.

This framework will be the basis for the modelling to follow. A familiarity with the approaches/mentalities is assumed. Here is a brief summary with links to fundamental aspects. Some familiarity with other applications of the framework will also help:  e.g. career development, cooperating, the commercial ethos, and business and market strategies.

• Real wealth refers to various goods and services that people require and desire to sustain their lives and well-being. Real wealth also includes ability, knowledge, relationships and more. Economic growth is the expansion in this real wealth.
• Government activities hardly ever generate wealth: if they did, there would be no need for taxes.
• Governments are funded by taxing (i.e. coercively confiscating) the wealth of people in the private and productive sectors. They then spend some of this real wealth on themselves (in the form of salaries, buildings, travel, perks, &c.) and redistribute the remainder in ways that accord with the incentives and views held by the politicians in power—often re-election is the main incentive.
• There has been an inexorable growth of laws, regulations, expenditures, bureaucrats in governments and quasi-government agencies. Where governments take over production themselves, distortions, inefficiencies and waste occur due to political pressures and priorities.
• The result of dysfunctional government behaviour is unlike most psychosocial phenomena, in that it does not self-correct, but increases inexorably until there is some form of breakdown.

• The economy is an abstraction with no real-world reference.
• Interventions by governments or central banks «in the economy» are therefore often, or usually, part of the problem, rather than part of the solution.
• Similarly there is no such thing as «national» output. Except in some ruthlessly authoritarian societies, all wealth is produced by somebody and belongs to somebody.

• Consumption is the exchange of one product for another, usually via money.
• Consumption is part of the economic process (otherwise there is no reason to produce) but production must precede consumption.
• Production involves work. Borrowing money and spending borrowed money does not.
• Borrowing, to enable consumption, is irrational at root and should be resisted whenever possible.
• Living within one’s means is essential.

• Money cannot be consumed, whereas tangible goods and services can be.
• Money is a unit of account, a convenient mechanism of exchange, and potentially a store of value.
• The exchange function of money enables people to abandon the inefficiency of barter, and to specialize in ways that suit their talents and opportunities, while still being able to obtain the variety of goods and services they need.
• The greater the division of labour and specialization, the more efficient the use of resources—especially the human resource.

• Increasing the supply of money does not increase productivity or wealth. What results instead is a faulty allocation of resources, which eventually produces economic deterioration.
• Any given stock of money is sufficient to offer a medium of exchange service. So printing money to «meet a demand for money» only reduces its purchasing power.
• Central bank printing of money is identical in effect to counterfeiting.
• Money itself cannot raise the level of genuine sustainable economic activity. There is no correlation between amount of money and economic well-being.
• Easy money (via credit) is invariably misallocated and misused, leading to speculative bubbles that eventually lead to a bust that causes widespread harm—sparing the people in charge who are responsible for the easy money and credit.

• Price is the rate at which a good or service is exchanged for money (i.e. purchased).
• The more marketable or valued a good or service, the higher the exchange rate (i.e. price).
• Purchasing always refers to specific goods in a specific situation, and prices are the manifestation of assessments and preferences made by individuals at the moment of purchase.

• Given a stock of money, an expansion in production of goods and services must lead to increased purchasing power, and therefore falls in prices. This is the way that wealth gets distributed throughout an economy.
• Falling prices in a recession (financial bust, market collapse or deflation) are different. They are a consequence of misallocation of resources due to loose money policies which stimulated the boom. (During the boom, the price rises were a manifestation of the increasing stock of money.)

• The most suitable commodity exchange for money over the centuries has been gold.

• Fractional reserve lending by banks allows their loans to be many times the valued amount of their deposits. These banks are backed by a central bank, which is allowed to create and allocate money when needed.
• A bank or central bank that lends money that has not been deposited (whether to other banks, firms or people) is creating money out of thin air.
• This easy money fosters booms and speculative bubbles
• If it is reasonable and fair that no-one should lend money they do not have for profit, the fractional reserve system is ethically wrong.
• Depositors should be told unequivocally that they are unsecured lenders to their bank.
• Authorities should warn that the higher the interest rates offered on deposits, the more risky the bank. Ergo, it should be illegal to publish tables called «best saving rates».

• No sensible depositor would knowingly put money in an institution that lent more than its deposits.
• Depositors should have the option as to whether a bank can loan out their deposited funds or simply store them.
• Depositors should pay banks for the administrative costs of safekeeping and moving assets, including money not loaned out.
• If a depositor’s money is loaned out, then the depositor should specifically agree and accept an agreed risk of the loan category, and the interest offered to compensate for this risk.

• Savings can be lent directly or via intermediaries to business for investment in new production entities.
• Interest rates reflect time preferences: how much of a given flow of goods and services (real wealth) is allocated for consumption now, and how much to saving—thereby creating a pool of funding for investment. That investment can then build a more complex system of production, which grows wealth.
• A high immediate access interest rate means that people are less willing to wait for the return of their money.
• Artificially lowering or raising interest rates interferes with the most efficient allocation of resources and distorts patterns of production.
• Eventually this must lead to a recession as unsatisfactory investments are closed down.

• Buyers are interested in products not companies.
• A competitive environment is not one with many participants in a particular market, but rather a large variety of competitive products.
• For any given product, a market leader invariably emerges.
• Strictly speaking, every firm has 100% of the market for the specific product that it offers.
• Product differentiation enables many leaders to underpin their wealth generation via properly-regulated markets.

• There is no such thing as a «free market». There are only markets that enable free enterprise.
• A market is communal, while enterprise is individual.  For markets to operate properly, and not suffer from the «tragedy of the commons», fraud, or manipulation, they need some basic enforceable regulations.