Recession explained

[johnyj]

--Chapter 1--

ABCD 4 people on an island

A hire C to capture 4kg fish each day
B hire D to pick 4kg fruits each day

1kg fish or 1kg fruit equals 1 shell in the island market

C and D's salary is 2 shells

Each day, A sell 4kg captured fish for 4 shells, pay C 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

B sell 4kg picked fruits for 4 shells, pay D 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

C and D use 2 shells salary to buy 1kg fish and 1kg fruit

So, everyone consume 1kg fish and 1kg fruit per day, and they produce exactly the same amount

Total GDP per day on the island is 8 shells

Total amount of money supply required in island market is 8 shells, e.g. 8 shells are enough to facilitate all the trading day after day

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[johnyj]

-- Chapter 2 --

Now technology evolved, A can capture 4kg fish by himself and B can pick 4kg fruits by himself. Since the market consumption is just 4kg fish and 4kg fruits, A and B decided to fire C and D

C and D lost income and stopped consumption. This change the consumption of both fish and fruit to 2kg. Since A and B now have higher income, they can consume more, say 1.5kg fish and 1.5kgfruits, so the total consumption of both fish and fruit changes to 3kg.

Total GDP per day falls to 6 shells

C and D have problems for living, if there is social wellfare system, the problem will be shifted to government balance sheet

Even in this extreme example, there is only 50% of people get hurt. Although the total GDP reduced, the living standard of A and B actually improved.

In a larger economy, when only 10% of people lost their job, the rest 90% of people will actually get better life. Those 10% people will have to find another way to make a living, before that, GDP will be lower than before

So, recession typically comes from an increasing in productivity and no new vocation to absorb the jobless people

[GeniuSxBoY]

Also, giving free money to people that don't work (i.e. welfare, unemployed) is like:


A buys a pizza from me. I pay taxes. Taxes go to A.


Therefore it's like A gives me $20 to buy a pizza.
After buying the pizza, I give him the $20 back to buy another pizza.

This creates more and more work for me, but I keep getting poorer.

[hugolp]

What a useless example. Johnyj are you trying to be the member that exposes more economic fallacies per day?

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

[johnyj]

Also, giving free money to people that don't work (i.e. welfare, unemployed) is like:


A buys a pizza from me. I pay taxes. Taxes go to A.


Therefore it's like A gives me $20 to buy a pizza.
After buying the pizza, I give him the $20 back to buy another pizza.

This creates more and more work for me, but I keep getting poorer.

Good point, if the island has a government, then C and D will get compensation from A and B's taxes. A and B will not get poorer since their efficiency is higher, they just not get enough rich

My model has not studied the tax in precise numerical way, so I can not say anything concret now. Anyway, A and B's technology advancing is the reason that C and D lost their job, they should have certain responsibility for the consequence, but not all of it

In a bigger economy, if 90% of people get rich because of adoption of a new technology, then if some part of their gain converted to higher tax and support those who lost their job, the overall impact could be reduced

[GeniuSxBoY]

For the lulz:  http://answers.yahoo.com/question/index?qid=20070419102245AAGqoZm

[YoYa]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

[johnyj]

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

This is a good and natual question, but my example just show the theory, not necessary to be 100% exact

In a developing economy, C and D can do other things that A and B are interested in to make a living, so expand the whole economy, this has been the case for hundreds of years

But in a developed economy, almost every thing that A and B are interested in have already been produced by E,F,G,H etc... C and D has become so specialized in their branch and if they quit the job, they might not be able to find other thing that A and B are interested in to make a living

And C and D basically lost the possibility to make a living by fishing and picking fruit for themselves, because the living cost is so high that just fishing and picking fruit all day is not enough to pay their rent

[johnyj]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

Intresting story! If you can provide some numbers, that's even better, we then can analyze different possibilities in such a inter-island trading environment

[YoYa]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

Intresting story! If you can provide some numbers, that's even better, we then can analyze different possibilities in such a inter-island trading environment

/b/ nevar kept records, and Island A had outsourced it's record keeping to /b/......

[kjj]

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

This is a good and natual question, but my example just show the theory, not necessary to be 100% exact

In a developing economy, C and D can do other things that A and B are interested in to make a living, so expand the whole economy, this has been the case for hundreds of years

But in a developed economy, almost every thing that A and B are interested in have already been produced by E,F,G,H etc... C and D has become so specialized in their branch and if they quit the job, they might not be able to find other thing that A and B are interested in to make a living

And C and D basically lost the possibility to make a living by fishing and picking fruit for themselves, because the living cost is so high that just fishing and picking fruit all day is not enough to pay their rent

Ever hear of Ned Ludd?  This was pretty much his theory.

It was wrong then, and it is wrong now.

[realnowhereman]

Now technology evolved

Who did that then?

When you answer; you'll find it's worth at least 2 shells.

[johnyj]

Now technology evolved

Who did that then?

When you answer; you'll find it's worth at least 2 shells.

It could be C and D, and after A and B learned the trick, they fired C and D due to overproduction 

Of course you could say that C and D should keep their secret or even file a patent, but since A and B own the business, C and D's invention belong to the company

[Anonymous]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

[johnyj]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

Good point, over-loaning is also part of the reason to a recession, I will study this in a numerical way later. I believe, if the demand is higher than the capital, then we do not have a recession.

[jtimon]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

Good point, over-loaning is also part of the reason to a recession, I will study this in a numerical way later. I believe, if the demand is higher than the capital, then we do not have a recession.

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

[johnyj]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

[jtimon]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

[johnyj]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

Wait, after those business CEOs got the income from FED and go shopping, they found out there is almost nothing to buy since FED has bought up everything (inflation incoming...)

I think FED do not have the right to consume anything they bought, they have to sell to another user to get those money circulate back, if they can continously push this circulation, then economy activity will be accelerated. But if some one in the middle of this circulation start to save/hoarding cash, then the amount of money required to keep those activities are much higher

[Anonymous]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

[johnyj]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

[jtimon]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

Wait, after those business CEOs got the income from FED and go shopping, they found out there is almost nothing to buy since FED has bought up everything (inflation incoming...)

I think FED do not have the right to consume anything they bought, they have to sell to another user to get those money circulate back, if they can continously push this circulation, then economy activity will be accelerated. But if some one in the middle of this circulation start to save/hoarding cash, then the amount of money required to keep those activities are much higher

Don't you understand that by buying things when nobody wants them and selling them later (cheaper?) the fed is sending false signals to the market?
This demand by any means necessary makes no sense. It's like a fake war with paintballs to "stimulate the economy", just a waste of resources, completely anti-economic. Society cannot invest without saving!!
Seriously, you should watch the video. Your proposals sound as non-sense as Paul Krungman's. Maybe you even agree with him.

And then, read some austrian literature or Silvio Gesell or, even better, read both.
You're clueless about the real causes of a crisis and its solutions.

http://mises.org/literature.aspx
http://www.community-exchange.org/docs/Gesell/en/neo/
http://www.complementarycurrency.org/ccLibrary/materials/neo.zip

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

Sure, like quantum computing, thorium based nuclear energy, genetic engineering...

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

If you save your money in the bank, with out inflationary monetary system, after 10 years you will have less value to invest than you have today. People use to call your later option borrowing. If you borrow from real saver, you're using the resources that he could be using. If you borrow from the fed, there's more money than resources -> inflation -> other investments that seemed solvent go broke.

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

But the resources the governments gives out of this new money to the priveleged borrowers are stolen from everyone else.
When you print money money you're not printing real resources !!!

[johnyj]

But the resources the governments gives out of this new money to the priveleged borrowers are stolen from everyone else.
When you print money money you're not printing real resources !!!

Just like price or value itself, when we talk about cheap/expensive/efficient/waste, there is no standard benchmark

Maybe the supermarket destroying all the last weeks food is a waste of resource, maybe using 1 million to buy a small house is a huge waste of resource, but this kind of thing happens everyday in our life. As long as someone is willing to pay, it is ok. That is the issential in market based economy

I agree with lots of Krungman's opinions, he is definitely the one understand the "effective demand" concept, and he already forecasted today's situation 2 years ago, he said that the stimulation is not powerful enough

In my opinion, government is suitable to do those infrastructure and long term investments (green energy, medical research, education etc...) that private company do not have the possibility to do

[jtimon]

Maybe the supermarket destroying all the last weeks food is a waste of resource, maybe using 1 million to buy a small house is a huge waste of resource, but this kind of thing happens everyday in our life. As long as someone is willing to pay, it is ok. That is the issential in market based economy

But their private business or people. Is not the same if who demands the waste is the public sector or the private federal reserve.

I agree with lots of Krungman's opinions, he is definitely the one understand the "effective demand" concept, and he already forecasted today's situation 2 years ago, he said that the stimulation is not powerful enough

2 years ago...I trust more Peter Schiff, who warned about the housing bubble since at least 2006. And Schiff thinks Krungman is an idiot. I didn't knew Krugnan before watching that video, but I think Peter is right again on that one. Not that I agree in everything with Peter, like many austrians, he has those "low interest are bad" and "money needs intrinsic value" dogmas.
But I agree with him that the way interest are being lowered is bad. Probably he doesn't know anything about abundant money (LETS, ripple) nor demurrage (Gesell's freigeld).

In my opinion, government is suitable to do those infrastructure and long term investments (green energy, medical research, education etc...) that private company do not have the possibility to do

I think that all those things could be managed much better by the private sector.
The reason why the financial private sector thinks in the short-term is interest.
I gave an example in the "Resource base economy" thread.

But again, read some austrian economics, please. Keynes's theories will be remembered as failed theories.

[johnyj]

My early years of economy understanding was following Austrian economics approach (working->saving->investment), but recent years, especially after seeing higher and higher efficiency in many industry created more and more jobless people, I start to believe the demand side is the problem. As krugman said, some theory perfect for a small group of people, will fail when applied to everyone on the society

In an island which there is only 2 people, it's much easier to get this overview: Everything A do will depend on B. A can not increase his sell(thus enable his saving) without B's consumption increasing, otherwise he will just create deflation

If everything A produced can be saved for decades for future consumption (like gold), then Austrian economics might be true. But in reality in a market based economy, most of the things A created need to be consumed rather quickly.  This means that if B can not consume A's products, A will not get enough sell to make his saving possible. And it is the same from B's point of view

If A start to reduce his consumption and save, B will immediately feel his sell are decreasing, and B will start to cut spending too, this in turn caused A's sell to decrease, this kind of race can continue for a long time

[jtimon]

My early years of economy understanding was following Austrian economics approach (working->saving->investment), but recent years, especially after seeing higher and higher efficiency in many industry created more and more jobless people, I start to believe the demand side is the problem. As krugman said, some theory perfect for a small group of people, will fail when applied to everyone on the society

Everything that is true for a few people in an island doesn't have to be necessarily true for a bigger scale. But every economic claim that is true must also apply for a few people in an island. These examples have more to do with reasoning and explaining than with extracting conclusions from them.

Also, that's all you learned from the austrian school in your early years? Nothing about government spending or monetary inflation?
Nothing about transfers of wealth and mis-allocation of resources?

In an island which there is only 2 people, it's much easier to get this overview: Everything A do will depend on B. A can not increase his sell(thus enable his saving) without B's consumption increasing, otherwise he will just create deflation

A can enable his saving without B consuming more:

1) A can consume less.
2) A can produce more efficiently and save time to produce other things.
Also is not a clear example. What is A saving for? If there's only two people, why do they need money? What are they bartering?

If everything A produced can be saved for decades for future consumption (like gold), then Austrian economics might be true. But in reality in a market based economy, most of the things A created need to be consumed rather quickly.  This means that if B can not consume A's products, A will not get enough sell to make his saving possible. And it is the same from B's point of view

I think that money should not be both scarce and everlasting. It will has interest which I think is "bad".
Seriously, read Gesell, maybe you like it.

If A start to reduce his consumption and save, B will immediately feel his sell are decreasing, and B will start to cut spending too, this in turn caused A's sell to decrease, this kind of race can continue for a long time

Again, What is A saving for?
Here's my example:

A produces fish. B produces rice. They barter fish for rice.
If A wants to save time to build a net (invest).
He can:

1) Fish less for its own consumption and use the remaining time to build his net.
2) Fish double one day and spent the following day for the net.
...
He doesn't need to involve B.
If he wants to involve it. He can propose to B:
1) Give the same rice for a week although I'll give you half the rice, I'll give you double fish +1 next week.
2) Give me half rice this week and the next. Next week I won't give you fish.
He doesn't need B to reduce its consumption, but he doesn't have to trade with him if he doesn't want to.

It's all about producing and consuming not selling.
We can sell the same ticket to each other a hundred times and it will increase GDP, but not our prosperity.

[Anonymous]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

How do you think one million dollar loans are made? Through collective savings in a bank. Those are degraded with a printing press (bonds) and wasteful spending. There is not enough real money in the system.

[johnyj]

2) A can produce more efficiently and save time to produce other things.

Yes, if the productivity increased, A will have more time to make other things, in this way, the economy grows on the island.

In natual economy, A and B produce for themselves, saving is ok, reduced consumption do not affect others. But in a market based mordern society, saving is more complex, since A and B are very specialized in produce one thing in mass quantity, so they are highly dependant on the market to sell their products

If we could remove money from today's economy system, then Austrian economics is really good. But as long as money exists, many of the things looks reasonable are not possible in practice

My model tries to include the most important issues in today's economy: Money+Market+Market participator. I tried to reduce it to the minimal scale while still keep the basic structure intact. And it can grow: A and B can have employees, there could be other producers, market can provide loan etc... but they all contain basic economy behaviors: make, sell and buy products/services using money provided by market  

I don't think we can remove money from today's system, so many things are dependant on money to evaluate, driven and limit

We can sell the same ticket to each other a hundred times and it will increase GDP, but not our prosperity.

By using my model, if A and B just sell the same ticket to each other a thousand times, if the price stays constant, the market maximum only need to provide 2 shells to facilitate the trading, so the GDP will not increase

If the ticket price rose each time they sell to each other, then required shells for trading will increase, and GDP increased. But it is difficult to tell the rising in value of the ticket is caused by demand or just by speculation, typically both

[johnyj]

How do you think one million dollar loans are made? Through collective savings in a bank. Those are degraded with a printing press (bonds) and wasteful spending. There is not enough real money in the system.

It is a good question and it's difficult to answer

Saving in money/gold form is just an illusion, because money/gold can be kept for a long time, but most of the products can not be stored for a long time, it means saving for the future use will not apply to every product, and will never apply for services. The saving is the purchasing power of money, not necessary to be actual resources

A fisherman can sell his fish and put the money in his closet for a long time, he can also just put the fish in his closet for a long time. Both are saving action, but the degradation is totally different. This unequalty in value degradation created problems

Actually in my island model, I just don't see how saving is possible without market stocking goods or B's debt (if A start to save, it means his consumption is less then production, then B's consumption must be larger than production to avoid stocking of goods at island level, thus created B's debt)

The simplest way to create saving in money's form will be stocking durable goods at marketplace. But since A's product is fish and B's product is fruits, they are basically not stockable. And services (which is a big part of todays economy) are even less stockable

When you say "collective savings in a bank", it just mean a lot of money in the bank. These money do not correspond to the actual resources that originally produced to exchange the money, because those resources already been consumed or degraded heavily.

Degradation happens everyday, and after you exchange products to money, it will not stop this degradation. You hold the money at hand and products degraded/consumed in another place, you never noticed the same money can not buy back the same product after 1 year, since those products are not there anymore. You call this a saving, what you save is just the purchasing power of the money, not the actual resource

Because those "collective savings" are only purchasing power, as long as money have purchasing power, it does not matter it is coming from saving or just from printing. And the stableness of this power is decided by inflation. But money supply do not have direct connection with inflation, people's consumption behavior play a big role here

[The Script]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

[johnyj]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

[The Script]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

[jtimon]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

[johnyj]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

The comic book is dedicated to Adam Smith. He established economics as a science, I always enjoyed reading his book

And that is a very early stage of economics. After that, it has evolved in many aspects

In Adam's theory, the value of goods is decided by labor used to generate the goods, while in newer economic theory, supply and demand curve is the only benchmark (Petroleum for example, does not contain enough labor corresponding to its value, and it worth almost nothing before combustion engine was invented)

Later part of this comic book turn to politics and conspiration, this is not the topic of economics if you really regard it as a science. Science only deal with mathematics and logic

I like the Marshall's idea: Human are not producing anything, they just move things around and consume them. So, the more efficient they can move things around, the more wealth they can consume, this mostly decided by technology and energy supply

[johnyj]

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

Thanks for sharing the video, really fun to watch  

Another one include Friedman
http://youtu.be/BwuJzo9eX9k

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

[jtimon]

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

Government spending to increase demand has a lot to do with politics. Politicians always love to spend to buy votes.
Also the market moves to what the government demands, so other demands can suffer because of it.
If the government spending is based on real loanable funds, the interest rates rise and private investors will find borrowing harder.
If it is based on monetizing public debt (the fed buying bonds), the interest rates are reduced, sending a false signal to investors, because their plans doesn't take into account the coming inflation and inflation will cause interest rates to rise in the long run.
So government spending always represents an attack against private investors, who are the ones supposed to solve crises.

I prefer to attack economic cycles at its roots, that is interest. The compounding effect of interest pushes the exponential growth of credit, but when that growth becomes unsustainable, the shrinking credit produces deflation which produces further liquidations in a positive feedback loop. Since reducing interest rates by monetizing debt is unsustainable, interest has to be eliminated by demurrage.

[MatthewLM]

The industrial revolution was completely characterised by recession.

The recent recession was completely caused by technological advancements.

That was sarcasm.

No idea what the OP has been reading.

[jtimon]

The industrial revolution was completely characterised by recession.

The recent recession was completely caused by technological advancements.

Ey, luddite talking there !

That was sarcasm.

Oh, I see, you're not luddite.

No idea what the OP has been reading.

He said Keynes.

[MatthewLM]

The OP appears to be a luddite and this was my point.

[talldude]

The only thing that matters for long term economic growth is the pace of technology growth (well, you need to fund it through saving instead of borrowing). Better technology leads to improved productivity meaning less time needed to produce the goods and services we enjoy. Of course, if we're talking about countries, policy becomes important as it can affect the efficiency of using the available technology etc.

Read up on the solow model - in the long run it's been pretty much spot on. I'm not going to try to explain it here since it would take me a couple hours to do it justice.

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!

[The Script]

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

Thanks for sharing the video, really fun to watch  

Another one include Friedman
http://youtu.be/BwuJzo9eX9k

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

Keynes wasn't the first one to use the concept of "effective demand".  That phrase dates back to Ricardo, and actually, even all the way back to Adam Smith.  However, Keynes took it and attempted to apply it to a precise mathematical function.  Let us examine his functions and see if it bears up under scrutiny.

From page 25 of The General Theory:

Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the Aggregate Supply Function.  Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being D = f(N), which can be called the Aggregate Demand Function.

The definition of a function is that it is a specific and constant relationship between an input and an output.  Keynes' equations cannot fulfill this requirement and therefore shouldn't be written as functions.  There is no precise, mathematical relationship between the number of men employed and his costs or revenue.  It changes depending on individual workers' qualities, efficiency and available of equipment for the workers to use, etc.  They simply are not functions of each other in the mathematical definition of a function.

Also, why is the first equation the supply price of employing a given quantity of men, while the second one is the expected proceeds to be garnered from employing a specific quantity of men?  Z and N are real sums while D is the expectation of real sum further invalidating the formulation of these relationships through mathematical equations.

Now, you may argue that Keynes did not intend for his mathematical equations to be taken as literal mathematical equations, but they often are by mainstream economists.  Furthermore, formulating these relationships as mathematical functions lends itself to a lack of clarity and allows for false assumptions and inferences to made that can lead to gross errors further on in the economic thought process.

[jtimon]

(well, you need to fund it through saving instead of borrowing)

What's wrong with borrowing and lending?

[Murwa]

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!

You are assuming that he doesn't already have plenty of time off, that somehow magically technology doesnt allow him to work less.
Assumptions are a mother of all fuckups.

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

[jtimon]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

[johnyj]

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!

If you study my model, you will find out that after A and B increased their productivity to 4kg products per day, include C and D's work, the total fish will be 6kg/day and total fruits are 6kg/day, the GDP will be 12kg products.

But A and B need maximum 1.5 kg fish and fruits per day, C and D do not get a income increase due to they contribute nothing to productivity increase, so the aggregate demand on the island will increase to 10 kg products, less than the 12kg products.

That means A and B have to reduce the production, due to effective demand not high enough.

If M will buy those extra 2kg products and put it into investment, then everything is fine. But what if those guys just want simple island life and do not want anything more?

Keynes said:
If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.

[johnyj]

Government spending to increase demand has a lot to do with politics. Politicians always love to spend to buy votes.
Also the market moves to what the government demands, so other demands can suffer because of it.
If the government spending is based on real loanable funds, the interest rates rise and private investors will find borrowing harder.
If it is based on monetizing public debt (the fed buying bonds), the interest rates are reduced, sending a false signal to investors, because their plans doesn't take into account the coming inflation and inflation will cause interest rates to rise in the long run.
So government spending always represents an attack against private investors, who are the ones supposed to solve crises.

I prefer to attack economic cycles at its roots, that is interest. The compounding effect of interest pushes the exponential growth of credit, but when that growth becomes unsustainable, the shrinking credit produces deflation which produces further liquidations in a positive feedback loop. Since reducing interest rates by monetizing debt is unsustainable, interest has to be eliminated by demurrage.

In my island model, there is no interest involved, just simple math, still you can see productivity increase will lead to recession

Actually I do not think government can do very profitable investments, but since most of the small companies fail anyway, it does not really matter who is doing the investment. In a post recession time, small companies typically are contracting and saving instead of investing, and banks typically are not willing to loan to those high risk small companies, so you really need some one powerful enough to spend BIG to bring up the demand. Ideally it should be the big multi-national corporations doing this, but I guess they do not really care about the effective demand when they are still looking at profit/earnings


I can think of  4 ways to do with increased productivity

1. Increase export
This put the problem to outside world, but do not work in a global level (There is no aliens on Mars will trade with human), it does not work when globalization has reached certain maturity

2. Move redundant people to new industry
This has been the case for hundreds of years, and mostly driven by human desire. Now that most of our desire have been fullfilled, it's getting difficult to find a new industry that can absorb huge amount of redundant people, so government spending for longterm projects is the current cure

3. Heavy taxation on high income people and use wellfare system to compensate those who have been replaced by machines and software
Nordic countries have this practise, this will create less trouble in society but reduce efficiency and discourage hard working (maybe that is needed)

4. Reduce the working hours so that more people are needed
This actually is the best long term approach no matter how high the productivity is, working hours can continously decrease and at the same time it gives people more time to consume, I don't know why no one is discussing this alternative

[jtimon]

Actually I do not think government can do very profitable investments, but since most of the small companies fail anyway, it does not really matter who is doing the investment.

Does it matter at least what the investment is or the government can just invest in preparations for a fiction alien invasion?

In a post recession time, small companies typically are contracting and saving instead of investing, and banks typically are not willing to loan to those high risk small companies, so you really need some one powerful enough to spend BIG to bring up the demand. Ideally it should be the big multi-national corporations doing this, but I guess they do not really care about the effective demand when they are still looking at profit/earnings

If the problem is the lack of investing and lending (I would say that caused by deflation but you just say is "typical in a crisis") why not just charging demurrage to money holders to encourage them to either spend (they can store goods as savings), invest or lend?
Have you heard about Silvio Gesell? Keynes liked him, but he (Keynes) didn't understand him (Gesell) correctly.

[Murwa]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

Pay more attention to what you answering too.

Someone claimed that recession is not caused because people are not fired due to automation. That is obliviously wrong. People are fired , new jobs are needed.

Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time with ever increasing speed as time goes on. ( since progress is geometrical .

That obviously is unsustainable and we see the effects today.

[kjj]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

[Murwa]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

Ah yes because situations from 200 years ago totally apply .

[jtimon]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

Pay more attention to what you answering too.

I guess this is the "collaboration instead of competition", the awareness and the "unalienated culture" that the resource based economy promotes.

Someone claimed that recession is not caused because people are not fired due to automation. That is obliviously wrong.

Yes, someone said that recessions are not caused by increased automation and I state the same thing.

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

with ever increasing speed as time goes on.[/b] ( since progress is geometrical .

Are you going to say moore's law is an universal law of nature applicable to all humans technologies or something?

The exponential growth in money supply and energy production are completely unrelated with the exponential grow of GDP?
Is technology the only thing that affects the economy?  
 

That obviously is unsustainable and we see the effects today.

I know, we must destroy the machines or free trade. And you're not a luddite because you love robots and hydroponics. I know you're a cornucopian.

[jtimon]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

Ah yes because situations from 200 years ago totally apply .

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

[Murwa]

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

Oh i love how you used the word serve, i like high grade prostitutes as well.

Ok so what are they gonna do exactly , picking their noses ? Practically everything you do for money requires consumption of some sort even if energy.

The rest i wont even comment because it is below certain level.

[Murwa]

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

Situation back then  :

New jobs were created faster then they were replayed by machines. Technological progress was relatively slow we had plenty of cheap resources around and so.

Today :

New jobs are created slower then they are replaced by machines. Progress in automation and robotics is very fast and increasing as we speak , also we are reaching energy,resource,peak, that slows down job creation.

No difference  ?

World fucking changes it doest stay the same for 200 years , gosh.

Just it is only enough that process of automation is faster then job creation and you have a problem . It is not like we all are gonna wake up tomorrow unemployed ...

[jtimon]

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

Oh i love how you used the word serve, i like high grade prostitutes as well.

The word comes from service. If you ever hire an economics teacher, he would be serving you. Mixing jobs with arguable reputation doesn't help with the "level of the discussion". I don't have anything against prostitution provided is voluntary, but that's totally off-topic.

Ok so what are they gonna do exactly , picking their noses ? Practically everything you do for money requires consumption of some sort even if energy.

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

World fucking changes it doest stay the same for 200 years , gosh.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

[Murwa]

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

And those services dont consume anything ?
Economic lessons are drafted on earth with stick ? Scientists dont use any tools ? Artists draw pictures only in their imaginations ?

What if any of the above services gets better efficiency due to better equipment ( for example more machines can be serviced per person ) , the person that loses its job and he change it for different one , he is forced to start consuming even more.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

No really the tendency started since great depression. Just look how many useless jobs we have since then ( bankers , marketers , lawyers , government employees ) and many more
I dont think it is a main reason for recession since societies were offseting in creation of above jobs.

The main reason for todays recession is obviously criminals from wall street and money created out of debt.

[jtimon]

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

And those services dont consume anything ?
Economic lessons are drafted on earth with stick ? Scientists dont use any tools ? Artists draw pictures only in their imaginations ?

The lessons can be teach orally or with computers. Most scientist use computers as their main tool. Artist can produce culture much cheaper thanks to technology.
But how they needing resources leads to the need of infinite growth?

What if any of the above services gets better efficiency due to better equipment ( for example more machines can be serviced per person ) , the person that loses its job and he change it for different one , he is forced to start consuming even more.

No, I don't think no one is forced to consume. If the services get better efficiency and more jobs are destroyed, new jobs will be created, it's the same question again.
You assume that machines will eventually do everything that people value.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

No really the tendency started since great depression.

So there wasn't economic cycles before the great depression? Why we don't call it the first depression then?

Just look how many useless jobs we have since then ( bankers , marketers , lawyers , government employees ) and many more
I dont think it is a main reason for recession since societies were offseting in creation of above jobs.

They're useless jobs in your opinion. Be the intermediary in a lending/borrowing transactions seems useful to its customers. Without basic interest and without the state provided privilege of fractional reserve without negotiating with the depositors banking would be very different though. 
And what sustain really useless jobs (only the government is able to pay for these) is not the "surplus prosperity machines provide" but the institutionalized robbery from other members of society known as taxation.   

The main reason for todays recession is obviously criminals from wall street and money created out of debt.

I think Greenspan's printing and Bush's "owning a house is the American dream and the government will help people that can't afford to own one to buy it" helped.
I recommend you this documentary.
And again, I think interest is in the roots of economic crises. Do you see something wrong in my previous reasoning?

[johnyj]

Does it matter at least what the investment is or the government can just invest in preparations for a fiction alien invasion?

There is something hidden behind this, I still can not figure it out clearly, maybe it has something to do with people's desire

If the government created a Mars immigration project and hire 10 million people to work on it, they will get a super loan from FED to finance the project, but how could they payback the loan?

So, this project must bring some income in the future, and that income will come from the majority of the people, the project must serve the interest of most of the people to be profitable

In the island model, after A and B fired C and D, pushing the GDP down to 6 shells and C and D now become jobless. C and D could each produce 2kg potatoes per day and sell potatoes to buy fish and fruits, thus even lift the sales of A and B

Nowadays, if you are jobless, could you easily find a way to serve the interest of most of the other people? No way, most of such kind of service have already been industrilized and mass produced. And the biggest problem is after a people get enough rich, he will be quite satisfied with his life and his demand increases very slow while his saving might get bigger and bigger

In the past, demand is never a problem since many social members are poor and have strong demand, people were working hard to improve their life, but after entering 21st centry, it's totally another picture: almost everyone have their house/cars/food/cloth/mobile phone/notebook, quite difficult to dig out a requirement that is big enough to create lots of job

[johnyj]

After the people established in Mars, they dig deep into the planet and mined unobtanium, which is 20 million dollar per kg



Then this Mars project will very easy payback it self and even made the government super rich

So the key point is: Why this unobtanium could value so high?

There could be many reason, but through economic point of view, people have super high demand for this precious metal is the only reason, and their ability to pay is another issue

In basic island model, C take out 100 shells loan to harvest a black pearl, and sell the pearl for 200 shells. Although his loan is magnitudes higher than the GDP of the island, he is still very profitable, so the bank will not deny his loan. But how could he payback the loan is the big question: A and B simply do not have the ability to buy his pearl