Random thoughts on the basics of economics

At its basic level, economic growth involves an increase in the production of goods and services. Real growth - that is, economic growth adjusted by population - is thus a function of efficiency: an increase in the production of goods and services per head of population. This implies an increasing efficiency in production. In a market system, efficiency is measured by profits and price. In any system (market or otherwise), efficiency is measured by total cost.

Profit: When goods and services are cheaper to produce, private companies make higher amounts of profit.
Price: When goods and services are cheaper to produce, consumers pay less.
Total Cost: When goods and services are cheaper to produce, the total cost of production and consumption to the economy is lowered.

The economy suffers when:

• The total cost of purchasing these goods and services goes up - total cost being price plus total cost of ownership plus total cost of production. Cost involves more than price.
• The measurement of price and cost becomes opaque due to changes in the value of money, which acts as a unit of measurement. (Money is simply the means by which society orders the economy around. Money acts as a unit of exchange, a unit of measurement and an asset that is subject to the laws of supply and demand.)
• Investment bubbles occur within a market system. A bubble is inherently unproductive.
• An economy produces and consumes goods and services that it does not need (eg, most Western nations can survive on half the food they consume without any real negative effects to the economy)

If there is no increase in the efficiency of production, the economy moves into a steady state, neither growing nor declining (the model proposed by Robert Solow).

An increase in the efficiency of production usually results from technological change (also pointed out by Solow)

While the market system is the most widely used economic system, government forays into an economy have proven to sometimes work and sometimes not. The only pragmatic reason for a government to inject itself into an economy (ie by producing goods and services itself) is if it is able to be more efficient than the market in the area being affected (there are other reasons than being pragmatic though).

Random Thoughts on Government as Business

One way to look at the place of government in an economy is to view it is as just another business. This is because:

1. It produces goods and services
2. It has customers
3. It has shareholders
   

Of course there is a limit to which government can be identified as a business:

1. It cannot go bankrupt (debt can be defaulted)
2. Monopoly: It has little to no competition in an economy
3. If it is a national government, It can declare war against foreign national governments
4. It writes and enforces law to govern both society and itself
5. It has the means of creating money and enforcing its use
   

The way I always look at government is that it is a mutualized monopoly - while it has no competitors (and is thus a monopoly), its customers are its shareholders. At least in a Democratic country, the government's customers are the people, who are equal shareholders in the national government.

Tax, therefore, should be seen as the price the customers pay for the goods and services that the government provides. The fact that a "user pays" system is not set up does not mean that the system is flawed, since "user pays" itself can be a flawed way of pricing, depending upon the goods or services produced (selling food over the counter is a good user pays system, having toll booths every few kilometres to pay for road building and maintenance is not a good user pays system).

Random thoughts on the UK electoral system

Here's some grotesque figures for you all:

The numbers on this graph represent percentages - first of amount of votes and then in amount of seats in parliament. As you can see both the Labour and Conservative parties have, on average, enjoyed greater percentages of seats in parliament than the percentage of votes they gained. UK Labour is especially at an advantage here. Of course the main loser has been the Liberal Party/Liberal Democrats, who have, on average, had 10.6 percentage points less seats in parliament than they gained from votes, which is an enormous amount at the best of times but especially so for a party which has taken an average of 13.6% of the vote.

This situation is due to Britain's electoral system which rewards vote plurality. Although it is the simplest voting system that can be implemented it really only works in a two-horse race, in which it becomes a majority vote by default. The danger of an electoral system based upon a plurality of votes is that the party in power inevitably governs with the consent of a minority of people. Realising the dangers of such a system means that voters either give up voting altogether (their vote does not count if they live in a safe seat) or end up voting for one of the two main parties instead of the party they want.

Perhaps the worst case of a government being elected that did not have majority support was the 1983 election in which Margaret Thatcher was returned to power ostensibly on the back of a successful Falklands War campaign. If we look at the figures, though, we see an interesting situation, namely that Labour and the Liberals gained a total of 53% of the popular vote while the conservatives gained only 42.3% of the vote (a percentage of votes which, in other times, has led to electoral defeat for that particular party). Now while it would be remiss to assume that all of that 53% voted against Thatcher, the history of the time is important to consider. 1983 saw a massive drop in the amount of Labour votes - at 27.6% it was their worst post-war electoral result ever - while, at the same time, a huge increase in the amount of votes directed towards the SDP-Liberal alliance, the forerunner of today's Liberal Democrats. The SDP-Liberal alliance came about when a number of MPs defected from the Labour Party to form the Social Democratic Party in order to promote a more moderate social agenda than that being promoted by the Labour Party. They teamed up with the UK Liberal Party which had been marginalised for decades as the perennial third party with little to no influence. While the two parties had their differences, they obviously felt that their similarities were such that an alliance could be formed. Confronted with the prospect of voting for a hard-line leftist Labour party or a hard-line conservative party, many moderate Labour voters abandoned the party to vote for the SDP-Liberal alliance. In other words, the creation of the SDP and its alliance with the Liberals caused many Britons to reject both the reigning party and their traditional opponents. In effect, therefore, 53% of Britons did, in fact, vote against Margaret Thatcher in 1983 and probably did so because of her policies at the time. Yet the electoral system was such that it delivered Thatcher a second term in office. The election also kept the Labour Party entrenched as the opposition instead of being threatened by a resurgent third party, commanding 32.2% of the seats in Parliament as a result of gaining 27.6% of votes. The SDP-Liberal alliance, of course, were punished by Britain's electoral system, resulting in a paltry 3.5% of seats in parliament despite gaining 25.4% of votes. This result eventually led to electoral reform naturally becoming an integral part of Liberal Democrat policy since then.

The Liberals have, in fact, been a consistent force in British politics since 1974 when they gained 19.3% of the vote and were probably the reason for the hung parliament of the time. The United Kingdom in 1974 was, of course, reeling from various social and economic problems and electors turned to the third party to show their lack of faith in the two main parties - a situation which is being repeated now. The difference between now and 1974, and, more importantly, now and 1983, is that neither the Labour Party nor the Conservatives are likely to gain more than, say, 36% of the vote - Labour especially is likely to end up with less than 30%. Yet despite the problems with UK Labour, the Conservatives are not leading in the same way as they led between 1979 and 1992.

My own personal desire is for the Lib Dems to win a majority of seats in Parliament and for Clegg to become PM. Although the chances of that are low, they have improved somewhat since the first debate. Nevertheless the most likely result appears to be a hung parliament with the Conservatives having a plurality of seats and David Cameron thus becoming PM, and with the Lib Dems controlling the balance of power. Hopefully this situation will force electoral reform.

My own preferred electoral system is and will remain Demarchy. I doubt that Clegg and Cameron will introduce a British Demarchy, so what is my wish list for UK electoral changes?

1. Abolish the House of Lords. Don't replace it with anything. This would create a unicameral system with only Parliament operating as the legislating body. Amount of politicians removed = 733. These guys are not elected anyway. Besides, the house of Lords is an historical oddity and has no place in a modern democracy.
   
2. Halve the amount of constituencies from the current 650 to 325.
3. Introduce a Hare-Clarke voting system and have 4 seats for every constituency. Amount of politicians added = 650. With four seats for every constituency, a politician could enter parliament with 25% of the vote, thus giving voters a good reason to vote for their minority party.
   

What I like about my proposed system is that it results in a net drop of politicians from 1383 (733 Lords + 650 elected MPs) to 1300 (1300 elected MPs) while increasing a more proportional system of government. I prefer unicameralism over bicameralism (ie two legislative bodies) because it will make legislative activities simpler and more decisive once a decision has been made. While it is true that a secondary legislative body introduces checks and balances to the system, my argument is that a singular legislative body that is appointed by a proportional electoral system will itself provide the necessary checks and balances.

I also like a Unitary system of government. I may have Scottish blood in me but the idea of devolving too much power to Scotland, Wales and Northern Ireland is not necessarily a good thing. I don't want a Federation. Besides, the Scots the Welsh and the Irish already have MPs that can act on their behalf.

Getting rid of the Monarchy and having an elected executive would be a good idea too, but I doubt that Clegg will be able to pull that off. That would be too much too quick and something that would need some level of public support behind it. It would also need a decisive referendum and should probably be considered only after a more proportional system of government is introduced. Say, maybe in 10-15 years when Charles ascends to the throne?

Random Thoughts on the irony of Minarchism

Just how limited should "limited government" be? If you believe certain right wing commentators both on the internet and in the real world, "the state's only legitimate function is the protection of individuals from aggression, theft, breach of contract and fraud.". This quote comes from the introduction to the Wikipedia article on Minarchism, which is probably a better and more descriptive title than "limited government".

Modern day minarchists - virtually all of them from the United States of America - believe that the state's power should be limited to national defence (ie the armed forces), law enforcement (ie the police) and the legal infrastructure to ensure that violations of criminal and civil law are punished (ie courts and prisons).

(EDIT: Please note that I am talking more about populist beliefs of Minarchism that you would find amongst social conservatives in the US Republican Party or in the Tea Party movement.)

In the mind of minarchists, government programs such as health care, education and scientific research should not exist. Responsibility for these areas should be left up to the individual and/or the free market. The argument against such extensions of government involvement in society is that it expands government power, and any expansion of government power is bad because government naturally seeks to oppress. As for the effectiveness of government intervention, many would argue that the government is naturally incompetent and is unable to create any effective intervention at all - thus government programs such as public education are a drain on the economy because any benefit arising from such a program would never be as good as one completely provided by non-government sources (eg private schools, home schooling). Others would argue that even if the benefits of government intervention do outweigh anything individuals and the market can produce, any extension of government power leads to a loss of liberty and must be resisted.

Of course minarchists point towards the "sword" that the state wields as proof of its corruptibility, and this is borne out through historical experience. States have often used the police, the army and the legal system to enforce their sovereignty and law to the detriment of the population it purportedly serves. Failure to pay taxes - including taxes to support public education or health care - along with a failure to submit to laws set down by the state - including laws set up to regulate the behaviour of individuals and of the free market - cannot be maintained by individuals without the state eventually using its power to force people to comply.

Yet the irony of this situation is that minarchists support the very power that the state has that can be used to oppress - the military, the police, the court system and prisons. Moreover the very things that minarchists complain about the government doing - involving itself in education, health care, welfare - exist to benefit society as a whole. So minarchists are fearful that the state will use the "sword" (military, police, legal system, prisons) but want to limit the state merely to sword bearing activities. It's like saying that you're frightened that your next door neighbour might kill you with that axe he's carrying so you try to limit everything he does but you still allow him to carry an axe.

This, of course, is an anarchist argument - that the state is inherently evil and should be abolished, thus allowing individuals and society to carry on without it. The difference between minarchists and anarchists is that a minarchist wants to the government to stay out of everything except the military, the police, the legal system and prisons while an anarchist wants the government to cease existing altogether. Additionally, anarchists are quick to label the police, the military, the legal system and prisons as being extensions of fascism.

So is it possible for the government to provide any form of positive societal intervention (public education, health care, etc) without having any form of "sword"? Is it possible to have a government that does have a place in society but does not have any power in the form of military, police, law enforcement or prisons? I don't think so; besides, it's never been done.

What I would like to point out is that government often defines itself by the sort of power it wields. If the state has the ability to create a better society by, say, providing free health care, then government would define itself by the good that it does in that area: namely reducing infection rates, preventing the spread of communicable diseases, increasing awareness of public health issues and so on. Similarly if the state has the ability to create a better society through public education then it would define itself by the good that it does via public education, namely improving literacy and numeracy rates, providing young people with opportunities that they would not have had otherwise and providing for scientific and technological endeavour to benefit society. If we think of other areas of government involvement in society - such as the importance of intervening in markets in the form of monetary policy, the space program, the building and maintenance of electricity, water and transport infrastructure, environmental legislation and improvement programs - then we will see that governments will define themselves in those areas.

And by "define itself", I'm talking about the role that government sees itself in having in society. And government here refers both to the employees of the state and the representatives we elect to make laws and decisions for us on our behalf.

But if we limit the government to merely minarchism - military, police, legal system, prison - then we will have a state that is defined only by its ability to enforce punitive punishment. We elect people into office whose job it is to enforce punitive punishment and we allow the government to employ only those people involved directly in or in support of punitive punishment. Thus government would only ever wish to justify itself by its ability to punish.

It's no secret that the United States of America has the smallest government system in the western world,* and this along with the world's largest prison population - in both absolute and per capita rates. By being so limited, America's governments (Federal, State and county) define themselves only by that which they are allowed to do best which, in this case, is to wield the "sword".

Thus the irony is that minarchism actually produces a fear of government while simultaneously allowing the government more power and reason to exercise its ability to punish. By contrast, western democracies that have "mixed" economies (a combination of government intervention and a free market) have larger governments but less desire to enforce punitive punishment. In fact these nations (mainly western European welfare states and social democracies) have smaller armies and smaller prisons.

Which leads me to the following conclusion: Small governments are more likely to oppress, while large(r) governments are less likely to oppress.

(And yes I am well aware of the Soviet Union. Government oppression in Communist states occurs when the state completely dominates and has eliminated any form of market and individual choice. But I am not arguing for communism but for mixed economies where both government and market co-exist happily)

* Government spending as percentage of GDP. Currently 25% in the US but rarely above 20% before the downturn (see historical tables of the FY2009 budget for more detailed figures). Most western nations have government spending beyond 30% of GDP (eg Japan is 39%)

EDIT: Here's a quick and nasty table I set up that highlights the size of respective national governments:

So my statement It's no secret that the United States of America has the smallest government system in the western world is true in the sense of "Western World" being western democracies. Only Mexico could be classed as worse. The nations in blue are nations whose GDP per capita (PPP) is less than 25% of the US.

It needs to be pointed out that the list here only uses data based on national government spending, rather than total government spending (ie spending by state and local governments). Figures for the US do not include this data, while France, Sweden and the United Kingdom are Unitary States, which mean that the figures used here accurately reflect the spending/gdp ratio.

Total government spending in the US is around 10 percentage points above the national level, which means that current total government spending represents around 33.5% of US GDP. See here.

A cursory examination of the Gini levels for each of these nations is interesting too:

Random thoughts on electric vehicles

Would you purchase a car that only had a range of 160km (100 miles)? I suppose in order to answer that question you need more information, such as "How fast will it go?" or "How many people will it carry?" If I then told you that the car in question had a maximum speed of 140 kph (87 mph) and was a hatchback and which could not refuel at a local service station but, until infrastructure is developed, can only be "filled up" at home... then you'd probably then ask "Well how much?" and then be surprised that the price was actually quite high for such a range disadvantage.

This, of course, is the problem facing first generation electric car buyers. Some time this year, Nissan will release the Leaf (pictured) onto the US market and thus become the first real fully electric car available for the public (with the notable exception of the EV1 and the controversy surrounding it). For us who are concerned both with the environment (especially lowering carbon emissions) and who don't wish to devolve society into anarcho-primitivism, the Nissan Leaf represents the first real step towards reducing carbon emissions while simultaneously maintaining an industrial society with viable personal transportation (as opposed to an industrial society that relies upon bicycles and public transport).

Yet the economist and the realist in me can't help but be worried about the Leaf. As a first generation electric car it obviously will have teething problems - not least being the lack of infrastructure needed to create a viable electric vehicle transportation system. In practical terms, this includes "charging stations" for electric cars located in people's homes, in parking areas and along travel routes. Unlike a normal service station, an electric car can't be charged up in the same way as a petrol-driven vehicle. The 2-3 minutes that a petrol driven car takes to be filled up is highly convenient when compared to the 30 minutes or so it would take an electric car to be charged up - and then only to an 80% level (fast-charging has the problem of not being able to charge fully, whereas slow-charging - done at home overnight - is able to charge up to a 100% battery capacity).

Yet even if the infrastructure is developed (at great initial expense to the taxpayer, though it will pay itself over time), the question of speed and range do come into consideration. While there are a substantial amount of people who would purchase the Leaf on its environmental features alone, the only thing going for it in the mind of the mainstream public would be its fuel economy, which is estimated by Nissan to be 150 miles per "gallon gasoline equivalent" (mpgge). In terms of internal space the Leaf would be considered no better than any other car in its size range, while the speed isn't exactly as fast as people would like (at least for those who wish to go speeding).

The most serious problem, though, is the range. Each Nissan Leaf has dozens of Lithium-Ion batteries stored under the floor - see here for a cutaway view. But even with these dozens of batteries and with the sheer time it takes to recharge them (especially when you are far from home) the range - 160km (100 miles) - is most inconvenient. Yet as I studied the subject further, the more encouraged I became.

Battery technology has come along in leaps and bounds. When the EV1 first came out in 1996, the two-door coupe used standard Lead-acid batteries and had a range of no more than 89km (55 miles). Subsequent improvements to the car's batteries - namely the use of NiMH to replace lead-acid - increased the vehicle's range to 116km (72 miles), which was better but still not good. Moreover, even the newer NiMH batteries took up a lot of room which essentially prevented the EV1 from having enough luggage space to compete with similar vehicles. Now, over a decade later, Lithium ion battery technology which was developed to increase the usable life of laptop computers, is now the preferred technology for electric car energy storage. As a result, the Leaf has more electrical power storage available to it than the EV1 - which in turn is responsible for the Leaf's superior luggage and passenger space. Yet it is nevertheless clear that current battery technology still has a long way to go.

It is inevitable that an effective battery system for an electric car will be developed. Every few months science and technology websites announce improvements to Lithium-ion technology or even better alternatives. As these technological changes begin to arrive, electric cars capable of 200, 400, 600, 800km or more ranges will be developed - and this will be the result of more electric power being stored in smaller and smaller battery packs.

But what of the 1st generation Nissan Leaf and its potential owners? It's all very well to argue that battery technology will be ready one day but that is hardly going to make people want to buy the Leaf now is it? Well, actually it might be - and this is where the advantages of battery technology comes in.

Here's the key - try to think of your potential electric car as an electric torch. As anyone knows, when torch batteries run out they just have to get recharged, or else thrown away. In the latter case, the purchase of new batteries is easy because batteries are modular and designed to fit all different sorts of uses. Now check the picture of the Leaf's under floor battery packs again - click here. Notice anything? They're modular. The Leaf doesn't have one big battery but dozens of smaller ones. If a battery is faulty then all you need to do is get a new one. And at some point in the future, you will be able to buy battery packs for your Leaf that can store more power. This means that your Leaf's range might be 160km now, but in 2 years time and with some newer batteries, your range might increase to 190km. A few years later and newer batteries increase the range to 250km. Own the car long enough and there is a chance that the newest battery packs could push the range of your 2010 Nissan Leaf to beyond 1000km. You can't do that with an ordinary petrol driven car - the only way to increase the range would be to increase the size of the petrol tank.

But electric cars have all sorts of other advantages over standard internal combustion engines. The most obvious is the lack of moving parts. An electric motor designed to move an axle doesn't have valves and pistons and doesn't need a driveshaft or a transmission. In short there is less to go wrong. Moreover, the lack of a driveshaft ensures that a car with an electric motor has a very high level of torque available to it. This means that even low-powered electric cars have the ability to move heavier than normal loads and climb steep inclines.

One design that Mitsubishi is developing is the MIEV concept - the placing of an electric motor within the wheel itself. This would allow a car to have essentially four electric motors powering it - one located inside each wheel. Obviously these MIEV wheels are modular enough to ensure that any faulty motors can simply be replaced as easily as the changing of a wheel - you can imagine a MIEV electric car not only having a spare wheel in case of a flat tyre, but also a spare engine inside it in case of a faulty engine. The great advantage of the MIEV design is that it provides more space inside the vehicle for batteries (there's no motor in the car at all), as well as providing constant 4 wheel drive - which can be quite useful even if you don't take the car off road. The Nissan Leaf, however, is a "traditional" front wheel drive in that the motor drives both sets of front wheels.

The last advantage that electric cars can bring will occur once the infrastructure is up and running. Essentially it can be argued that wherever there is grid power available there can be  a charging station. Current service stations need to have large underground storage tanks and need tankers to come along and refill them on a regular basis. An electric power infrastructure can allow smaller or larger charging stations according to need, as well as the ability to set one up near the electricity grid - no underground tanks need to be installed and no regular deliveries need to be made. Charging stations can also be automated, reducing the need for labour.

Petroleum powered vehicles produce as much if not more anthropogenic carbon than coal fired power stations. If the world is serious about reducing carbon emissions then electric vehicles must replace vehicles powered by internal combustion engines. Yet it is obvious that more electric cars will result in more electricity being used, which means that a drop in one area of carbon emission (petroleum) may end up increasing the use of other sources of carbon emission (coal and gas power stations) - though the net result will be a drop in carbon emissions (the carbon emissions resulting from an increase in coal or gas power due to increased usage of electric vehicles will be smaller than the carbon emissions no longer produced by cars powered by petroleum - this is because electricity resulting from coal and gas power plants is more efficient than internal combustion engines). So while there will be a drop in demand for petroleum, there will be an increase in demand for electricity which will necessitate the building of new power plants. Given the state of carbon levels in the atmosphere and the need to remove all forms of carbon pollution, new power sources must be carbon free (eg wind, solar, geothermal or even new forms of nuclear power).

I'm looking forward to electric cars. They will be quieter and simpler to drive. They will be (eventually) easier to "fill up". The inherent advantages of increasing battery power storage technology and 100% torque will eventually make electric vehicles better to drive than anything we have now. It will take time, but I'm actually a bit optimistic.

Update 2010-03-19: By way of comparison in terms of power and torque, it is good to compare the Leaf with the Tiida - the design it is based on. The Tiida has a 1.8 litre engine capable of producing 91 kW (122 hp) of power and 170 Nm (127 ft·lbf) of torque. By way of comparison, the Leaf produces 80 kW (110hp) and 280 Nm (207 ft·lbf) of Torque. So while the electric car produces 12% less power than its gasoline powered competitor, it produces 64% more torque. So while the Leaf has less power than a 1.8 Litre engine, it has more torque than a 2.4 Litre engine. It has, for example, more torque than a Ford Focus. Add to this the fuel economy - the 1.8LT Tiida at its best reaches 8 litres per 100km (29.4 miles/gallon) whereas the Leaf runs at 1.57 litres per 100km (150 miles per gallon) in the "gallon gasoline equivalent" (mpgge).

Random thoughts on our vegetarian future

One of the strategies seen by climate futurists (ie those who believe in global warming and who are offering possible solutions) to save mankind is for the world to become more vegetarian. Unfortunately this has been derided (mainly by climate sceptics) for being, well, too lefty and radical.

What I can predict, however, is that even if nothing gets done currently, the future will be vegetarian - there will be no choice. And the reason for this is not due to smarmy governments relenting to PETA, but market forces.

Let's say that in 20 years time, climate change is impacting food production worldwide. Changes in rainfall because of global warming have resulted in less rain falling in breadbaskets and more rain falling on areas not used much for farming.

So with a drop in food supply comes the natural market response - an increase in prices. And it is not just one particular foodstuff but all that are affected. So the price of grains, vegetables, dairy and meat goes up.

Of these the most expensive is meat, which means that the market would respond to higher meat prices by dropping its demand. In its place would come an increased demand for meat substitutes, which are essentially protein based crops such as lentils, chickpeas and soy beans (to mention just three).

One main reason for this occurring is that the farming of grains and legumes produces more joules of food energy per square metre than your standard cattle station (or non-cattle equivalent). It would therefore make economic sense for farmers to shift their farms from meat production to grain or legume production. With this under way, farms would then be able to produce more food energy to meet the sky rocketing demand.

Of course this change will not come overnight, and nor will the change be the same throughout the world. The world's farmers are not suddenly going to kill their cattle and grow lentils. Instead, it will be a gradual process and there will still be meat producing areas around the world catering for the richer nations.

Unfortunately it will be the poorer nations that will suffer the most during this switch-over, as they are the least likely to be able to cope with a change in crops, less grain production in drought affected areas, and the technology and know how to take advantage of changing conditions. Expect famine in other words.

Random thoughts on population decline, economics and the Islamic hordes

One of the greatest errors made in modern studies of demography and economics is the assumption that population decline and an ageing population is somehow disastrous.

Behind this assumption are two further assumptions - that taxes are somehow bad and that a decline in GDP is bad.

It is true that many western nations will have a declining population by 2050. Many of these nations have old age pension systems funded by tax revenue, so the retired and aged people living in these countries will be supported by these taxes.

But of course the assumption is that increasing these taxes are bad. They're not. And the reason is that when a population declines, a country is spending less money in the following areas:

• Property: Less people means less demand for property.
• Infrastructure: Less people means less need for new water, electricity and telecommunications infrastructure to be built.
• Education: Less people at the younger age spectrum means smaller schools and colleges.

So for all the doctors and nurses and administration staff that is needed to support an ageing population, there will be a drop in demand for constructions workers and teachers to compensate for it. In other words, an increase in welfare spending on the aged is matched by spending decreases in other areas of the economy.

Ah, I hear you say, but constructions workers and teachers are essential for economic growth whereas nurses and doctors looking after retired people are a drain on the economy. Not necessarily - they are all producing goods and services. What you're worried about is GDP.

An increase in GDP is not necessary for good economic conditions. Economist Robert Solow's exogenous growth model proves that the natural state of an economy without any growth inputs is one of stabilisation. In other words, it is quite possible to have a stable state economy that provides workers with full employment.

Of course, when a population declines the effect upon the economy is negative. Yet that is not necessarily a bad thing. If an economy is in decline as a result of a population decline, the trick is not to aim for growth, but to focus on GDP per capita. In other words, so long as GDP per capita increases, total GDP can continue to fall. Another way of looking at it is to ensure that GDP decline is slower than population decline: If GDP declines by 0.5% in a year while population declines by 1% over the same period, then you have a good thing happening.

There is one final problem with people worried about population decline - they do not seem to understand basic demographics. "Populate or Perish" is one catch cry that sums it up - we must increase our population or else our nations will die out.

That's rubbish.

Take the USA. In 2009, the USA had just over 309 million people. If the population in the US begins to decline such that there would be 209 million people by 2109, is that such a bad thing? Population decline won't wipe a country off the map - no one is going to "perish". Unless, of course, people somehow think that Moslems will continue to have lots and lots of babies and take over the world - a common semi-racist belief amongst many. It is racist because it is based mainly upon ethnic assumptions and because it assumes that such ethnicity will not change. The reality is that many Moslem nations have exhibited a substantial drop in fertility rate over the last ten years.

Demographers have pointed out that when you take into account things like infant mortality rates, accidents and other conditions, the average woman must have 2.1 children in order for the population to remain stable (ie 10 women producing a total of 21 babies). If the average woman has less than 2.1 children there will be (eventual) population decline, while if they exceed 2.1 there will be (eventual) population growth. Of course, many western nations have fertility rates of 2 and below, which indicates population decline. But here is a list of nations with predominately Moslem people who are near or below 2.1:

• Bahrain: 2.29
• Lebanon: 2.21
• Kuwait: 2.18
• Indonesia: 2.18
• Turkey: 2.14
• Iran: 2.04
• Tunisia: 1.93

And all of those nations have declined from higher fertility rates in the past. This proves that there are Moslem nations that are not breeding children to take over the world, which means that Moslem nations which are having lots of children can also drop down to low birth rates.

In summary, population decline is not an economic problem, it will not cause economic and social chaos and it will not allow a horde of Moslems to take over the world.

More random thoughts on government debt

All Western nations - with the notable exception of Australia and Norway - have high levels of public debt that will inexorably erode any economic recovery over the next decade.

Back in 1996, the Howard government in Australia enacted all sorts of austerity measures to cut government spending. At the time they did this, unemployment was still relatively high at between 7 to 8 %. Within 10 years, all government debt had been paid off.

There is still some level of Australian government public debt - the market needs some sort of government backed securities to act as a benchmark for lending elsewhere - but this is balanced out by government investments in the market (called the future fund).

The advantage this has brought Australia is profound: 100% of government spending goes towards government programs and policies, rather than debt servicing.

Western nations, especially the PIGS (Portugal, Italy, Greece, Spain), all have very high levels of public debt, and that debt has meant that a huge proportion of government spending goes towards debt maintenance rather than on health, education, law and order, and so on. Paying off debt is essential to maintain quality government services.

A government won't collapse because of debt. If a government takes on too much debt they can simply choose to default. But the result of this default will be to strip investors (which includes the pension funds and savings of ordinary people) of their savings. In other words, the pain of the default is felt by the market and by households.

The other thing about debt is that indebtedness is a liability during an economic collapse while savings are an asset. As anyone knows, losing your job with $10,000 in the bank is better than losing your job with $10,000 owing on your credit card. So it is with governments.

Governments can and should run fiscal deficits during hard economic times - but these deficits must be balanced out by savings when economic times are good. The governments of both Australia and Norway had erased their public debt leading up to the global economic crisis, which has allowed both nations to enter the crisis in a strong fiscal position.

Random Thoughts on inflation and interest rates

Let's assume that you live in an area that has been flooded. Let's assume that there are thousands of you sitting in houses on a large "island" caused by the flood. Now let's assume that the flood takes years to subside and that you don't have any way of getting goods from the outside or exporting goods to the inside. Let's also assume that there is no legal tender and that rescue is impossible.To summarise:

• Forcible closed economy for many years.
  
• No way for imports/exports.
• No currency.
• Rescue is impossible.
  

So what would you do? Naturally the best option would be to ration out necessities, like food. Because food is so scarce, and because it is so important, hoarding it for future use is logical. Other economic activities, like dance classes, would become less important. As a result, the relative value of food goes up while the relative value of dance classes goes down. In this environment, people are more likely to stop teaching people to dance and more likely to plow up their back yards to grow food. By contrast, people who chose to teach dance instead of grow food are idiots.

Now let's add money into the equation. With the economy suddenly becoming closed and no longer having the ability to export/import goods and services, the result would be a huge jump in inflation in some sectors (such as the cost of food) and deflation in other sectors (such as the cost of dance classes). But let's assume that the net effect is inflationary. What to do?

There is a choice - you can increase interest rates to control prices, or you can keep rates low to stimulate production.

If you increase interest rates to control prices, the "economy" contracts considerably. Because money becomes more valuable, people are no longer using it to purchase food, which results in a drop off in the purchase of food.

In other words, the raising of interest rates to control the inflationary effect of a supply shortage leads to the common sense conditions of the currency-less flooded island economy I have outlined.

By contrast, letting money devalue via inflation will lead to people using it to purchase the wrong goods and services, which occurs because confusion over money's usage increases the more often it changes in value. If money keeps inflating out of value, a barter system will eventually result and the "common-sense conditions" will eventually arrive... except the currency system has been ditched.

So, when faced with inflationary pressures from supply shortages, we have a choice - we can either kill off inflation, which leads to common sense austerity in the face of poverty while still using a currency; or we can let inflation confuse everyone for a while before common sense austerity is finally reached after having ditched the currency.

And, of course, the removal of currency then leads to further poverty, or at least a severely impaired potential to regrow.

tl;dr Price stability is essential when using currency, no matter where the inflationary pressure comes from.

Random thoughts on Keynesianism

The net effect of Keynesian stimuli is proportional to its relative broadness.

The broader the stimuli, the less growth seen in the short term, the more sustainable it becomes in the long term.

The narrower the stimuli, the more growth seen in the short term, the less sustainable it becomes in the long term.

Eg: Should we spend $30 billion on one company or upon 3000 companies?

Question: Is debt reduction a better choice than production?

(these are random thoughts outlining some of my thinking, not any of my conclusions)