Greedy Goblin

Thursday, November 3, 2011

The true third way

The two known (democratic) economics models, the pure free market and the social democracy, have both failed. The pure free market failed 80 years ago, in the First Great Depression. The reason for failing is that the middle and upper class has a tendency for frugality, therefore they tend to consume less than they produce. However the production and consumption must be equal in the whole system. If there is more production than consumption then some of the goods will not sell, so their producers will lose their business and jobs. These people will lose their income therefore will not consume, decreasing demand for production even more. The cycle will never stop as the remaining actives are still producing more than they consume and the inactives can't consume. At the end, everyone goes bankrupt, just as it happened.

Enters the social democrat who mixes bleeding heart with the necessity of equalizing consumption and production: "let's give welfare to our fellow humans!". As the welfare leech consumes more than he produces, the system stabilizes. After the communist revolution and World War II when Lenin-Stalin and Hitler successfully mobilized the hungry and angry people, there was even more reason to fill every stomach. So the happy and stable era of social-democracy started to last forever. Well, it did not and is ending now, in the Second Great Depression (2008-?). The reason is that a low-skilled worker is unable to create enough value to have significantly more salary after tax, than the welfare. So these people quit or come up with salary demand (backed by politicians setting minimal wages) that the business cannot pay so they lose their job. The increasing swarm of inactives need higher tax from the remaining actives, pushing another bunch of actives to the point where they rather take welfare than work. As the activity rate is dropping, the political power of inactives grow, getting even more welfare at the cost of even more taxes. To make things worse, there are loans, available to both people and governments that can cover the holes for a few years until the loaners find themselves underwater: no more loans and no capital left.

The search for a third way is going on for long, showing that people are not satisified with the current systems. However they found nothing just empty PR slogans. Elevating or decreasing the tax with a little is not a new way, that's just a shift between free market and social democracy, but since both of them are fundamentally wrong, their combination can't be much better.

Let me introduce the true third way: Society-scale consumption of services. These services do not increase the quality of life of any particular person, they increase it for everyone. We all breath the fresh air, we all benefit from less crime and accidents or the advancement of science. Education - while received by a particular student - is not personal "fun", only can be used for increased productivity, which is beneficial for the society.

Let me give some examples: building a new highway is not essential to anyone. We could use the old roads. I would clearly not pay thousands of dollars in advance for a private firm to build it. However the government takes this money, builds the highway and then I will use it increasing my quality of life both when I drive on it, and by not suffering high traffic in the smaller roads nearby.

Same is true for scientific research. No one would pay, especially in advance to a "fly a man to a Moon" company. The US government taxed the citizens and sent men to the Moon. Now we all enjoy the satellite communication that spawned from the experience gathered during the space race. Our life is better because it happened and no private firm could have made it, not because they can't send people to the Moon (actually they did, as NASA contractors), but because they couldn't get customers who would paid for the service in advance.

Environment protection is another good field for the government. We all enjoy the cleaner air and water, and especially the generations to come will benefit from the preserved resources. But how do you gather customers for it for a private company? Actually here even national governments can fail as the pollution flies over borderlines.

Setting more strict security laws also increase consumption: if we would limit the speed of heavy trucks and enforce shorter driving sessions between resting sessions for truck drivers, the same cargo transfer would need more trucks and more truck drivers: more jobs for drivers and manufacturers. Of course we would have to pay for it as customers, but what we would actually pay for is the decreasing chance to be hit by a truck.

So the third way is actually forcing the people to consume services, therefore creating jobs producing these. The difference between this way and the free market is obvious: "the society" is the biggest consumer, 40-50% of the working hours of the workers of the country would be spent on creating services for it, paid from tax money. The difference between this way and the social-democracy is also apparent: you must work to get money, the government won't feed you. The government pays for services that are good to the whole society instead of giving it to leeches.

The best thing about Society-scale consumption of services is that there is no such thing as "enough security", "enough science", "perfectly educated people" or "perfect environment". Therefore there is no reason for unemployment. The government can always pay for another project that will give jobs to the people while keep increasing the quality of life of the society.

Please note that the above would not need huge government sector or abandoning the values of competition motivated by personal gain of the business owners. For example in the project of "plant forests" the government plant nothing, it buys privately owned forests, so a businessman can buy some land, employ foresters to plant it, and sell it to the government profitably when the trees grown.

We must fight against the social transfers (that gives my money to someone who did nothing for it), but not the taxing which is necessary for the government to pay for the projects that will benefit all of us.

PS: Of course there will always be some inactives. I'll post about how to handle them later (no massacre involved).

PS2: While I could not gather enough data, (link to budget comparison pages would be welcomed) I'd guess, the reason why Scandinavian countries are happy despite high tax is high society-spending relative to welfare.


Josiah Carlson said...

Your claim of production/consumption imbalance being the cause of the Great Depression is only partially correct. The Great Depression was the result of circumstance, it didn't just happen.

Consumption fell because people lost jobs. People lost jobs because businesses had no way of paying them. Business couldn't pay and failed because credit, cash flow, and investment dropped following the stock market crash of 1929.

Why did the market crash? That's not quite so easy to answer, as there are at least a dozen competing "this caused the crash", with few common strings.

Anonymous said...

Imagine that you're a bureaucrat and I offer you $10 personally, so that government buys goods from me. Those goods cost me $50 to produce and I ask $100 for them. That way I get $40, you get $10. The goods are shit, but who cares? That's basically how government sector works in Russia 20-30% of the time. It's very ineffective unfortunately and most likely the situation will get even worse, as the new bill turns into a law.

How to fight that? The system you propose as the third way doesn't seem to have a built in mechanism against that sort of useless production and consumption.

Gevlon said...

@Anonymous: Imagine that you are a mid level manager of a private company and I offer you the same blackmail money so your company buys the same crap from mine.

Corruption is not restricted to governments.

Andru said...

Yes, but the problem is that, often, corruption goes hand in hand with political power.

In the private sector, if the CEO would find out that its subordinates are corrupt he's fire them and lawsuit their arses off, or else the shareholders would fire him.

Not quite the same in a republic. Governments are huge. By the time the news reaches the Prime Minister (the CEO) the damage is done. What's more, the Parliament (the shareholders) is not directly interested in whether there's corruption in the government apparatus, so they won't fire the Government (motion of no-confidence).

Parliamentary salaries are not tied to corruption, so they have little reason to act on news of corruption, while shareholder profits ARE directly impacted by corruption. You could argue that the representatives themselves would be fired by the population, but that's ONLY every 4 (or whatever) years. In the meantime, their salaries are guaranteed (there's very very VERY limited procedures for dissolving a parliament in most republics), and the population can foam at the TV while the press yells from the top of their lungs.

This is further complicated by the fact that often, Governments are not backed by Parliaments on objective reasons, but rather that they're from the same party.

That aside, what you describe is some kind of sustenable socialism, with the free-market capitalism at its base (the government does not own stuff, they buy it from the private, with the money they charge the private in taxes.)

Countries might as well try it. Everything else has been tried.

Dangphat said...

Is your scheme similar to the economic policies of President Hoover?

Anonymous said...

Did you realize that the welfare isn't actually a problem? In most countries, it is not a giant part of their budget.

I'm more worried about Warren Buffet paying less taxes than his secretary, and having enough money to shape politics however he wants. I'm middle class, and I pay the taxes, yet I have no power.

Anonymous said...

This does work; the important thing is that the money is not being spent on welfare. However, this is creating a market inefficiency: Forcing people to consume more increases aggregate demand, but only the worst macroeconomists look at aggregate demand alone. Have you noticed that you are creating a negative externality by forcing people to use more trucks? Then, goods are more expensive that are transported by trucks, the truck industry might just be replaced by trains, or at any rate, you are creating artifically high prices.

If you force people to spend 40-50% of their labor, capital, and resources on, there is so much production lost. Businesses would flow out of the country and go to China at a higher rate than they are now, and due to obvious government inefficiency, it would destroy our economy.

The Great Depression was caused by Herbert Hoover's currency manipulation. After the Great Depression, we stopped spending nearly as much and we had a boom; social transfers were actually pretty small. They ramped up during the 1970's-now, and are now huge goliaths.

If you FORCE a market to bear an inefficiency, people might not become unemployed, but they will leave the country and our economy will circle the drain if it reaches some 25%.

Kacper said...

This is not any third way, this is more of the same socialist bullshit. "I know better than you do how to spend your money so hand them over."

Even if you could set up a fair "best offer gets the money" system a few problems still remain. The politician/official handing out the spending would lobby for even more of it, meaning more power for him. At some point you reach diminishing returns, when more spending doesn't get you much better services. The free market deals with this in the infinite number of private decisions. An official would neither have the knowledge nor motivation to find out when this point was reached. Relevant knowledge is dispersed and so should decision power.
One should not spread even the tiniest forms of central planning beyond places where they are necessary.
This tax & spend plan would inevitably lead to wild inefficiencies and thus to impoverishment.

An this:
"Setting more strict security laws also increase consumption: if we would limit the speed of heavy trucks and enforce shorter driving sessions between resting sessions for truck drivers, the same cargo transfer would need more trucks and more truck drivers: more jobs for drivers and manufacturers. Of course we would have to pay for it as customers, but what we would actually pay for is the decreasing chance to be hit by a truck."

Is just inane. Taking this principle to its logical conclusion you should ban all cars: "Sure, the prices of goods and services would skyrocket, but what you really would pay for would be no one dying in traffic." The problem is people would die even more because, for example, the price of meds, and doctors, and healthy food would go up.

So what you're proposing here, compared to the free market system, is a severely stunted economic growth (poverty) for the doubtful benefit of having no market collapses.

And let's not forget the ethical objection: what moral authority do you have to tell me that I should spend my money on other people's education? What is your principle? It can't be libertarian. But if it's utilitarian then you have one hell of a burden of proof on your hands. Proof that you would indeed improve people's well-being.

Thanks for reading.

Anonymous said...

As long as the money creation are under the bank' controlls I can't see how the states can sustain projects 40-50% the size of the economy.

Look at the US dollars. Are created by a private entity, the FED , belonging to the big banks cartel .

For your sistem to be able to work the state must create the money instead the banks , and non debt-based. Basically the state must take the meat from a tiger. Kennedy was killed when he tried to do something like this .

none said...

They're doing this in China:

Anonymous said...

Let's not forget the current crisis began with the private sector. It wasn't wellfare or any socially oriented projects that sent countries into default-status.
It was the perception that finance rules... Take the last few days, Papandreus says the word "referendum" and markets go down, down, down... Ridiculous.

Anonymous said...

Isn't *forcing people to consume services* exactly what is happening right now?
You don't need a full new wardrobe every spring/summer/autumn/winter, yet people buy new things over and over because the old ones are not in/fun anymore, while what is in or out is dictated by the producing companies.

Anonymous said...

@ anonymous above:
Warren Buffet recieves most of his salary as capital gains, which are taxed less than normal salaries for obvious reasons. He assumes that since he understands finance, he is qualified to speak about economic policy.
In a democracy, it is mathematically impossible for two things:
a.) the 1% to have over 50% of the vote
b.) each and every person in the US to have equal power.

You have one vote and one vote only, and if politics doesn't agree with you it is because most people feel differently. We are the 53%.

Gevlon said...

@Kacper: the moral authority question is the easiest: "I got into the government, you did not, so I'm smarter and stronger than you, so I'll spend your money better than you could".

With the trucks, you don't notice that at first transportation can't be exported to China and having 50% more truck drivers doesn't destroy the truck transportation, just makes it a bit costier, while banning cars would destroy several areas of transportation. You also ignore the cost of fatal accidents, the loss of a person. As the GDP/capita in the US is about 50K and people work for 40 years, if you kill an average, middle aged person, you destroyed $1M.

@Anonymous before: people don't leave the country because they enjoy the clean air, low crime, low accident rate. It's not like welfare where you get nothing. You get a lot from these.

Anonymous said...

back @Gevlon. Your first statement somehow managed to be both morally abhorrent to most of the human race and false.
I'm glad we got to the bottom of your philosophy: nihilism. The strong shall rule the weak. This principle has yet to produce anything resembling a sustainable society anywhere.
Secondly: you might say that smarter person A would make better decisions than less smart person B in if she was in her place. You cannot say that smarter person A can make better decisions for a million people all of whom are less smart. It is impossible to gather enough relevant data.

I see my error in the transportation example. I assumed demand for transportation wouldn't drop if car-powered transportation would be abolished and replaced with foot-powered. I was wrong. The dilemma however still stands. It's not immediately clear to me that forcing more trucks on the market would produce a gain either in terms of GDP nor citizens' lives (remember the increased prices for meds). And so I prefer to err on the side of freedom.

Also: how in the world is sending missions into space in the collective interest of society?

Also also: I contest the notion that any bureaucrat would be more successful in selecting scientific endeavors to fund than a private business. These decisions would be purely arbitrary, as officials aren't trained in physics/biology/etc. Leading to more inefficiency and more poverty.

This is fun.

Gevlon said...

I just figured out how could we remove the government from this scheme, making it impossible to steal the money. Update in the post.

none said...

"Also: how in the world is sending missions into space in the collective interest of society?"

It prettymuch solves overpopulation and the need for raw materials. Atleast until we can mine out and populate the entire universe. Afaik thats a good thing for everyone.

Anonymous said...

@Anon First off, there are no societies where the weak rule the strong...the strong always come out on top. Sometimes it is a different strong...and sometimes the power differential is lower...but...the strong always definition.

Second...private industry is (a0 terrible at and (b) uninterested in funding the next fundamental scientific discovery. Both failures are rooted in being strongly budget-driven and short-term (less than 20 years( focused. (Most significant scientific DNA, cetera take a long, long time to commercialize.) Bell Labs and Xerox Park are decent examples of successful research programs that were closed because they didn't contribute to the bottom line.

OTOH, bureaucrats are a lot of stupid science is funded...but research is a bit of a cr*pshoot letting a lazy idiot pick fundable projects works better than letting an aggressive, cheap CEO make funding decisions.

Space far...have directly lead to the development of satellite technology and GPS.

Of course, this third way sounds like the US, more or less. As far as I can tell - our welfare spending is lower than infrastructure+environment+research.
I suspect that this blog is shaped by a European perspective (welfare state...)

Anonymous said...

Wouldn't there be a problem if we can choose which company to give our money?
I just say that the human itself is stupid (no offense here). We can easily be manipulated by commercials or something identical. With the beginning of the new tax-system, there would be an extremly high amount of commercials everywhere.
In the end the companies which can effort more money into this, will get more money from the common people and the rest will just vanish.

I hope, I got it right.

Markco said...

I like the motivation, but won't this lead to government dominating markets and forcing out private industry already present in them?

Government is basically a company that has no bottom line and cannot go bankrupt. These kinds of entities can improve our lives, like with the space race, but we walk a dangerous line when we let the giant take over any section of the economy, even research and development.

Good post.

Carl said...

I'd like to leave a comment to the last PS in the post, about scandinavian countries.

I live in Sweden and its true that we have high tax rates. A U.S. tax payer would likely call them insanely high.

The income tax is set to ~33% unless your annual income is above 43.000 euro, in that case a further 20% income tax is applied to the amount above 43.000. And what's more, companies have to pay 'social fees' that equals about 32% of your income. All in all, about 50% of the cost to employ a person finds its way to said persons wallet. The rest is lost to taxes and 'fees' along the way.

Adding to this, the V.A.T. is set to 25% except for food and litterature.

Now, what do we get in return?

Free healthcare. The nature of the illness doesn't matter, the cost of treatment doesn't matter.

Almost free medicine. You never have to pay more than 200 euros a year for medicine.

Visits to the dentist are free untill you are 20 years old.

If you are injured for life and can't work, you get 60-80% of your earlier income. For life.

If you are unemployed, you get 60-80% of your earlier income for a period of 1,5 to 2 years. If you still can't find a job after that, you still get your money but through other channels.

And most important of all, free education. Up to and including high school is completely free. At uni you have to pay for some of your own books, nothing else. I can spend year after year at uni without paying anything. What's more, the government will support me with about 800 euro a month for six years while studying.

Is this a good model of economy or not? Considering the situation of the world economy right now, I'd say we're doing good enough. We certainly have our share of idiot inactives, but not that many.

I havn't travelled that much so I can't really compare to other countries. But one thing comes to mind. Free education and incentives to study is important. An educated person is much more likely to contribute to the economy in a meaningful way.

Worth noting is that the vast majority of the population are in favor of theese high taxes. There is a lively debate about a 1% tax cut in one sector and a 1% increase in another, but very few question the system as whole.

Moving abroad said...

Message from Norway regarding "I got into the government, you did not, so I'm smarter and stronger than you, so I'll spend your money better than you could."

I see no correlation whatsoever between intellegence, strength, and political power.

Anyone with the ability to not answer a direct question with 100 words could get into the norwegian government. And those with the politically correct opinions of the day will reach the top.

I could probably go on and on about this, but I will spare you the read unless you really want it.

Anonymous said...

This is dumb. Somebody else already covered the problems with the description of causes for the Great Depression, but the idea that the current economic crisis was caused by overspending on welfare programs is obviously and factually wrong.

Ry said...

I'm seeing a lot of superficial understanding of economic principles within the comments.

First I'd like to point out the obvious flaw in the argument that a free market system is the best system, all the time, in every place. Free markets have their own inefficiencies, and in some cases it's a good thing for governments to force some "inefficiencies" on people.

The basic idea is that governments should try to modify individuals' incentives to either use or not use certain goods, in order to bring these incentives as close to total marginal cost as possible. This is because having an individual evaluate cost of a good at marginal cost is the most efficient outcome, with an evaluation of cost at above or below marginal cost lowering the size of total production on the whole.

As mentioned in the post, common goods such as education, research and quality roads should be subsidised, as they tend to be consumed at a lower rate than their marginal cost, since much of the benefit is incurred by people other than the ultimate consumer. This is why they have to be subsidised or paid for by government, in order to increase their usage and attain a closer-to-optimal usage rate.

Similarly, governments have to levy taxes on goods which create undesirable negative externalities, such as pollution, cigarettes and arguably other vice goods.

The free market also creates some inefficiencies in terms of an optimal individual game theoristic plan of action resulting on overall suboptimal outcomes, as in the common baseball stadium example. A completely free market system allowing each individual to employ the most rational, utility-maximising strategy would result in everyone being no better or worse off than before, at a higher cost.

Adam Smith himself stated in his seminal Wealth Of Nations that an individual acting in his own interest in a free market system "frequently" acts in an optimal manner. Frequently, not always.

Anonymous said...

Agree w/ Ry. Also, in a country with a sovereign currency (non-covertible, floating exchange rate) taxes do not "fund" the government. Indeed, the gov't is the monopoly supplier of the currency, why should it need revenue? It doesn't

In a modern monetary system, taxes exist to create demand for the currency. People want to accumulate the "money of account" because it's the only way to extinguish one's tax liability. Thus they seek jobs that pay wages in that currency.

The demand for the currency allows the goverment to buy things. But the taxes do not "finance" these purchases.

The gov't may also use taxes to regulate demand. If demand exceeds capacity, then higher taxes (which destroy money) reduces spending. Similarly, tax cuts increase aggregate demand.

Also consider that when spending is not adequate, taxes *cause* unemployment. Government should act as the "employer of last resort". I.e. provide a permanent job guarantee program. This is better than a welfare system, since people actually work for their wage. Working people are not only more productive, but also happier. Long term unemployment has serious social costs.

It's all about the MMT:

Anonymous said...

What you want is to have the government directly stimulate economic growth. Moving the money doesn't help compared to making something out of it. I don't think any government has ever previously successfully done that. Not that huge corporations are always the ticket for that either.

Your suggestions for exactly what stimulates growth could use some thought. Roads can't continually be increased because for that growth if there's no cargo to move on them. For one example. It gets controversial.

Also, politicians are very good at thinking of excuses to spend money. Did you know Hawaii has a highway? Pure pork barrel, admitted by a Hawaiian, no economic growth in mind.