A justification of a plan to end poverty through alternative Economic Theory
The idea: end world poverty by raising wealth in the economy. We suggest a 0.5% tobin tax that will raise a projected £1.25 trillion per year. This money is used to employ people in developing countries to build primarily houses and other assets which are then given to the poor. Careful analysis should provide the exact amount of houses to be built so as not to create oversupply. The stimulus of the aid package should circulate in the poor economies raising house and other asset prices as well as stimulating investment in productive activity. This raises the wealth in the poor countries which makes them have higher GDP growth. We argue that raising wealth is the key way to facilitate the market. Our analysis shows that developed countries will eventually reach a maximum GDP which they cannot go ahead without redistributing wealth to LDCs. We argue that building houses is a means to amplify aid given to developing countries, since houses go up in value.
We take concepts from fluid mechanics (sinks and sources) to represent the flow of money in an economy, the insight being that the economy is best represented as the dynamic system of a flow of water moving round points a space which represents different people in the economy. We use insight expressed in language rather than the so called rigourous approach of contemporary economics, which we feel does not achieve truth over time since it is limited in terms of the kinds of systems and processes it can express through mathematics. This is strictly speaking political economy in the vein of the classical thinkers such as Malthus and Adam Smith. These thinkers would identify systems and processes and think about likely senarios that would be produced.
Bank lending goes to the rich, so make the poor rich.
The principal of banking as an institution is to lend more money to those with more assets. In developing countries there are not many assets therefore there is less lending. More lending raises economic growth. Since a bank is a sink, that is it draws in much of the money in an economy like a black hole, there will be low growth since money will not be recycled to other people. There will be a one way flow of money towards lenders. By creating assets like houses as our plan suggests, the bank is turned from a sink of money to a source, that is a positive contributor to the economy. By making houses for many poor people, more lending is available for business owned by the poor. Thus the poor have a greater chance of becoming rich. This is like an inversion of microcredit, which involves lending to the poorest in small amounts. By raising the amount of wealth of the poor and then letting the market lend large sums to them to create more wealth, a faster move out of poverty occurs overall.
The depression inducing effects of debt repayments from LDCs.
Many developing countries’ governments have high levels of debt. There seems to be large amounts of particularly foreign denominated debt held by governments in these nations. We suggest that the reason for this may be a feedback compounding process that raises the level of foreign denominated debt held over time very quickly.
The process is as follows; foreign debt is taken which goes up by its interest rate. As the debt interest is paid, the exchange rate devalues, due to the massive exchange of money required to pay the debt interest off. This puts the balance of payments into deficit (given the fact that many factors such as poor marketing and poor quality products lead the demand curve for LDCs to be flat) which itself must be financed by debt, which in turn increases the interest payments. Overall the debt increases taking an ever larger part of the state’s expenditure and leads to default eventually. This process is increased by compounding of the various flows. According to Keynes, money flowing out of the economy will reduce GDP.
The Prebisch Singer thesis states that developing countries exchange rates have been devaluing. Our above analysis would give the reason for this as the massive outflow of funds to pay back debt as the reason for the pressure on exchange rates. Thus what is called for is a reversal of this with £1.25 trillion being pumped into developing countries’ economies every year. This would benefit developed countries because it would reduce the incidence of debt crises and defaults.
Inflation and assets
Inflation is not a reality. It is an imposed idealisation put upon data to reduce the primacy of money. Money is what is moving throughout an economy in a feedback process, moving from person to person, stimulating them into activity that is useful for others. Inflation, given by an average basket of goods does show a phenomena of price feedback, that is prices that depend on other prices, but it is an overstated problem. For example, in harsh times people will switch consumption to cheaper goods, goods which may be of a lower quality. Thus the uncertainty of knowing the right basket of goods to calculate inflation is apparent.
Thus we can see that the difference between real and non-real growth is near impossible to calculate. Thus we see the primacy of money in an economy. When we unlock ourselves from the inflationary chains we see that things like assets become deeply important for the economy. Looking at inflation adjusted income we would see asset rises as a decline in the growth of the economy. But rather they are the source of development. The myriad channels in which assets raise the amount of money in the economy combined with the fact that asset prices, while increased by the amount of money that goes into the asset market, can go much higher than the total amount of money in the economy. This is because only a small proportion of assets are traded at any one time. Thus most of the assets are held in expectation of capital growth or because they have a useful cultural value, like houses.
Market size and demand
The maximum market size of any product is assumed to be finite. A household would only have 1 washing machine, 1 or 2 cars, 1 microwave oven. Thus a policy that caused income to become more evenly distributed would result in greater demand overall. Keynes noted a similar outcome but through a different process. He stated that the proportion of income consumed declines as income rises. This is perhaps given some credibility by our finite market size argument.
This implies that a policy to make the poor in the world richer would increase the size of the global economy, making everyone better off. This is because the total market size would increase because more people would be able to demand goods. Developed as well as developing countries would benefit.
Memetic theory of house prices
A meme is a basic unit of cultural information. It can be anything, any message sent from one person to another. The y spread much like a virus until they reach the whole of society and form a consensus. Their dynamics are highly variable and unpredicatable though consensus can hold for long periods of time. In the housing market, memes propagate of the overall state of the market. System wide memes saying whether the market is thriving or in recession spread. At times the housing market is in boom, thus the boom meme is dominant. At other times it is the slump meme that forms the consensus. A criticism of the our plan to build houses is that it would create a surplus of houses and thus reduce the average house price. Our contention is that the reason why house prices go up is a memetic phenomena. They go up because the consensus is that house prices will go up. The stimulus package of construction suggested by our campaign would create the expectations of house price rises.
In short houses go up in value because people believe that they are going up. While demand and supply are key processes in the memetic system, the belief that something is valued at a certain amount is something that is transmitted throughout the network of people. Mania’s and panics in asset markets talked about by Kindleberger are more throughly analysed as a memetic phenomena.
Value
Goods are given value, that is the amount of money someone will pay for them, through the creation of brand names. Some brand names are from small businesses which create goodwill from their interaction with customers. Corporate brand names come from the interaction with society through advertising and Corporate Social Responsbility.
Before capitalism or the freemarket economy there is no value in society. As capitalism progresses new ideas are created for products, archetypes of the goods that are produced. Historically changing mechanisms come about for the creation of new archetypes and the attachment of value to them by society.
Thus is places like Africa many things are not given much value. As an economy develops and people’s incomes rise, value rises due to the pressure on prices of goods and services produced by firms. This raises the total amount of GDP, in essence ‘value added’, thus growth occurs. But this process needs a rising amount of money in the economy. The source of this money would be the increase in asset wealth produced by the plan we have given.
Feedback in the asset based free market economy
We look at feedback in the spending and investment as well as the growth of assets which are hypothesised to not take money from the economy.
Of £1 that is earned by a worker, 80p is spent on consumption. This cycles back into another persons earnings which increases the GDP of the economy to £1.80. This process continues until the earning is 0p.
Of the £1 earned by the first worker, 20p is invested in assets. This asset can go up or go down. If the asset doubles to 40p then the economic wealth of the society has doubled. No new money has been injected into the economy when the asset goes up in value but the wealth of the economy has doubled. Our proposed plan relies on building assets, in this case houses, that raise the wealth of the economy and thus impact on economic growth. When the asset is sold or a loan is secured on it, the worker can spend or invest more growing the economy.
As poor people would be employed to build the houses in our campaign (see Home page) they would spend much of the money they earn. This moves money moves on to the people from whom they bought goods. These people spend their money so money moves to others and so on. In this way more activity is created by injections of money into the economy. This feedback process, whereby an injection of money flows through the economy in transactions through many people making them engage in activity and also helping to fund investment and thus longer term activity is the essence of why the free market economy works so well. The problem with the free market economy is that there are sinks (as in a dynamic system) where most money flows towards without being recycled in the economy. One of the reasons why there are sinks is because many people do not have much money thus there is a lessening of economic activity due to poverty. This is the situation we see in developing countries.
figure 1.0 – money flow pyramid abstraction
Figure 1.0 shows a notional tree of money flowing between individuals. Each circle represents a person and the number shows the amount of money they have. The arrow shows the direction of consumption in other words the flow of money from one node to another. Each movement of money takes place in a single time period so the diagram shows 3 distinct time periods.
In time=0, the top tier node has £10. This node spends all their money on products from the two nodes beneath it, each of whom receive £5. Activity of those nodes in producing products has been increased. In time=1 the second tier nodes spend all their money on two other nodes each, though one node in the centre is a sink and receives money from many nodes and thus ends up having more money. Assuming that there are 3 time periods in a year, national income is £30 though money supply is £10. What we can see is that the reason why capitalism works so well is because of the feedback effect of money flowing through the society and stimulating people into activity.
Another point to make from this analysis is that the theory that raising money supply creates inflation is not necessarily true. Money simply flows in the economy and it is unlocked from the generation of price feedback (our subdivision of inflation as a concept) by our argument given above. In fact this analysis is similar to the quantity theory of money, but the novel feature that helps us is the analysis of money flow into different people in the economy and without linking inflation into the system. Keynes also touched on the concept of the flow of money but he subdivided the economy into firms and households, which we believe to not be general enough to give us true insight and also does not give a direct representation of the economy. The point of this kind of analysis is that it allows us to make a simple argument. If the amount of money in an economy is increased then national income increases, though how long this can occur will depend on how many and how powerful sinks are.
We can generalise this approach to representing money flow in the economy with a matrix of agents where each element of the matrix represents the bank account of each agent (Agent matrix). Another matrix determines the percentage of money that flows (spending) to each agent from each agent (transformation matrix, T (t(i), t(j)) where 1>t(i) ,t(j)>0). The agent matrix is multiplied by the transformation matrix repeatedly each period. What is noticeable is that while the bank accounts of each matrix goes up or down, the overall level of money in the economy has not changed. Money will tend to flow into some agents who are sinks, for example owners of large amounts of assets such as banks or supermarket chains. National income is given by the sum of many agents income in a period of time, there being many transactions in any period.
If assets are created for the poorer agents then lending can occur from the rich to them thus circulating money throughout the economy.
Sinks can be represented in this formulation as agents which have many if not all other agents spending much of their money on them. Houses are a sink in fact all assets are, but when they draw money towards them they become larger in value thus creating conditions whereby there is an outflow of money from houses into the economy. Thus tackling poverty through building assets is a viable technique to amplify aid flows.
Assets price growth
The essential property of assets is that they can grow to very high amounts, well out of proportion to the amount of money in an economy. The reason why is because only a small part of the total amount of assets in an economy are traded. The money that supports asset price growth is thus concentrated, so a boost to the economy can raise asset prices to very high levels. This unplugs sinks like banks and gets them to recirculate their money to people in society. The recipients of these loans will have a higher chance of creating new assets and flows of money if they start up larger and better businesses. Thus the economy grows by very high rates with wide dispersion of assets.
Housing Wealth
Some would argue that raising the amount of houses in poor countries would reduce their average price. This is a crude demand curve analysis. However, demand shifts up when there is a rise in wealth. Furthermore building large amounts of houses as in our plan raises and redistributes the total housing wealth which is average price times number of houses. This would have an impact on the economy even if prices were slow to increase.