Sunburnt cows and daylight saving time

I am shocked. Really. The amount of time and energy devoted to ridiculous ‘social issues’ like daylight saving time could be devoted to so many other worthy causes.

The DS (or is the BS) debate has seen the light of day again this week (sorry about that) in WA, where farmers have cited an obscure 1996 study by Stanley Coren that shows an extra hour of daylight contributes to fatigue and therefore road accidents. Apparently the study found an 8% increase in road crashes the first Monday after the introduction of daylight savings time, compared to the previous Monday.

While it is quite obviously a scare campaign by the WA Farmers Federation (WAFF), their website appears not to be a spoof, and contains the following important questions for the concerned public to consider. I have reproduced them below with my personal response to each.

• Does it make it harder to put your children to bed, while it is still light outside?
Do you mean like when they have a daytime nap?

• Are people becoming more fatigued, as they are inclined to stay awake an hour later at night, and what safety concerns does this raise (i.e. accidents while driving)
Are they also inclined to stay up later because they can use lights? Why aren’t they inclined to sleep in longer?

• Does it make sense to be driving to work in the dark during the daylight saving period?
Like the rest of the year you mean?

• Does it put businesses out with their key trading partners in Asia, given that WA’s normal time zone is the most populist time zone in the world?
Get real. By this logic we should all have the same time zone. And while phone calls are instant (and business hours will still overlap for 7 hours a day) transportation of goods takes time – a lot longer than the one hour we are so concerned about. Oh, not mentioning that by changing time by and hour you get a whole lot of other regions in on the same time – you win some, you lose some.

• Are you concerned that children may be in the sun during the hotter and more dangerous part of the day during daylight saving?
They’ll be sleeping because they are fatigued from staying up late. Is that why it wouldn’t be safe? Wouldn’t want tired children playing.

• Are there animal welfare issues, from farmers being forced to work livestock during a hotter period of the day?
No one tells you how to run your business. You can do it at the same ‘sun time’ if you like.

• Is daylight saving convenient?
Depends who you are.

Apart from the fact that literally hundreds of millions of people across the world quite comfortably handle a change in timekeeping twice a year, there is further scientific evidence to show the fallacious nature of the WAFF claims.

Four months after the cited Coren study was published, a response citing a plethora of existing studies using much more detailed data was published that put the debate to rest. They find a reduction in the number of evening road accidents, but and increase dawn accidents, with a net effect 900 fewer fatal crashes based on data for Virginia. In fact they cite a rigorous natural experiment in the UK where daylight savings time was kept year round in a 3 year experiment, where a reduction road fatalities by 1100 a year was attributed to more evening hours of light.

Oh, and I forgot to mention that the favourite study of the WAFF also showed that there is an 8% decline in road accidents on the first Monday upon a return to non-daylight saving time, leaving the net effect on road accidents to be… zero, zip, none.

So the question I have is this. Why are the members of the WAFF so upset about daylight savings time as to spend $10,000 and plenty of their own time and effort on a scare campaign? Further, in the US, farmers are having much the same issue, and citing the same study by Coren to ditch daylight savings time. In fact most web sites against DS time cite this research.

I wonder if we did the reverse, and called DS time standard time, and called standard time daylight wasting (DW) time, would we have the same anti-DS campaigners join the anti-DW brigade? Don’t waste our winter daylight because it causes traffic accidents.

What if we flipped it around and had DS time in winter in QLD? We could then have the same summer evenings (sunset around 6:45pm), and longer winter evenings, with the latest sunrise in winter being 7:39am, but the earliest sunset delayed from 5pm to 6pm (with twilight for half and hour before sunrise and after sunset).

Personally I prefer winter DS time. But daylight savings or not I’ll be fine. Can we just stick to our decisions and stop filling the airwaves with nonsensical rubbish that confuses and intentionally deceives people for narrow-minded agendas?

I’ll leave you all with a quote:

Of course, anyone who really doesn’t like daylight saving could leave their watch unchanged, stick to their old schedules as far as possible, and just bear in mind that everyone else is using a different time. The reverse is true in the present situation if you really like daylight saving.

Oh, yes I get the irony about the waste of time and effort on DS debate, and the effort I spent writing this blog. That’s just how frustrated I am with intentional deception by farmer lobby groups.

The construction of value

My title is yet another rip off. This time from Dan Ariely et al.’s 2006 paper Tom Sawyer and the construction of value. In my opinion, this paper lifts the lid on economics. Let me explain.

The majority of economists (there are exceptions) take the preferences of individuals as a given. I prefer watermelons to rockmelons if I am willing to pay more for watermelons. The study of economics can then be seen to answer the following question – given a group of individuals with given preferences, how are resources allocated?

Determining how these preferences are formed in the first place, and how they can be manipulated is an entirely different question, and one economists are only now beginning to grapple with. Psychologists and marketing departments have known for a long time how to influence peoples preferences, but economists have thus far remained quite ignorant.

Personally, I see a serious issues with overlooking the formation of individual preferences by economists. Ignoring the ability to manipulate preferences ignores an important feedback loop when attempting to explain inequalities of wealth. Not only does wealth provide the ability to accumulate more wealth, it provides the ability to manipulate the preferences of others in society. In fact, it is quite interesting to theorise about the impacts of a tradable commodity called a 'preference manipulation service' in a market economy. How would such a theoretical economy compare to one in which all preferences are fixed through time?

But getting back to the main point, that our preferences are revealed by our decisions, how then would we quantify preferences for non-market goods? Non-market goods are those which we cannot directly buy and sell such as air quality, clean oceans and other such things. This is a real dilemma for environmental policy makers.

The problem with surveying peoples’ willingness to pay is that they don’t actually have to pay, and can respond consistently with social expectations. For example a recent ABS survey found that "around one-third of households who were aware of GreenPower were willing to pay extra for electricity generated from renewable sources, but not all of them were using it, with around 10% of households paying for GreenPower electricity". Maybe if we use a conversion factor for such surveys, such as one third or one quarter, we might be close to the truth (if there is a truth).

There is a clear link between Dan Arierly's paper and the methods for surveying peoples preferences. For example, there are substantial priming effects. As a general rule, the more information supplied to the survey participant, the more they are willing to pay for anything! Tell them all the intricate details about the plight of penguins and we will admit that they are more valuable to us. A one liner that penguins are in danger and we won't take too much notice.

The economists dilemma then is whether or not we even have a preference unless we are forced into making the decision. Are preferences up for grabs until the last moment when we commit ourselves to a purchase? Are preferences the quantum mechanics of economics - not really there until observed?

Then again, maybe we shouldn't delve to deeply into this or we might find out just how easily we can all be manipulated and how little we know about ourselves.

Happiness, facebook style

Although spiritual leaders would suggest that happiness comes from within, recent research is suggesting it may also come from without.

You know the feeling, when someone laughs uncontrollably, you just start laughing as well for no reason – simply because they are laughing. Well this type of reaction is known as ‘emotional contagion’ and may describe why some groups of people always seem to throw a great party while others seem to be able to spoil the mood every time. A group of dominant and happy people can actually make others in the room happier.

Thinking of friends of mine I know there are some who are constantly happy, and probably part of bond between us is the mutual benefits of happy emotional contagion. And of course, this is likely to result in a feedback loop where one happy person makes others happy, and others who are now happy make the original superstar even happier.

Just throwing it out there, it probably happens in reverse as well. Unhappiness rubs off too. Maybe try whistling in the streets and see if you can rub off some happiness.

Hedonic price indexes - not only in America

If you recall a previous blog which linked to a crash course in global economics, you would remember a part about hedonic price adjustments when measuring the Consumer Price Index (CPI). Unfortunately, these methods are being adopted in Australia. For personal computers a hedonic price index was introduced into the Producer Price Indexes in 2003 and into the Consumer Price Index and the National Accounts in 2005.

That means that although prices for computer may be steady, they are falling in ‘real terms’ according to the ABS, thus we are all experiencing cheaper computing. The following graph shows that computers declined in price by 30% from July 2007-08. The same models only dropped in price 15%. So the question is: do we include the extra 15% decline in our price index?

I would suggest that the methods used by the ABS misinterpret the term hedonic. Hedonic psychology is concerned with the attributes of good or service from which we derive pleasure. By breaking down a single product into hedonic attributes we can determine the willingness to pay for component parts.

Hedonic analysis has been happening in property valuation since it first began. To compare heterogeneous goods we break them down into characteristics such as location, views, noise, number of bedrooms, and so on. We can then estimate how much a person may be willing to pay for an identical apartment in a different area, or with different views.

In terms of the computer price index, they have taken factors such as CPU speed, RAM, memory, as the characteristics from which we derive value. But clearly this is not the case. Many people have no idea of these specifics. They just care what it can do – save music, photos, word processing, internet etc. If I write this blog on an old computer, and I getting less satisfaction than writing it on a new computer? Unlikely.

A good that seems to me to be more suitable for hedonic pricing is housing. While house prices have dramatically increased, so have their quality. The renovation boom of the past decade has turned many suburbs into backyardless air-conditioned wonderlands. We can use hedonic methods to easily determine the potential price or rent of a house of apartment based on its features (this is how real estate agents do it in their heads). Now unlike computers, these features closely relate to the benefits we actually derive from the home. An extra bedroom of a given size has a number of possible uses from which we derive benefits. Adjusting for an extra room is prefereable, adjusting for the type of materials on the wall is probably not as good. Just because a more modern material is used (read faster processor, or bigger hardrive) doesn’t mean I can actually use the room (computer) for more purposes than I previously could.

Since housing is a large part of household expenditure (20%+) this type of adjustment might provide interesting results.

Anyway, it’s a slippery slope of political misdirection from here with hedonics. Let’s hope that PCs are just a pet project for now (they are not - one of the desired outcomes of the review of the desktop computer price index is the development of techniques to be applied to hedonic price indexes for other consumer durables), until their methods align a little better with the theory. This may involved surveys of consumers see which attributes provide them with benefits.

Why are the poor, poor?

Economists have tried to determine the reason some countries are wealthy while, relatively speaking, others are poor. They have eliminated a number of reasons that at first seem very logical.

1. Endowment of natural resources.
2. Quality of government and rule of law

However one major flaw is that studies comparing the endowment of natural resources compare current day reserves of resources currently in demand. If they had instead compared endowment of natural resources of use during the rise of agriculture some thousands of years ago, the answer may have been quite different.

I would propose that the reason some countries are poor, despite their current resource endowment, is that they were too slow to take advantage of those resources.

Consider the colonial powers of Europe during the 1600 and 1700s, namely the Dutch, German, English, the Spanish earlier on, the Italians a thousand year earlier, and the Greeks before that. The wealth of these nations grew from their own natural resources AND the quality of their government and rule of law. If there are rival tribes within a State, so many resources are devoted to war, that the accumulation of capital in the form of buildings, ship and machines is impossible.

Given time, any part of Africa could have achieved this type of emergence of civilization and wealth by developing cooperative States. In fact any less developed, or less wealthy, society could have followed this path. But there is a key reason why this did not occur.

The already wealthy European nations began trading, mostly through coercive force, with these less developed countries. Now trade itself is fine if we all start from equal positions and enter into it voluntarily, but history has shown that such ‘perfect markets’ are rare. Often one side has a clear advantage. And so it was with European traders.

If you have zoned out from reading, now is the time to pay attention. The reason trade between the already wealthy nation and the poor nation was not going to improve the situation of each player equally is because the wealthy nations brought with them capital. That is, they had tools, ships, weapons, and all manner of goods (and the knowledge of how to build them) that could be brought to the party, whereas the poor nation merely had labour and natural resources.

Since investment in capital generates a return, the wealthy country could maintain returns on the poor country’s endowment of natural resources. If they were wise (and most were very savvy) they would reinvest in the land itself. Thus the wealthy country would continue to preserve its wealth through the ownership of land and capital of other countries.

In absolute terms, the poor country would probably become ‘less poor’, but in relative terms, the gap in wealth between the rich and poor countries would in fact grow, not diminish. This is capitalism.

However, that is not to say that such a situation is inevitable. With an improved knowledge of the nature of capitalism, the Asian Tigers have been able to adopt the same strategies as the British colonial capitalists once did. By smartly investing in capital, both domestic and abroad, they have broken this historical trend.

Even as I type, China is making moves to acquire Australia’s mineral reserves. They are seeking to begin owning the capital, the physical means of production, by acquiring large shares of mining companies. Thus, they will generate a profit stream back to China from the use of Australia’s natural endowment of resources.

The same thing happens on a domestic level. Those who inherit wealth have a distinct advantage as they preserve their wealth in capital which can generate future returns, thus reinforcing the cycle. But that is not to say that those who start life relatively poor can never prosper. If they follow the simple rule of saving their earnings on labour and investing in capital, they too can prosper.

If economists could take a history lesson and broaden their perspectives a little they would see the simple explanation for the observed divergence in wealth. Given a stable political environment, rules could be attached to foreign aid that might require a proportion of domestic reinvestment in capital works. Poor nations, desperate for foreign capital, might want to rethink the advantages of allowing foreign investment in their natural resources, and instead promote the extraction and use by government owned companies that can keep profits within the country for further reinvestment.

What happened to whistling?

I see in so many black and white films young working class men strolling (perhaps even skipping) to and from work while whistling a merry tune. Why is it that in my hours spent cruising the streets of Brisbane I hear no whistling? Come to think of it, I may the only whistler remaining in Brisbane.

What happened?

Here are my suggestions:
1. People have headphones on playing music for them
2. People don’t know what good music is anymore
3. People have less skill (I remember learning to whistle when I was 7 – it took a while to get proficient)
4. People are afraid of bringing attention to themselves (although they are happy to wear whatever ridiculous fashion is trendy at the time)
5. People are to busy thinking of other things to think about a song
6. People aren’t very good at remembering portions of a song long enough for it to be interesting
7. People have lost imagination and really shy away from trying such a crazy thing as whistling their own melody

I propose – bring back whistling. And my reason is this. When I watch the crazy chimney sweep (thinking of Mary Poppins here) whistling his way to work, it makes me quite cheerful about life. There is a positive externality from whistling.

Maybe it is good government policy to slip some whistling in their next propaganda campaign. If you taught it at school it would lose its appeal. People have to think that they thought of it themselves.

Voting revisited

In keeping with the theme of my last post I will examine elections in more detail.

There are two issues that I want to raise;
1. strategic voting, and
2. the need for electoral districts

Strategic voting is where a person chooses not to vote according to their preferences because the probability of achieving them is very low. They may instead choose to vote for a second choice candidate in the hope of getting a higher probability second choice outcome.

For example, in the recent Queensland election I may have wanted to ditch the current Labor government for the Greens. Knowing that the Greens were unlikely to win a seat, I may vote instead for the LNP who were my second preference, but would have a much higher chance of winning.

The question remains, how many people vote for the major two parties but would really prefer a minor party or independent?

This brings me to my second point. Why do we need electoral districts? Given that each level of government should be concerned about issues covered by its laws irrespective of their location, why do we a need a local person to represent people at a State level? Shouldn’t the concerns of people anywhere in the State be equally as important? Why then the need to differentiate communities by their elected representative?

My solution is simple. Remove electoral districts. Have a parliament made up of representatives from each party in proportion to their vote. If 30% of votes go to a party, they get 30% of the seats to allocate to their best people. People would then have a clear incentive to vote for their preferred party/candidate. In this scenario independents could be elected by anyone in the State – it might be a large ballot paper.

The only problem that remains is getting anything done. If the parliament is made up of ten minority parties with 10% of the seats each, there is a strong incentive to do nothing and blame everyone else for delaying your proposals.

Of course, there is no perfect system. You get better incentives for people to vote for their preferences, you get less done and even more political finger-pointing.

Rewarding bad behaviour

One of the main functions of government is the redistribution of wealth. However, governments also have the luxury of promoting social goals through the incentives offered to both the contributors, and the beneficiaries of this redistribution.

However, the unfortunate problem is that much government intervention rewards 'bad' behaviour.

Let me explain.

A progressive tax system conveys the principle of vertical equity; that those with a greater ability to pay should pay more. However, if you look at this from a slightly different perspective, you are simply punishing the good behaviour of highly productive people. The reverse of this is rewarding people for not working through unemployment benefits.

Don't get me wrong, I believe that these two problems are minor in comparison to the benefits such a welfare structure brings to society. But what about other more controversial ways to use taxes and subsidies?

In the water industry there have been plenty of subsidies lately in both and urban and rural context. In the city, households are given free water tanks and free toilet and shower fittings to promote more efficient use of water. In the country, there is a rural water use efficiency program that essentially subsidises farmers to invest in more efficient irrigation methods.

If you think critically about this you see the perverse incentives. Those households who are already efficient, who already have efficient fittings, get nothing. Those wasteful households who have done nothing to conserve water now get a whole bunch of free stuff. The same applies in the country. Those irrigators who already use more efficient techniques get nothing while those who have caused the water problems by using outdated irrigation methods get subsidised sprinklers.

Rewarding bad behaviour has been happening with the subsidisation of energy efficient lightbulbs, solar hot water, and other 'energy saving' gadgets. Those people who have already spent their own hard earned cash on such things get nothing, while the slackers get some them all for free.

It is equally as bad with the advent of proposed trading schemes for both water and emissions. Those companies and individuals who already use the most water or energy efficient technology have little scope to adapt. Those who use outdated and inefficient technology now get incentives for them to invest in new technology. They also get rewarded with more permits due to their higher historical emissions or water use.

The question that remains is how to overcome these incentives. Well I for one have a view that the water and energy efficiency subsidies are ineffective anyway, so the easiest thing to do is scrap them. For the cap and trade systems, which I believe are currently the best way to deal with finite renewable resources (and for sustainable levels of emissions/pollution), it is a more difficult question. You could, for example, gift permits at the beginning of the scheme inversely related to previous use. The more they have used, the fewer permits they get. But determining an actual measure for this over a vast array of businesses of different scales and different industries seems close to impossible.

I am open for suggestions on how to overcome these issue, and for any other examples of well intentioned policies rewarding bad behaviour.

Another reason for small government

As a new public servant I have discovered what I would call the ‘baseline’ person. They don’t seek to challenge the status quo, they all seem to desire the ‘normal’ life – a house, two cars a pool out on the city fringe. If you tell them you did anything out of the ordinary is immediately received with absolute shock. Mountain biking – shock. “Isn’t that dangerous?” You have longish curly hair – shock. You eat rice that comes wrapped in a leaf – shock. (insert anything that hasn’t recently been on Today Tonight here) – shock.

I am going somewhere with this. Public servants seem to be, either by selection or through indoctrination, reluctant to challenge anything. Also, given the ‘worker’ mentality and fairly widespread unionism, I would suggest that most would be Labor voters.

This leads me to two interesting conclusions.
1. The reluctance to challenge things make them highly likely to vote for the sitting political party, and
2. if that political party is Labor, then the this likelihood is greatly increased.

Therefore, there is a self-fulfilling process happening. Labor governments by their nature prefer more government intervention, thus need a larger government. The more people they employ, the more voters they get indoctrinated, thereby reinforcing their position.

When a challenging party that believes in small government comes along, there is a massive pool of workers who, now indoctrinated, also feel like there job is threatened if the government is going to downsize.

Maybe this goes some way to explaining the Labor dominance in the States. Maybe it helps to explain the failure to get widespread support to dispose of States altogether. There are 1.3million State employees in the country, but only 400,000 employees in the federal and local governments combined.

Then again, maybe I have just seen a representative sample of a much broader population. Given that I have spent the past 10 years on the fringes, rather than in ‘mainstream’ society, this might just be my first real introduction to the silent majority, the baseline person.

Tuscany v Tassie

For those who don’t know, I am planning a trip to Europe in June. The attraction of Europe for me, a simple Aussie, is the history of human society that is embedded in the environment there. The rivers, still often beautiful, have been subjected to thousands of years of human tinkering. No one would even know the original path of some developed rivers. Even the countryside is not ‘natural’, but the product of thousands of years of agriculture in various forms. The cities obviously are the product of man, but still capture humanities path through history to the present. This humanised environment is beautiful and enticing to me.

Then I consider the wild areas of Tasmania and New Zealand. My Dad is a fan of this environment, hiking the tracks in the fresh mountain air, with none of the bustle of city living. But even in this environment, humanisation (for want of a better term) is occurring. Huts are built. Tracks are formed on the side of steep ravines, and fallen trees are transformed in to nifty seating for a weary wanderer.

When I go camping, it is partly to get closer to nature, but in doing so I change it. I instinctively humanise the landscape as I go - remove fallen branches to make some nice open space, forge a track through to the beach, and make a fire place. I want to go out to nature, but then subconsciously change it as soon as I get there. The result then, for me at least, must be better than the landscape in its original form.

At this moment I believe there must be an instinctive desire to humanise our environment, whether we value natural environments or not. But how does this impact our lives in contemporary urban society?

One important thing that springs to mind is that this humanising desire explains why people apparently ‘over value’ design. I live on the darkside with a Mac laptop. Yes, in my opinion it is more functional, but I must admit, in the beginning, the design really appealed. When the initial decision was made, I simply paid for looks. It was humanised.

More specifically, does this kind of desire explain the premium people are willing to pay to own their own home? Yes, home ownership is more secure, but does security explain the massive premium people are willing to pay? Or does the ability to customise, to humanise, to personalise our space contribute to this willingness to pay? I don’t know; it is just a suggestion.

To put the whole thing in reverse, would there be outrage at the suggestion that you couldn’t personalise your office space at work? Would a premium be paid for home ownership if regulations forbade different colour paint, renovations or extensions, and no changes to the garden?

Then again, maybe I’ve picked up on something that is explained by deeper causes and possibly has an evolutionary explanation.

It takes a global financial crisis (GFC) to...

1. Make government function efficiently. In our department budgets have been slashed, people are not being hired, travel expenses are coming down, but the same work is being done. What a way to improve the productivity of government.
2. Send very large but inefficient companies bust. They had so much power to keep doing what they were doing, holding back innovation, adopting new business practices last, but now they're broke, and the efficient guys remain. There will be plenty of slack to be taken up by young innovative companies. Also, rumour has it that Pacific Brands has wanted to cut back their workforce for a while now, but needed the GFC as an excuse.
3. Teach generation Y about the budget constraint. When I was teaching economics to first years they had trouble comprehending that individuals have limited budgets and must choose between various consumption options. A common response was that I just spend what I need, when I need. Maybe now their family funded credit cards are being reined in, and students will start get better results in first year economics.
4. Shelve poor infrastructure investments – I’m thinking of the Northern bypass tunnel here. No one has the money to build this kind of rubbish.
5. Make us all expert economists. The amount of rubbish in the media lately, and the number of unqualified and irrelevant experts is astounding.
6. Actually make people worried enough to pay off their credit card. Hundreds of dollars in interest payments and fees weren’t enough incentive – thanks GFC.
7. Reduce global emissions
8. Prevent new mining operations on environmentally sensitive sites.
9. Decrease politicians pay (US only)
10. Decrease outrageous CEO pay (US only)
11. Give us the cooking practice we used to pay for – for free in our own homes every night!

Can you think of anything else?

Updates

Well, it appears I was ahead of the crowd on at least some of the issues I've been discussing in this blog.

For starters, a previous blog that was critical of the research paper proposing to fix the floor in the emissions trading scheme pre-empted the current debate, which threatens to postpone any emissions reductions measures. You can read about the political debacle it created here.

Another point getting more publicity is the proposal that governments make no new policies in response to the GFC (that's Global Financial Crisis for those out of the loop). My stimulating paradox blog came to the same conclusion as Dan Denning. But hey, who trusts what they read on the internet.

A final update regards the announced (finally) Queensland elections. Given the GFC, the basic lack of innovation over the past decade, the threat to the Great Barrier Reef from climate change, the massive social disruptions likely to be caused from mining operations closing down, I am surprised there is even an opposition wishing to get elected! My bet is that whoever has the catchiest slogan will win - yes, it is a fickle business. But really,there may be plenty of fodder for bloggers in the next month.

Sorry for the cop-out blog, but there will be some detailed analysis next time.

Homogenous Humanity

I want to take a bit of a break from the financial crisis to talk about humanity, and more specifically, racial identity. The growing number of interracial and relationships I have witnessed, including my own, has led me along a line of enquiry that has some interesting implications.

To summarise, the question bugging me is whether the increased interracial breeding, especially in Australia, and probably much more so around the world, will cause distinct racial identities fade away? More importantly, will we end up with a ‘standardised’ race of humans? Or, will other environmental factors contribute to changing the nature of humans? Could we develop new races?

Overall, what will this impact have on our society?

The issue has bugged me since I learnt that there are in fact different races. At primary school I was completely ignorant of race. I had friends back then who I only now realise are Aboriginal, Indian, and Chinese. Further confusion was raised when I discovered that there are many policies that specifically determine outcomes based on race – with various Aboriginal assistance programs. There is an obvious justification for singling out the Aboriginal people for assistance given Australia’s history, but what about the half Aboriginal guy? Should he get half the assistance? Should half of him assist the other half of him? Why does he identify as Aboriginal and not Irish anyway? What about the quarter Aboriginal Chinese Indian African guy? Or is he something else altogether?

This brings me to the important social implications of such racial change. With which groups will the mixed race generations identify. Am I Indian or Chinese? And what if India was at war with China (heaven forbid); with which powerhouse will I side? My point is that the destruction of racial identity might have a beneficial effect of decreasing animosity amongst nations. In Australia especially it would be difficult to conjure domestic support for wars with nations whose racial heritage runs through the blood of many of our citizens.

Will religiousness fade away as racial ties fade? What religion would the son of a Buddhist and a Catholic be?

Would we try and preserve ‘pure’ races? Will some become extinct through breeding alone?

Maybe I should have at least proposed some hypothetical answers to these questions before I started writing. Please, I am interested to know your thoughts. Having a half Anglo-Saxon (what am I anyway?), half Chinese son myself I expect that many more questions will be raised. Will this generation of interracial children have trouble fitting in at school, being neither in the Chinese nor Aussie crowd? Who knows.

Challenging the time value of money

Why is it that we expect our savings to ‘grow’ all by themselves? What would happen if our savings diminished over time instead?

Let’s first have a look at the historical coincidences that led to the absolute acceptance that the future should be discounted. Before any banking system existed, to save you must store your valuables, whether it be precious metals, grains or other food, somewhere where they can be preserved. To save them for the future, you must invest MORE in the present, in the form of preserving food, building defensible stores, and if there was enough gold in there, possibly paying for protection, to have LESS in the future. Thus prior to banking , the future was valued MORE than the present.

The logic behind this is simple. The future is risky, and to maintain your wealth for future times of uncertainty, you must invest in the present to protect it.

So where did the idea of earning a return on savings originate?

It must have been some time ago when the idea of lending money with interest first came into being – it even gets a mention in religious texts. I imagine that the ancient Greeks and Romans were the first to consider the problem I am considering today.

I guess there were two interrelated issues that led to money lending at interest – the advent of central banking in the form of paying goldsmiths to store and protect your gold, and the advent of international ‘trade’. I use the term trade loosely because much of the trade was involuntary in ancient times – by that I mean that that trade was achieved by waging war. But the point is that through trade increased wealth could be achieved easily, which could then be used to pay interest.

To get back to the questions I raised at the beginning of the blog, I would suggest that the reason we expect our savings to grow is because that is how it has been for a long time. Most of the time we can generate a small positive return on savings if there is a little growth in production.

But what if we have reached some resource limits, and growth is now a little more difficult to achieve. How can we lend money with interest in an environment of negative growth? On a national scale, how can we generate the wealth necessary to pay the interest? In short, we can't.

Maybe some readers have already noticed a major problem with negative interest rates (or a deteriorating money supply, or a reversal of the principle of the time value of money). Those who hold wealth will have a much more difficult time preserving its value. Challenging this one basic principle raises questions of the validity of land ownership and rents, and how it may be possible to own any income producing asset, let alone value it? Imagine capitalising an asset at 0.00001% - any income producing asset would be almost infinitely valuable. Where would be the motivation to invest in any capital equipment?

Where does this leave us? To be honest, the more I think about it, the more I see the importance of maintaining economic growth. A sustained period of negative growth would destroy the system – the money supply, capital values, rents – but what would it be replaced with? I am yet to think of a reasonable alternative, but I am sure there must be one.

Stimulating paradox

I read an intriguing article yesterday about the fundamental paradox that underlies the global phenomenon that is currently known as an ‘economic stimulus package’. The basic gist is that to justify spending billions of dollars the government has to scare the crap out of everyone to justify it. In doing so, they radically increase the chances that people will want to save instead of spend. They could have alternatively just said everything was fine, downplayed the situation as a media beat-up, and done nothing. At the moment, doing nothing is exactly what I think is the best thing for governments.

But let’s take a moment to look at the theoretical arguments surrounding the stimulus. I am going to raise quite a few economic theories that have been subject to debate a long time, so please do a little research if anything interests you.

Keynesian theory suggests that recession is caused by a wave of pessimism that flows through society, impacting on business decisions. It has some merit. One business sees another buckling down for tough times ahead, so they do the same, and so on until everyone has reduced production, but no one knows why. Real herd mentality in action. The economists’ prescription for getting out of a Keynesian style recession (Yes that there are different types of recession that require different policy responses. For example one caused by a ‘supply shock’ to a key resource.) is for government to intervene in markets to maintain demand and employment, in addition to ‘talking up’ the economy to raise business confidence. It seems that the current policy response forgot to mention that things will be fine, and went for the big spend – the exact problem raised in the paradox article.

But there is more. The opposition raised a very interesting point about the merit of giving people cash to spend, when the principle economic theories of consumption suggest that only a very small proportion will be spent. Milton Friedman’s Permanent Income Hypothesis (PIH) explains how people choose how much to spend based on their long-term expectations of income. Thus it would be expected that a one off payment will be diluted amongst household spending over a long period.

The opposition has a few more economic theories up their sleeve as well. One of the main maco-economic models, the IS LM BP model, that links together interest rates and output of the economy taking into account international trade and foreign exchange, makes clear that in a country with a floating exchange rate, fiscal policy (government spending) will be rendered completely ineffective.

Further, the Barro-Ricardian equivalence hypothesis (which doesn’t gain much acceptance anymore, but makes a very good point) also suggests that fiscal stimulus will be ineffective, whether financed through debt or taxes. Since any money the government has is raised through taxes, and any debt they incur must be paid by future taxes along with interest, people will realise that this round of debt funded spending is actually equivalent to RAISING TAXES. And what kind of stimulus would that be.

My final point is about the continual decline in interest rate, and the possibility of a liquidity trap. In short, a liquidity trap occurs when lowering interest rates does not increase the supply of money. Banks are already reluctant to lend, and since their real returns are minimal once the nominal interest rate approaches the inflation rate, they fail to approve more loans even though the interest rate is lower. I would suggest that there may be a little of this occurring, especially if the current interest rates drops are perceived as temporary measures.

In any case, we will never know if the fiscal (and the Reserve Bank's monetary) stimulus did anyone any good, because we have no basis from which to measure the success of failure of the policy. Maybe we could have given the money to just half the states and done a bit of a real life experiment. The political claims will be obvious - Rudd Bank will claim success no matter what the outcome, because 'it saved us from the worst of it', while the opposition will blame the stimulus for any further deterioration of economic output. Neither of them are right. We are subject to the whims of international markets, and no policy of ours have a noticeable impact.

Before I go I just want to let you know that I am more of a subsriber to the theory of creative destruction. This theory suggests that recessions are a necessary part of development. A recession is simply a process of 'destroying' outdated and outmoded production systems to enable the 'creation' of production chains for new goods and services. Followers of this theory would see a recession as a sign of development, and not something to be avoided.

Unfortunately governments have a hard time persuading people that some short term pain is worth the long term gain.

That’s all for now folks.

A monetary system for a sustainable society – the BIG question.

I spent a couple of hours this evening watching Chris Martenson’s Crash Course. For those interested in financial or environmental matters, and believe there is any connection between the recent ‘financial crisis’ and the peak of oil production it is very interesting. For others, it is probably still quite interesting.

I won’t give it all away, but the lecture series gives a thorough overview of money supply, speculative bubbles (a must see section), debt, growth and all things financial. It concludes that we are in for some tough times due to the coincidence of peak oil, retiring baby-boomers, and the collapse of a speculative bubble in housing.

These intriguing lectures got me thinking about another issue. Why is it that concerned individuals spend so much time looking at the problem, and telling others about the problem, but are rarely discussing potential solutions. And I mean real solutions – the mechanics of it all – not just ‘be nicer’, ‘do your part’. What is nice anyway? And what is the part I should do, and will it work? These are the questions that need answers if change is to happen.

I know I may have fallen into this trap a little in some of my blogs. But I’m in good company. Al Gore’s Inconvenient Truth spent hours on environmental problems, but only flashed up a few dot points on what we as individuals could do, and given my recent research, most of them are a waste of time.

All of this must be leading somewhere. It is. Given the intrinsic relationship between economic growth and environmental decay, and consumption of natural resources, we must reject growth as a long-term proposition. However, if we accept that society will be forced to exist within limits, and that any growth period will be counteracted with periods of degrowth or ungrowth, how will the financial system operate?

By the time you have watched the Crash Course, you will know that for money to stay in existence growth is an absolute necessity. So how can we have a currency that performs the basic functions of money – a store of value, a medium of exchange, and a unit of account – when the quantity of goods produced in the economy may fall for long periods of time? How can interest be charged on loans if there is no extra increase in production with which to pay the interest?

This question has perplexed me for a long time. We need a monetary system that has the flexibility to adjust the quantity of money when the quantity of goods produced changes, but one that will not be prone to periodic episodes of high or negative inflation. If we have a fixed amount of currency, maybe used gold for example, when output increases prices would decline, and then rise again when output decreases. How can money act as a store of value in this case? If you lent money in period of price deflation, no one would be able pay the interest, as the loan would be continuously getting larger in real terms. This is one of the main concerns about the current financial crisis. If deflation sets in, it will become self-reinforcing, and lending will cease altogether, stifling investment of all forms.

Anyway, for now I hope this has raised your interest in the matter of money, and I will endeavour to examine some options in the next blog.

Down the rabbit hole

I thought it might be nice to put up on the front page a recent comment by Chris. He states:

I can't quite get my intuition around this counter-intuitive concept. I'd like to try to develop some points that still bamboozle me:

1. Equating dollars to energy: For the purposes of example let's make up an economy, let's call it Moldova, which is powered 100% by coal-fired power plants. Say Moldova is a pretty dodgy place and the coal-fired power plants are running break even: so it costs the same amount of Mol-dollars to produce the energy as what they sell it for. Intuitively we would expect that this system could work; that the Moldovians, however poor they may be, would have electricity. However if we substitute the words coal-fired power plant with solar panels it becomes impossible. In both examples the cost of production equals the price of their product. It's easy to understand that if in the process of creating the solar panel we require the same amount of electricity than it produces over it's lifetime we gain nothing since we can easily equate apples with apples. However when we equate dollars with energy, one dollar spent on buying a solar panel (e.g. $1 = 1Wh) only produces 1Wh back again we gain nothing from the process. Thinking this way, equating $ with Wh, how can our poor Moldovians still use their electric milking machines?

2. I'm trying hard not to believe that we gain nothing from buying solar panels. Assuming they cost (like in Moldova) the same as the value of the energy they produce. We spend a dollar on a solar panel: this dollar in infinitely divided as it swims upstream through peoples wallets, and through this process looses it's identity as my 'green' dollar and comes out representing the total resource inputs of our economy, probably more a brownish sludgy colour now. So it doesn't matter if I temporarily green wash my dollar or spend it to create a burning petrol feature-fountain in my front yard: it's all the same. However I reckon by buying a solar panel I change the resource inputs of our economy: so my dollar swims up a slightly altered stream, it still arrives a brownish sludgy dollar, but a slightly greener one.
However after my solar panel is online, the total resource pool of the economy increases, energy becomes cheaper and consumption increases to fill in the space my green dollar bought: so total polluting is not reduced. Arrghh! I thought I was arguing for solar panels!! damn. BUT.. if the federal government wants to stimulate the economy they should spend it on solar panels? Since they would be growing the economy without increasing pollution. I've lost my point. Anyway what do you think?

Cheers
Chris.

My response:

Chris. You have some very neat logical arguments here. And there is no real answer to the first one. I have been pondering this problem for about a year. I get the feeling we are getting very close to the bottom of the rabbit hole, with only one remaining theoretical explanation. Chaos! (complex adaptive systems to be more precise)

While I have given the impression that tracing resource inputs to the economy up the tree can be envisaged much like a never ending family tree, there are interactions along the way that make it a complex system, and the capacity to learn and change also makes it adaptive. There are two major problems with such systems; (1) an action cannot be isolated from the rest of the system (thus one product cannot be isolated as good or bad), and (2) the way to change the whole system is uncertain, given the complexity of actions in response to change within the system.

Further, there are major problems in my theoretical argument against solar panels due to time and technology. For starters, the energy we used to construct the power plant was from half a century ago, which came from power plants and oil wells built a century ago, which were constructed from… well you get the picture (maybe read my Hunger, humans or happiness blog). Without this previous energy use, we would not have current energy production. Thus we could arguably trace back infinitely through time the energy requirements of producing a given product, which may be a sum total of all energy use in history!

In light of these and other issues that arose in lunchroom economics discussions, I developed a ‘Theory of Private Property’, which suggests that somehow economic growth (but not human welfare) is fundamentally linked to the creation of private property. How to develop this into a comprehensive and useful theory presently escapes me, but I am yet to find contrary evidence to dispute the relationship. The point of such a theory would be to suggest that solar power cannot contribute to growth because it doesn’t involve the use of land (whereas fossil fuelled energy can due to the continued consumption of land in the form of coal or oil). If we could attach a right to the sunshine, it may help. The solar energy producers would pay rents on the rights to the sunshine.

Anyway, while that was not a short answer, it does begin to raise some important points that one might consider before proclaiming a specific behaviour as good or bad.

Banking is a Ponzi scheme

I mentioned in my last blog that I would comment on the similarities between Bernard Madoff's Ponzi scheme and the tradition of fractional reserve banking. However, many other, and probably more eloquent, writers have had similar thoughts and done the hard work for me. In a break from tradition, this blog simply directs you elsewhere to pursue this astounding, and concerning idea.

The Wall Street Ponzi Scheme called Fractional Reserve Banking: Borrowing from Peter to Pay Paul, by Ellen Brown

Ponzi Schemes in Russia, Colombia and the US: from Mavrodi to Murcia to Madoff (MMM), by Kaufmann