Sunday, November 27, 2011

Keynes' Multiplier

The primary explanation used by Keynes to explain why public investment would spark economic growth and hiring was his "multiplier" theory.  The idea was that public money spent on hiring the unemployed to build infrastructure projects would cause an infusion of money into the economy and expand the monetary base causing the economy to grow.  Each dollar spent would have a multiplicative effect on the economy.  Of course, now we know it did not work.  It failed in the 1930s and again after the Global Financial Crisis of 2008. 

Why did it fail?  N theory shows that it is wealth that the economy runs on, not money.  Money is just a placeholder.  Money acts like a barter exchange unless there is a profit activity.  In a barter economy there is no wealth creation beyond the production of more goods which cannot occur unless the factors of production are free, and that is the situation in only the most primitive societies.  It is only in a society with a banking system that expansion of the Money Supply occurs and provides the opportunity for wealth creation.  Profit accumulation is the only method of Wealth creation.  Profit acts like an asset allowing a bank to make further loans and expand the Money Supply and provide the opportunity for more profit accumulation.

Keynes' monetary expansion since it created public assets, public infrastructure, failed to create a profit making Private Sector asset.  The public assets are of no wealth creating value.  The Public Sector borrows based on their tax base not public assets.  The tax base was not expanded by building public infrastructure.  No wealth creation occurs in this process unless the constructor is in the Private Sector and makes a substantial persistent profit over time.  Typically, infrastructure projects are one time events limiting the consistency of the profit stream and therefore diminishing the economic effectiveness.

Keynes felt more money in the hands of the unemployed would spark some economic expansion.  Now we can see that this did not occur, but it should have been predictable.  In a economic downturn businesses are struggling.  An injection of a little cash is much appreciated, but it is unlikely to be enough to make a business person hire new employees or expand.  It only sustains them in a difficult time.  Insufficient wealth is created to change a business person's perspective. 

A business person's perspective will only change when the outlook for the economic future changes.  This is why the Great Depression lasted until WWII.  This is why the Great Recession will last until there is a change in economic outlook.  Since government is impotent they should stop screwing with the economy.     

Sunday, November 20, 2011

Transaction Tax

Herman Cain, a possible United States Republican Presidential candidate rose to the top of the voter preference polls in October 2011 until disclosure of previous sexual abuse charges toward women was revealed in November.  His rise in the polls was due almost entirely to an economic policy he called 9-9-9.  His economic policy included a flat nine percent income tax, a nine percent national sales tax and a nine percent corporate income tax.  All these taxes would allow elimination of the federal tax code and generate the same level of revenue as the current tax system.  The simplicity of the tax law was appealing to the electorate since it implied fairness.

Another taxation method first proposed by Keynes in 1936 is much simpler.  Although Keynes proposed a "financial" transaction tax, expanding the concept to all monetary actions could provide revenue equivalent to the current the USA federal tax revenue.  The system could be further enhanced by Private Sector expansion into activities undertaken by peripheral federal agencies.

It turns out such a system only requires a 1% transaction tax on funds transferred from one account to another.  Since this transfer is accomplished by the Federal Reserve, collection of the 1% is properly considered a fee and not a tax.  The Federal Reserve would extract the 1% fee as the payment moved from one party to the next.  Such an idea has broad political support.  Steiglitz said such a system with collection by the FED or ECB is practical in this day of electronic money.  Krugman said, "It is about time."  I have promoted the idea in my book Rule of Money.

Instead of taxing at a rate of 9-9-9, it is possible to structure a federal funding system of none-none-none-1.  The 1 being a transaction fee of 1% on all transfers of funds or wealth.  To make the system fail safe it is necessary to eliminate all bills and currency and only use electronic money.  There are numerous advantages of this change.  First, it would collect a fee for illicit activities that go untaxed.  Essentially, the drug and sex trade would be revealed.  No longer would it be possible to transact drug sales on street corners.  No longer would the girls and patrons of the sex trade be anonymous.  All this exposure would enable police to better enforce the laws of the country.

Self-interest & Politics

The concept of self-interest is the strongest motive affecting economic choice.  It is not the only criteria for choice.  Parents often select children's toys to help the learning process.  Many gift choices for children are made out of love.  Obviously, this is the case for many purchases made for all the special people in our lives.  This type of choice is the opposite of self-interest.  Nevertheless, many choices are made out of self-interest and especially choices around preservation of self.

The purpose of politics is to provide protection.  So obviously, it is an arena where self-interest is the name of the game.  Consequently, selection of a political party is done primarily to protect one's self.  The components that a person feels most vulnerable to losing are the same components that will guide their choice of political party.  A job for most people is a vulnerable necessity in maintaining their lifestyle.  Likewise, wealth is a vulnerable element in the lives of many wealthy people.  For many poor people the social services they receive are critical to their ability to survive.  Many elderly people are in a similar situation.  Consequently, people in these groups will support a political party that will protect these needs.

Much of the electorate is not choosing a candidate based on political philosophy, but rather based on their commitment to maintain critical services that provide protection of the voter.  For the elderly it is retirement funding.  For the poor it is social services.  For the wealthy is police protection and stability of financial markets.  For the middle class it is employment at a high level. 

For some people it is not their self-interest that concerns them, but the self-interest of vulnerable segments of the population.  For many wealthy people this involves helping the poor or elderly.  They use their money and voter influence to sway segments of the population to causes they embrace.  Similarly, anti-abortion groups often abandon their personal self-interest to protect the unborn.  Pro-abortion groups have the opposite view since their concern is for the mother's life.  It is just a slight change in perspective that puts these groups at odds.

Ironically, although we all start on a path of shared self-interest we quickly diverge on our own particular trail seeking specific protections for what we deem is "most" important.  It is that word "most" that trips us up.  What is "most" important is our own protection.  If protection of every one's interests proceeded our own self-interest than political choice would be much simpler.

Wednesday, November 16, 2011

Keynes Investments

During Keynes' lifetime there was no distinction made between Public sector and Private sector investment in economic theory.  Investment was investment.  In fact, Keynes justified increasing Public sector investment to replace diminishing Private sector investment after the stock market crash of 1929.  Treating investment in the Public and Private sector as equivalent seems like an obvious oversight on his part.  Certainly some types of investment are more likely to spark increased economic activity than other investments.  For a private investor choosing the right investment depends on the degree with which an investment will increase in value.  This is especially true of a stock market investment and less so for a bond purchase, but the potential increase in value of each investment plays a major role in the selection of which product to purchase.

Keynes, on the other hand, only followed the investment cycle from a savings account into a private company or into a public agency where the funds were used to pay a salary or purchase a product.  He gave no further consideration to what happened to the money after this transfer, but it is the next step that sparks economic growth.  If the money ends up in a business it is likely part of a process of profit making.  Profit expands economic growth.  If the business segment is growing the company may use the funds to leverage additional business loans.  Business loans have the potential to increase investment capital tenfold when a bank uses the Federal Reserve System.  This path is much preferred to a company simply paying an employee's salary.  The employee might use the funds to pay his federally insured mortgage or send his salary into another investment dead end.  Such an investment in our current situation does earn anyone a profit, and therefore, is economic growth neutral.  Unless the salaried employee purchases a product from a company making a profit and growing, there is no resultant economic growth.  For instance, an employee spending most of his money on food from subsistence farmers is not expanding the economy by spending his salary.  This type of exchange is a barter level trade.

Only Private sector investment advances economic growth.  The federal government of the United States calculates economic growth by the rate of GDP growth.  Unfortunately, federal expenditures from tax collection and borrowing are part of GDP.  Does this make sense?  It does not.  Imagine if there was no Private sector and all expenditures were from borrowed funds and the government increased their expenditures 12% per year.  Would you believe the government that economic growth was increasing by 12%?   The way GDP figures are used this would be correct, but it isn't.  Government expenditures should never be part of GDP.  Economic growth is the increase in the profitability of the Private sector.  From the government perspective if economic growth is 12% their tax revenues should increase 12%.  From the Private sector perspective under this scenario businesses will know the size of the market for goods and services will increase 12%. 

Tuesday, November 15, 2011

Velocity of Money

The Velocity of Money is a principle of conventional Economics that persists today even though it is an absurd extraction.  The equation of this principle was first stated by Irving Fisher, one of the stalwarts of 20th century American Economics.  The equation is MV = PQ.  P is Price and Q is quantity of products.  So the price of all the products sold in a period is equal to the quantity sold times the price and this is equal to MV.  M is Money and V is velocity of sales in a period.  Make V = 0 and all the products sold in a period are equal to all the Money used to make the purchases.  Very logical, but there is one complication.  Since money is not consumed after the sale the merchant has the Money to use and make an additional personal or business transaction within the same period.  In calculating PQ we added all the purchases within a period so we need to know how many times the same Money was used in a period to assign a value to V.  To do this in the United States we rely on figures from the Federal Reserve to determine the amount of money available to make purchases.  This allows us to fix the amount of Money in the economy during a period.  V now becomes the factor in the equation necessary to equalize the equation.  It turns out this factor called Velocity is usually between 2 and 3.

From this principle Economists derived a couple of assumptions.  First, it seems increasing velocity means increasing sales.  Second, it implies if the amount of Money increases and Velocity does not change then Sales will still increase.   That is the priciple.  The next jump is where the principle falls apart.  Economists stated increasing Sales implies economic growth.

Let's see how this theory works in the real world.  Imagine yourself as a Day Trader with $100,000 to invest.  In the first hour of the market you purchase a stock for 100 k.  One hour later you sell the stock and pocket a 5 k profit.  Thirty minutes later you buy a new stock for 100 k and sell it 30 minutes later at a profit of 5k again.  Just before lunch you buy another stock and sell a couple of hours later for a profit of 10 k.  So far you are up 20 k.  But in the afternoon you make another 100 k purchase and immediately the stock starts to fall, by the end of the day you feel you must sell and loose 20 k ending the day and the period just where you started.  According to the "quantity equation of exchange (MV = PQ)"  the equation looks like this 100,000 * 4 = 100,000 * 4.  The equality works, but was there any economic growth?  No, Money just went back and forth between the Day Trader and his Broker. 

You could craft a similar scenario between a Grocer who supplied milk to the Barista across from his store.  It does not matter how many times the Barista spent her earnings to purchase milk at the grocery.  What does matter for economic growth is the profit she made and the profit the grocer made.  The Day Trader can contribute to economic growth, but he needs to make a profit.  Spending Money without making a profit does nothing for economic growth.  The Velocity of Money is just a calculation of how many times consumers divide their spending.  It does not tell us anything about how Money grows.  Profit is the primary economic growth mechanism.

When government taxes their citizens and spends the funds on a new fire truck no one makes any money.  If the price of the fire truck is $300,000 then PQ = 300,000 * 1 = 300,000 * 1 = MV.  No economic growth occurs, but if the fire truck is purchased from a private firm the PQ = MV possibly looks like this:  300,000 * 1 = (250,000 + Profit) * 1.  The private firm makes a $50,000 profit on the sale.  The $50,000 is additive to the economy stimulating economic growth.

Friday, November 11, 2011

Rule of Money

A couple of years ago I was mulling over the difference between gold coins and paper money, when I realized one is a real thing and the other is a concept.  This meant gold was a commodity subject to the laws of Supply and Demand and paper money was not.  Paper money was a concept.  A concept like money, riches, earnings or love and peace was not subject to the Laws of Supply and Demand, because there was no limit to how much you could have.  Paper money was only subject to the method of acquisition.  The only Rule of Money is that it must be earned.

I used that Rule of Money as the title of my book and proceeded to investigate what the consequences were for the economies of the world.  It ends up that a country can use the concept to provide free education funding, free health care funding, free retirement funding and income for stay-at-home Moms.  It also means every citizen in a country following Rule of Money principles will have more money to spend.  It means every country will have more wealth to use reducing their debt.  It means every country will have more job oppportunities.

 Of course, injecting more money into a society brings out the Supply and Demand purists arguing that increasing the quantity of money brings on inflation.  Solving this dilemma required a review of economic principles and creation of a new simpler economic theory.  I call this new perspective N Theory.  It is based on the observation Economics is about the purchase and sale transaction, and not about solving the scarcity problem.  The are many other groups solving those issues like the agricultural industry, the energy industry, the clothing industry, the toy manufacturers and the housing industry.  How they do it is interesting, but it is not based on Economic principles it is built on business principles.

Back to inflation, N Theory explains it is not the quantity of money that causes inflation, but a lack of competition.  It is so obvious.  A few merchants at Christmas with the season's hottest toy and the price goes up.  If Christmas bonuses are up does the price go up, maybe, but not likely.  Why do economists feel it necessary to create such as convoluted explanation for inflation?  Simply, because it fits with the principles that underlie their profession.  That is why I created N Theory so they would have a podium to hang onto.

Thursday, November 10, 2011

Financial Crisis Inquiry Commission

On Wednesday, November 9, 2011 Phil Angelides was interviewed on Bloomberg TV about the Financial Crisis Inquiry Commission that he chaired.  During that interview at 3:12 PM EST he stated, "The economy is run to benefit the lenders."  Isn't that similar to saying: the economy is run to benefit the citizens.  Isn't it our money in the banks?  Who does Phil want the economy to benefit?  The only other option is for the economy to benefit the state.  An organization he has worked for his entire life.  I can only explain Phil arrogance by assuming after so many years it appears a Public employee forgets he was hired to provide a service to the citizenry, not the other way around. 

He continually harped on the compensation system of bank employees as a primary reason for the Global Financial Crisis. It seems only fair to gather information about his compensation and retirement benefits.  Let's lay it out on the table Phil.  How much life time compensation do you receive for your "public service?"  Don't forget the perks!  State Treasurer is probably equivalent to a Vice President in charge of retirement funding at a firm like Aetna.  Let's compare your compensation and see if it is equivalent?

Grating to me as a citizen who pays his salary, is his myopic analysis of the fairness of the Financial Crisis Inquiry Commission.  This Commission made up of 9 out of 10 Public officials is so biased as to be invalid.  The appropriate thing to do would be to hire 9 Managers from Bear Sterns, Countrywide Mortgage, Lehman or Merrill Lynch and form a new committee headed by Phil and see if they come to the same conclusion.  I am just guessing, but I suspect 9 out of 10 would place the blame on the government policies of lowering loan standards. 

I think this is such a good idea that if you had a position at one of the major firms in the mortgage meltdown of 2007 and want to help please email me by adding a comment to this blog.  We can form our own Financial Crisis Inquiry Commission.  We can do it all online.  We will just read the transcripts of the testimony collected by the FCIC and come to our own conclusions.  I will do the writing for the effort.  All the information is on a website hosted by Stanford University.    

Keynes & Hayek Agreement

Nicholas Wapshot has written an excellent book about the history of the disagreements between Keynes and Hayek.  The book is titled KEYNES HAYEK The Clash that defined Modern Economics.  The book points out on page 21 that both Economists believed "the amount of money in the economy was the key to understanding inflation."  Such a conclusion is inevitable from two strong adherents to Supply and Demand Theory.  "The amount" is the Supply of money and "inflation" is an indicator of the Demand for money.  According to N Theory it is this misconception that underlies the economic folly of the 20th century.  We can clearly see the folly of believing interest rates indicate the Demand for money.  During the Great Depression and the Global Financial Crisis the Demand for money was at a fever pitch, but interest rates were nearly zero.  Since interest rates are a product of Central Banks setting rates, it is absurd to consider them indicators of the free market.  They are only indicators of the government's financial strength in setting rates.  In the United States commercial banks can go to the discount window to borrow.  This opportunity and rate sets the competitive environment for purchasing T-bills.  In other words if the cost to borrow is low, then the return on lending will fall to low levels.  Why is this not working the same way for Greece and Italy?  It would if investors felt confident both countries would make their interest payments.  It is not at all about the amount of money in circulation, but whether the borrower has sufficient income to pay the interest bill.  Italy and Greece do not.  It is not  because the ECB issued too many Euros.  It is because Greece and Italy spent more money than they had capacity to repay if higher interest rates prevailed.

Countries just like subprime mortgage borrowers, look at their current financial situation to determine if they can take on more debt.  They do not consider what will happen in the future if interest rates rise.  The failure to correctly evaluate a future with higher interest rates affects home borrowers the same way it affects sovereign debt borrowers.  What home borrowers, Greece and Italy did not realize is when they went to refinance after a couple of years, the interest rate might be higher.  When this happened in all three case, the borrowers were unable to refinance and were pressed into foreclosure or default. 

Did they get into this position, because of a misrepresentation of money according to Supply and demand Theory?  Keynes and Hayek by tying the value of money to the simplistic Supply and Demand Theory made money a commodity (See Article "Money is a Concept").  This destroyed the relationship of money as payment for work.  Countries spent money that they did not earn.  Individuals home owners purchased houses that did not jive with their earning ability.  By unlinking the value of money from work and tying it to the amount in circulation both Keynes and Hayek promoted a false belief that money could increase in value without people working to earn it.  When interest rates fell home investors believed in a monetary windfall.  Oh my God, cheap money!!!  They suddenly saw their home investment increase in value.  Not realizing money is tied to work and not to interest rates, homeowners fooled themselves into thinking they were richer.  Had these homeowners not been misled by our leading Economists they could have realized it was a value bubble that would readjust to the true value of their earnings.  This illusion is most abused by national governments and Central Banks.  Greece and Italy both spent more when interest rates were low, not realizing that they would have to eventually pay for spending money their citizenry did not earn.  Likewise, China is setting her citizenry up for massive inflation by artificially under compensating her workers.

Tuesday, November 8, 2011

Is Economics a Science?

Usually, no one questions whether Economics is a science.  I want to be the first.  Although there is some give and take among Economists.  Most conventional Economists will concede that Economics is not a pure science, but a Social Science.  A social science is one that is proven through statistical analysis.  This compromise is necessary, because Economics studies human behavior.  Human behavior is different from the behavior of objects, for instance, in Physics.  Humans do not respond consistently or uniformly.  We call this difference "free will," but it is this flexibility that makes it difficult to turn study of human activity into a science.  This difficulty led to the invention of Social Science.  Social science allows facts to be uncovered by finding tendencies.  Social Science does that by creating large groups of humans and stating that in a large group humans act consistently.  There are a number of problem with that assumption.  First, it is not always true.  It can only be true if humans respond within specific limits, i.e., the requirement for rational behavior.  By requiring the subjects of the study to act rationally, Social Science can say such and such is true if everyone in the sample acts rationally.  Of course, there are common circumstances when people do not act rationally: during a panic, during a disaster, during confusing circumstances, during a situation where they feel endangered, etc.

Even after correcting all the defects in a Social Science study or in a pure scientific study there is still a flaw in using these processes to study Economics: they do not work in uncovering the goals of economic process.  Economic study is not about unearthing the bones of a process, but about following and understanding the path of invention.  It is about understanding the rules and axioms that define economic process.  It is about the constraints on the economic design process.  Economics is closer to Architecture than Anthropology.  It is a creative field attempting to improve human existence.  Like an Architect, an Economist is trying to configure the structure of the economy by locating the columns of the money process to support the beams of business and position the floor joists of regulation in the proper position to achieve stability and the strength for the economic edifice to rise higher.

Social Science approaches to Economics only record what has happened in the past.  Social Science studies develop very elegant and sophisticated mathematical formulas, but they simply record the past, they do not predict the future.  It would be like writing a mathematical formula for the Burj Khalifa in Dubai.  Very elegant and sophisticated equations could be written to describe the building in every detail, but does it tell us anything about the building that will exceed it?  No, it only tells us what the starting point of the next design will be.  There is not a clue about what direction the design will go in from this starting point.

Sunday, November 6, 2011

Why Government cannot Increase Employment

Government cannot increase employment, because new employment requires additional money.  Government can print more money, but government cannot create more money.  More money is only created when a profit is made.  Government is not a profit making entity.  Government is a tax collecting entity.  Only the Private Sector can make a profit (or more money), and therefore only the Private Sector can create new jobs.  Government jobs created with borrowed money are not real since the borrowing cannot be sustained indefinitely.  The only way a job can be sustained is with a profit making system.  Our profit making system is the Private Sector.

You are thinking that can't possibly be right; didn't FDR create thousands of jobs during the Great Depression?  Think about this: Did any of the jobs paid for by the WPA survive into the 1940s?  The answer is no, because the jobs were not needed and were paid for with borrowed money.  The government did not make a profit on the employees hired by the WPA, consequently there was an insufficient revenue stream to pay for the employees.

FDR did not create jobs.  He simply made welfare payments contingent upon completing a task before checks were passed out.  The difference between an employment check and a welfare check is the employment check pays a worker for contributing to an activity that makes a profit.  Since no government activity makes a profit, a worker engaged by the government is simply a welfare recipient unless the worker provides a service the Private Sector agrees to fund through taxation policy. 

This is the dilemma faced by the citizens of Greece.  Their massive Public Sector is sucking the vitality out of the Greek economy.  Billions and billions of Euros are spent on jobs that the Private Sector does not need to make a profit, and consequently, the Private Sector's ability to grow the economy is strangled.  You can see that any effort to expand Public Sector employment will further burden the fragile Private Sector in Greece.  Greece needs economic growth and that can only be provided by the Private Sector.  This is not a new problem for Greece.  For over 100 years Greece has been run by two political parties that promoted Public Sector employment.  One party emphasized Public Sector employment in the social services arena and the other party favored employment in the military and foreign affairs arena.  For over 100 years the Private Sector and economic growth was ignored with the current disastrous economic effects on the Greek citizenry. 

Money is a Concept

Most money is an electronic notation in a bank account.  It has no physical presence.  So money could be considered a concept since there is only a physical presence to money in a few specific versions, but money is a concept to distinguish it from being a thing.  Why is this important?  All things are subject to the rules of Supply and Demand, but concepts are not.  Why is that important?  Things are subject to inflationary effects related to the amount available.  The price of computers will fall as the quantity available in the market increases.  The price of oil will increase as the demand increases.  A concept like "love" does not change in value as the quantity of love increases in the world.  A concept like "peace" does not decrease in value as more and more of the world becomes peaceful.  Likewise, the value of money does not decrease as the quantity of money in the world increases.

Seeing money as a concept allows countries to find strategies to increase the quantity of money in their citizens' pockets without fear of Supply and Demand inflation.  There are other types of inflation.  Money is subject to inflationary effects since it can be exchanged for other types of money in the world.  The differences in value between the money of different countries is caused by an adjustment in the value of earnings of various people.  You can imagine if two people doing the same job in two different parts of the world are paid in different currencies and they buy software from a company in Seattle, WA, that eventually the value of their work expressed in their home currency will gradually move toward the value of the currency used in Seattle, WA.  Convergent inflation is nothing to fear.  It is simply a correction of an imbalance in value.  It will be painful for awhile, but eventually all currencies have to equal the value of work completed to earn it.

Currency can be debased by printing currency that is not earned or excessive payments to people who do not earn it.  This is one of the dilemmas of Third World countries.  To increase the amount of money circulating in their economies they expand their Public Sector.  Unfortunately, Public Sector employment often exceeds what is necessary.  This is equivalent to paying someone to stand around.  The value of their work is debased and consequently the value of the money printed to pay the new employee is likewise debased since Money=Work.

Econ Education: Focus

If a college hired the past head of Greenpeace to lead the Marine Studies Program what would be the focus of the department?  Do you think the practices of the whaling industry might receive scrutiny?  Is it possible a new course would be developed to analyze this topic?  Of course, it would.  Personal bias enters into the selection of coursework at the college level sparked by the viewpoint of key Professors. 

Likewise, the Econ educational curriculum is biased by the idea of redistributing incomes.  This focus comes from the liberal political policy that rose to prominence in the early twentieth century.  In fact, the political philosophy even permeates the high school economic education policy in the United States.  The Council for Economic Education ( sets the National Standards for Econ education.  The National Standards list twenty topics in the order they should be taught to high school and college students in the beginning Econ classes.  The first topic is "Scarcity," or the fact there is not enough for everyone so a system must be devised to ensure everyone gets a share.  From this assumption there are two prominent paths to follow.  Either government steps in to divide the products of the community (communism) or the market divides the product of the community according to individual success in the economy (free market system).

Path one is a political system where the government takes possession of the production processes of the community.  Path two is the use of an economic system.  Econ education obviously should be focused on Path two.  What should occur first in Econ education is a historical discussion of how earliest man developed a barter system and then eventually developed a monetary system.  The role of banking and government should be introduced so the student has some perspective of the underlying reason government got involved in the economic system (to increase their wealth) and bankers (to increase their wealth).  This is the outline I followed in the Rule of Money.

After discussing the role of personal choice in the second National Standard of the Council for Economic Education (CEE), the next topic of Econ education is "Allocation."  How the CEE can jump to the allocation of products without talking about the economic participants (Buyers and Sellers), the history of production and the development of markets seems oddly out of order.  I strongly doubt any manufacturer every considered whether his products ended up with the "right people."  Nevertheless, the CEE goes down this path to show product distribution is not "fair," and it needs to be modified by a compassionate government.  Unfortunately, the history of government is quite different from this fairy tale view of government.  Who sacked and burned cities over the last three thousand years?  It was not the farmers or even the bankers, it was the government.  Most of the history of government is as a greedy totalitarian group of people only looking after their own welfare.  Historically the welfare state is a misnomer. 

Saturday, November 5, 2011

Favorite Outcome of N Theory

One of the great things about N Theory is the ability of a country to expand the wealth of the non-business segment.  My favorite segment to add to the pay for work group is the stay-at-home Moms of the world.  Every Mother or Father raising a child deserves to be paid for the work they are putting into the rearing process.  Certainly, the parent needs income to pay for food, clothing and housing.  N Theory allows the government to incubate private companies managing these rearing services.  Then these private companies get paid from "new" money created by government to essentially provide childhood development services like a school system.  Then these schools pay the parents for their services.  The parents purchase nutritious food, adequate clothing and housing.  The money cycle kicks into gear and the toddler school system borrows to expand and deliver new services.

Can you imagine how fantastic it would be for the 25% of the world that lives in abject poverty to have sufficient funds to feed, cloth and house their children.  All of this is possible by using the power of the Private Sector and the full capability of the banking system.  It is not taking from the rich and giving to the poor, but allowing the poor the opportunity to earn a decent and sufficient income to provide for their families.

How all this works is described in the Rule of Money coming out in January 2012 at

N Theory versus Supply and Demand theory

N theory is a new economic theory intended to replace the Supply and Demand theory of price setting.  Negotiation is the basis of N Theory, hence the name.  Where Supply and Demand theory has a product focus, N Theory focuses on the people (Buyers and Sellers) in a purchase transaction.  N Theory is introduced in my new book, Rule of Money.  In the book I explain that Supply and Demand theory is limited in that it is only a two factor function, quantity and customer interest at a specific price.  The reality of the world is that there are numerous factors affecting the quantity of a product brought to market and the equally complex and diverse decision by consumers to buy a particular product.

I introduced N Theory, because Supply and Demand theory no longer reflects the reality of the diverse worldwide market for products.  Supply and Demand theory, also, does not reflect the differences in customer perspectives.  N Theory takes the economic prediction out of the office and makes it a recording of a purchase transaction.  The moment of a market transaction is the N Theory event.  It is when a consumer agrees to an offer made by the retailer. 

A merchant will set prices based on when a successful transactions occurs.   If the merchant sells 10% of his product stock in the first week he will probably lower his prices in the third week depending on his projected turn.  Likewise, if he sells 80% of his product stock in the first week, he will increase his product order the following week and raise his prices when new product stock arrives.  Obviously, the decisions the merchant makes is much more complicated.  Trying to predict the merchants decision with a mathematical equation is impossible, but what is possible is to record the marketplace results and select a product pricing strategy for the next batch.  Briefly, that is what N Theory is about.

Supply and Demand theory is not discarded in N Theory, but its role as the foundation of economic process is challenged.  Supply and Demand theory is just one among among hundreds of factors that affect product pricing.  It is time for Supply and Demand theory to step down from its pedestal and find its place among the average run-of-the-mill everyday factors. 

Is there any Money left?

The Tea Party Republicans are aggressively working to reduce the size of the Public Sector.  Their main reason for chopping the size of government is to reduce the financial burden of paying the bill.  Exactly, who are they paying?  In 2011 the number of federal employees is usually stated as 2.8 million.  That is slightly less than 1% of the population.  If the federal budget annually is $3.4 trillion than each federal employee spends 1.2 million.  Roughly 10% of that expenditures is their personal salary and benefits.  Another 15% goes to pay the interest on the national debt.  Another 55% goes to pay for entitlements.  Slightly more than $700 billion is spent on contractors outside of government.  That equates to 20% of the budget and therefore leaves no money for federal employees to do their job! 

Herein lies the problem?  Hopefully, the accounting for federal expenditures released to the public is incorrect and not understated, but it is clear there is a need for greater efficiency or the elimination of some functions.  Is there an opportunity to be more efficient?  If the federal government was a private company getting efficient at delivering government services would be a priority.  Maybe, the Post Office could be auctioned off to UPS, DHL or Fedex?  Maybe the Labor Department and the Commerce Department could be eliminated or sold to a private demographic firm?

It seems like the time as come.  When the amount government collects is only sufficient to pay their salaries and their bills is it time to stop the spending race?  Even Nascar slows down when there is a crash on the track.  In fact, if it is bad enough they stop the race.

Whose Interests does Government represent?

Do Government officials actually listen to the public, or do they spend most of their time listening to special interests? Special interests is defined by the media as the private Sector.  American media concentrates on the attention special interests get before Congress, but is that an accurate assessment of what actually occurs?  In the 1990s I spent quite a bit of time in Olympia, the state capitol of my residence, and even traveled to Washington DC to develop support for an urban renewal project in a poor run-down community near my residence.  I attempted to link the Public Sector and Private Sector in a project to restore the economic vitality to this community.

One thing you learn when you seek out your Public officials is that you spend a great deal of time waiting.  Like sitting in a hospital emergency room, you see who gets priority and how long each visitor gets to spend with their Senator or Representative.  In fact, you even get to see how much importance a Senator or Representative gives to various types of visitors.  As each visitor leaves sometimes the Senator or Representative gets up and takes them to his office door or gets their jacket and even escorts out into the main corridor.  At other times when visitors leave the office, the Senator or Representative already has his head down, sitting at his desk, looking at the items from his in-box.

Although my observations are clearly not comprehensive enough to draw any conclusions, they may prompt some challenge to the almost cliche conclusions of the media about the attention Public officials give to special interests.  My little sample concludes the people getting most of the time with Public officials are members of the bureaucracy.  Public officials seem to spend an inordinate amount of time meeting, reviewing and crafting legislation to give direction to the various agencies of government.  Likewise, the agencies of government spend an inordinate amount of time lobbying for their "pet" projects.  In Washington DC it was extremely rare to be in an office when a private citizen visited an official.  In fact, it was rare to come across anyone from the Private Sector.  Of course, I was from the Private Sector, but I was invited on the trip to secure funding for the local transit agency and city.  Consequently, I was rarely given a speaking role in drama playing out around me.