Towards a New Economics
By: Asif Rajbee
The solution to poverty
The idea is to use money gained from a tax on foreign exchange transactions to invest in building houses in the Third World. £250 Trillion of foreign exchange transactions are made every year(source The Guardian) and estimates are that a 0.5% tax would raise about £1.25 trillion per year. This could fund a massive program of house building in the Third World. Millions of new houses could be built to high standards as well as infrastructure every year. The poor of the developing world would be employed to build these houses thus stimulating their economies. This income would feedback through their economies over and over kick starting development.
Poor people in developing countries could be given these houses for free . Over time there would be increases in house prices in those countries and therefore people who were initally poor would become rich. The stimulus to their economies of £1.25 trillion per year would increase house prices. House prices already go up in developing countries. Brazil experienced rises in house prices, South Africa sees 15% rises every year and Pakistan has just had a major house price boom. The trouble with these asset price rises is that the poor do not benefit.
The poor in developing countries would demand goods from rich nations which would give more jobs for people like you and me in a rich nation. The poor nations would also have more money to invest in new kinds of production, education and healthcare making the need for aid irrelevant. The source of most economic growth in the last two centuries has come from asset price inflation and we feel that the reason why poor countries are poor is because they do not have assets. Billions of poor people would have a nice home to live in and be well off.
Debt and Balance of Payments
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, 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.
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 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.
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. 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 ‘four walls for freedom’ campaign 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.
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. The Four Walls for Freedom campaign 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.
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.
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.
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Ex artist and phd student involved in campaigning against terrorism, war and poverty.