Sunday, 27 February 2011

Economic Equations

Ever since the ITiCSE conference in Turkey in late June 2010, I have been thinking of how flawed the economic thinking is.

At the ITiCSE conference, one to the speakers had talked of Turkey aiming to export more than it imported. The problem with that objective is that it isn't possible for all nations. If there are more exports than imports then somewhere there are exports that are not being consumed. Gifted exports are still imported somewhere. It is simply that the receiver doesn't attempt to match the value of the gift with their own exports so there is no imbalance added to the system.

If there is a country importing more than it exports, it has to be receiving gifts or borrowing to cover the difference between its imports and its exports. Fundamentally, the total physical exports must be equal to the total physical imports around the world.

sum of exports = sum of imports

If a nation is primarily on importer then it is either generating new credit into the system or accruing debt. If it generates credit into the system then it doesn't care about the imbalance because there is really no cost to itself. If it incurs a debt then that probably comes with an interest requirement attached meaning that in order to pay back the loan, it has to export more than it imports. I would contend since that is the goal of all nations and economic units then somewhere the system is going to breakdown and debts are not going to be repaid.

My argument here is that at best, we might actually get a balance between exports and imports for all nations or economic units.

However, there is another line of thought that really caused me to try and write this entry. It relates to things that are purchased / imported in order to be destroyed. An army is a consuming economic unit. Weapons for war are assumed to be produced simply to be destroyed. Nobody expects an army to earn through exports / sales, the cost of its operations. These are the black holes of an economy. Governments attempt in balancing the books to pay for these black holes through taxation but this upsets the export to import balance or does it? The government uses the tax to buy goods and services or to support others who are consumers of goods and services. You could argue it is a wealth distribution mechanism. The question is whether it works.

Maybe some of my thinking is too simplistic but what I see is pressure to have a system that is out of balance and a balancing mechanism in the form of interest accruing debt that simply puts the system further out of balance. The economic black holes consume without adding balance to the economy and consequently need gifts in order for the system to remain balanced. If these economic black holes cannot borrow against future profit because there will never be a future profit. All they do is increase the size of the future gift required to keep them in operation.

I see a fundamental problem with all of these attempts to balance economics because they make assumptions that profit (exports are greater than imports or income is greater that expenditure) is possible. In the end, they have to be equal and for that to happen in a system that is out of balance requires gifts to consumption units (the economic black holes).

Some will argue that I have it wrong because growth is what will enable a country to repay loans and interest. Growth doesn't generate funds to cover interest payments. There has to be growth in all nations in order to maintain the balance between imports and exports. It is not possible to have more exports than imports. If more is produced than can be consumed then it is simply wasted and adds further cost to an out of balance system.

References

Douglas, C. H. (1974). Economic democracy. Epsom, Surrey: Bloomfield Publishers.

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