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Economics 101

This is my take on what commentator mark has to say here.

If a government can just print money then there is no absolute requirement for them to get their revenue from taxes, or for them to borrow money from anyone. I take it you agree with this – the problem is the fear of generating inflation.

No it isn’t like that. Neither is their any strict limitation on me going to the local corner shop with the contents of The Monopoly box. Sayeed will tell me to fuck off but strictly speaking… Why am I reminded of the Ark-ship B here from Hitch-hikers? You know they define leaves as currency and when massive inflation hits they embark on a scheme of disastrous deforestation.

But what is the mechanism by which inflation will increase? If the market mechanism is functioning, price increases when demand for a product increases more than supply (or supply declines). Money does not have a magic property whereby its mere existence increases the price of goods – people have to spend it to make this happen. I take it you agree with this also.

A year ago Sayeed sold Coca Cola for 10p less a tin than he does now. Is this because the Cola Mines of Atlanta are running low? No. This is due to inflation which is caused by the government not even pretending to print money (or grow leaves). Let’s look at this scarily for a moment. If I wanted to buy a reasonable house in a nice area I would need a quarter of a million quid. A hundred years ago I could do it for 500 quid. If scarcity is the driver then please explain how come a rough doubling of population has led to a 500-fold increase in property prices? No the driver was inflation and what Mark Wadsworth calls “Home Ownerism”. How does that work? It works like this. I think we can all agree that say a holiday in Acapulco is a luxury but food in the belly and a roof over your head and a sources of heat, light and water are absolute basics. Mr Ugg the caveman would agree with that one. Now when the price of all basics other than housing rises the likes of the Daily Mail and the Express go rightly mental. House prices going-up to silly levels is though seen as “a good thing”. It’s like when they go on about abandoning collective bargaining for salaries across the country so say a nurse in London is paid more than a nurse in the Orkneys you just make the situation worse because you might as well write cheques drawn on the public purse directly to Rachman. Or another way of looking is this. If we need to bend the market out of shape to allow a nurse (essentially a graduate job these days) to afford a modest roof over his or her head in London then isn’t something deeply structurally wrong?

In this case producing more money will increase production, because a man who was doing nothing will instead be making aircraft and a factory which was sitting idle will be producing missiles. We are increasing demand for aircraft and since there is idle supply, it is unlikely that the price of aircraft will increase by much. As a worst case scenario, the price of aircraft will increase a lot – but this is still unrelated to the price of stadiums, the price of coca cola or anything else unless demand for those increases also.

A Mk14 Spitfire cost twelve grand. An F-35 costs the thick-end of a hundred million. The Typhoons over Libya cost us 80 grand an hour -operating costs -not capital. Aircraft do cost more. We only don’t notice it because airlines are vicious because they have to be – razor-edge economics. And your argument is pure Keynesian nonsense. You might as well say we can cause economic growth by paying Fred to dig a hole and Dave to fill it in again. If people want it and are allowed it will happen. Your example of missiles is curious. Think on that.

If demand for a certain product is too high, the government could reduce demand by lowering spending or increasing taxes upon it.

Which is why the government increases taxes annually on addictive substances and things you can’t get around like fuel. Oh, but you don’t have a car? Don’t matter. Even if you walk to the shops someone had to deliver their stuff. There is a way round it. Living in a yurt on sunshine and eating shit off the trees in some Allah forsaken ‘stan.

But this is a very different story from “reducing spending on aircraft is neccesary to make a stadium” – that simply isn’t true.

Let’s say you have a twenty. You could go to the movies with your date or have a takeaway with him or her. Not both. To say otherwise is the economics of magic beans.

The sad thing is that right wingers are very happy to oppose the idea of aggregate demand when it suits them, but are still prepared to use the very same idea to argue against government intervention.
And I am amazed that you think people need to be taught the bog-standard, intuitive views which you have expressed. Where do you think you learned these ideas? I think I remember seeing a similar view of inflation on an episode of Duck Tales once…

Why do intuitive views need to be taught? They are like intuitive and frequently wrong. Here is an intuitive idea for you all. In my mother’s house in Gateshead there is a Monopoly set. As a small child I used a Biro to add zeros to my notes. Now at some level I knew this didn’t work but I did it because I was a kid and everyone games Monopoly anyway. If I had kids I would rather they watched “Anal Angels XV” than play that game for it is wicked. It really brings out the worst in people. The only other game I ever saw that lead almost to the Rozzers being called was Risk and that “incident” wasn’t strictly speaking game-related. That was because after copious libations a bloke wearing a Soviet general’s hat and mirror-shades, drunk and affecting a Libyan accent (he was from Sussex) urinated in a Scouser’s sink. Crazy student days! Damn fool! He’d taken North America which is the key to the whole game. My point is QE or whatever is exactly what I knew was wrong with what I did with Monopoly money when I was eight. Gideon Osborne has a lot of catch-up to do. Yeah, I said it. I trust small children from the early eighties (like me!) more than Oxford PPE graduates. Or Nottingham University chemistry students (almost as bad as medics) playing board games and causing fisticuffs. They never played Risk again.

It is important to tie our ideas of money to what is happening in terms of real products and services.

If only that were true! But you need to define “real” here. And that is tricky. That is why there is a market. For example let us say a hip-replacement operation costs 10 grand. Now I don’t like hospital food or being taken apart by doctors (I have lived with medical students) and I don’t have a gammy leg so that isn’t a ten grand value to me. It would be if I was walking like Dr Strangelove. 10 grand though would buy a nice little motor -now that could be useful. I now have to get my Dick out. My Philip K Dick. His long short story Paycheck has a lot to say about value.

Dick said of the story: “How much is a key to a bus locker worth? One day it’s worth 25 cents, the next day thousands of dollars. In this story I got to thinking that there are times in our lives when having a dime to make a phone call spells the difference between life and death. Keys, small change, maybe a theater ticket – how about a parking receipt for a Jaguar? All I had to do was link this idea up with time travel to see how the small and useless, under the wise eyes of a time traveler, might signify a great deal more. He would know when that dime might save your life. And, back in the past again, he might prefer that dime to any amount of money, no matter how large.”

Thornavis,

If you are familiar with th idea of opportunity cost, answer me this. What is the opportunity cost of a stadium? In what way is it a aircraft except in the sense that we have chosen it to be?

The opportunity cost of anything is the cost of what else you could do with the money. To put it simply a fairly wealthy soul might buy a Porsche but that means he or she has chosen their form of German metal and they can’t then buy the Mercedes too. That is opportunity cost. Either/or.

62 Comments

  1. mark says:

    Rab,
    Lend/ lease…

    A government choosing to pay a foreign denominated loan incurred in time of desperate need is rather different tobpaying for “school day”

  2. Thornavis says:

    mark
    Well since you now admit you don’t know how the Olympics are being funded here’s how.
    http://www.london2012.com/about-us/funding/index.html
    As you can see a fair bit of direct government spending. I look forward to your convoluted and contradictory explanation of how this is not really happening

  3. mark says:

    Thornavis,
    please explain to me exactly what you think i am saying.
    I think this exercis will help us.

  4. Thornavis says:

    mark
    I don’t know what it is you are saying that is what I’m trying to pin down and what the substance of my vanished comment was about, you’re like that old joke about the Irish question, every time someone came up with an answer the Irish changed the question. You hop about talking about how money is created and why governments don’t need to tax to fund large projects and how money spent on the Olympics can’t be affecting the funding for other things and just about anything else that seems to come into your head, I’ve been trying to answer specific points in your comments and getting nowhere. The conclusion I’ve reached is that originally you just wanted to be the anti-contrarian contrarian and pick a fight with us over our perceived libertarian fundamentalism and then got carried away with your theories on economics and money supply. In effect you’ve been unintentionally trolling and we’re partly to blame for encouraging you, despite that it’s been quite fun, may I make a serious suggestion, why not set up a blog of your own ? Not that I’m saying you shouldn’t be commenting here but I think you might get more out of that than just arguing with us about, well what ? Buggered if I know.

  5. mark says:

    Please take comment 11 53 as my opinion. Could you explain to me what that comment means?

    I know you are busy, but i’d be damned grateful.

  6. RAB says:

    He is too, isn’t he Thornavis?

    Mark, you appear to have agreed with most of my points so far, and completely ignored the others, while I have responded to all yours (18 comments so far, this is my fourth. I know how to be economical :-) )

    “I must admit that I do not know the organisational details of the olympics,”

    Umm well game set and match my little friend! Honestly, where the fuck do you think the money is coming from?

    Do you honestly believe that Govt can just keep on printing money and we will accept it? Do you know anything of the Savings and Investment markets? Do you understand that Wealth can be created and it can also be diminished? that it is not a zero sum game?

    “don’t you think that there might be a difference between money and the real economy? ”

    Doh yes! This is exactly what we have patiently been trying to explain to you for days now, and you turn round and claim our comments for your own!

  7. RAB says:

    “A government choosing to pay a foreign denominated loan incurred in time of desperate need is rather different tobpaying for “school day”

    No it isn’t. Discuss

    A debt is a debt, and has to be paid if a binding contract has been entered into. I’m a trained Lawyer. The reason for the debt is immaterial. In criminal law though of course, the reason (Mens Rea) is often cited in mitigation pleas. :-)

  8. mark says:

    RAB, Thornavis,

    If you are unable to explain what you think I’m saying, might it not be the case that you aren’t thinking about it much at all?
    If you can’t give a concrete example of where I have changed my mind, isn’t it possible that I haven’t done so.

    I’m going to go out on a limb here and say that the 11 53 comment is the best comment ever posted on this website.
    Just read it again and it was great.

    RAB –
    I agree with 1 plus 1 equals 2, but that doesn’t mean I’m adopting the idea from you. It means that the conversation is way over your head and that you chipped in with something everyone else had assumed without explicitly mentioning, expecting people to be impressed.
    Which important point of yours have I failed to address?

    “game, set, match”
    Not really. Are you suggesting that we require a universal understanding before we can comment on anything? That everything affects everything else? If so, might I suggest that conversation with mortals probably isn’t for you.
    “Where the fuck do you think the money is coming from”
    Ultimately either from the government or their henchmen in the banks.

    I’m not really sure what you will or won’t accept, though I could probably have a fair guess.
    I know a little about savings and investment markets.
    Of course I understand that wealth can be created and destroyed.
    Of course I understand it isn’t a zero sum game.
    And I accept that two plus two equals four.

  9. Thornavis says:

    mark
    “I’m going to go out on a limb here and say that the 11 53 comment is the best comment ever posted on this website.
    Just read it again and it was great.”

    Yes dear the tea trolley will be round in a minute, now I must go and see to that nice Mr. Napoleon.

  10. RAB says:

    Look Mark, here’s the deal we have going round here. YOU explain what you think you are trying to say, and the rest of us agree or disagree. We are not in the business of parsing your incoherent thoughts for you.

  11. Thornavis says:

    mark
    Why do keep coming back to this ? Because I’m a sucker for punishment I suppose, anyway what RAB said and a bit more – your demand that we explain ourselves to you was irritating and rather bad mannered at best and a sign of an over inflated ego to boot, confirmed by your subsequent vainglorious crowing about how brilliant your comment was. What are you my old schoolteacher ? Do I have to write an explanation using only one side of the paper and showing my workings ? FWIW that comment was one of your more lucid ones and the claims it made were contested by us afterwards, I can’t see what it is we are supposed to explain, I would be prepared to bet that whatever explanation we had given you you would have come back and said that wasn’t what you meant at all and how this proved what numpties we are. It’s what you’ve been doing throughout this thread, I’m willing to accept that you may genuinely not understand that but I’m not getting involved in your confusion, that’s really why I suggested you might like to have your own blog, it will help you to get your thoughts more organised and your writing clearer, it’s difficult to do this, I know I tried and couldn’t do it, it takes me all my limited ability to get reasonably coherent comments together, to be honest I don’t think you’ve reached even that stage yet.

  12. mark says:

    “Aircraft engineers, if fired, cannot easily become architects. Beer factories cannot make running shoes”

    Mark 11:53

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