An explanation of the financial crisis

[protagonist]

An explanation of the financial crisis

Money is the promise or representation of wealth. A society needs money because after the division of labour, everyone is both a customer and a supplier, and so everyone produces wealth and needs wealth at the same time. The amount of wealth they produce is represented by the amount of money they have, which is exchanged for other people's wealth as required. A requirement is reflected by market demand. For example, if everyone needs food, they would pay more for it, and hence the demand for food would rise - meaning that food becomes more profitable. The economic system assumes that everyone is in the pursuit of profit. This means people would produce (or somehow obtain) more food to gain the extra profit, and hence satisfy the demand. On the contrary, if some wealth, for example an old inefficient machine, is no longer required, then people would no longer pay money for it, and hence it would become less profitable and less of it would be produced.

Naturally, most people start off with nothing, so they need some money from those who have it, to start their own wealth production and contribute to society. (This was originally provided by the bankers, who lent money on the basis that people would become self-sufficient and produce enough wealth, exchanged for money, to pay back the bankers. Thus, the easier the credit, the better the economy. However, the borrowers are entirely at the mercy of the lenders, so they could be easily enslaved by the lenders - debt slavery. Nowdays, people who do not have the money to start their own production can be employed by a producer and gain a portion of the money that the producer earns. Naturally, the employees are entirely at the mercy of the employers, so they can also be enslaved - wage slavery.)

The circulation of money is crucial, however, because it means getting the necessary wealth around the economy so that everyone can survive and grow and produce wealth.

The economy is healthy when the circulation of money is good, and is unhealthy when the circulation of money is stagnant (or nonexistant). This can be caused by 2 factors:

a). The bureucrats, bankers and corporate executives pocket all the money themselves, which means that they become richer while everyone else is becoming poorer. This problem will only worsen as they will invest their money to concentrate more and more wealth into themselves. The bank executive who has stolen billions from its customers and pocketed all that money is not going to use that money to give to charities. He will start a new bank to lend money to people, or maybe create a corporation that sells goods to the people. All these ways will make sure that he gets more and more money from the people. The people have less money to spend and so the demand falls, meaning employment falls, meaning those who used to be employed have less money, and so the economy declines more and more.
b). The fall in employment is also caused by people being made redundant by machines. Why have factory workers when you can have fully automated factories that make goods faster, cheaper, better, and more reliably? Why have hundreds of clerks when you have computers that do all the maths for you? Machines are efficient, powerful and reliable. They have naturally displaced more and more people from work. The unemployed have a lot less money to spend, which means there is less demand in the economy, which leads to more unemployment, and the cycle continues. The only thing slowing this vicious cycle is the welfare money which is spent by the unemployed to generate demand for the economy.

[The Grey Badger]

Yes on a. No on b. You leave out the factor of wealth creation by innovation. Hand workers were replaced by machines, but there were more jobs in factories, and so many, many more good were produced that people could afford that employment went up. So did opportunities. For example -

A hand weaver in his cottage was displaced by factory looms. There were jobs in the factories for his children and for the neighbor's children who would have been landless agricultural laborers. Then there were jobs supplying the factories, shipping the goods, and selling the goods.

Fast-forward 200 years. The factory worker is displaced by the computer. But his son struck it rich in Silicon Valley. His daughter, meanwhile, has a nice little craft business selling handmade things to the luxury market, "guaranteed 100% hand-crafted and organic."

I didn't mean to close the circle that nicely, but one way to measure these things is population increase after a major wave of innovation. Another is the amount of household wealth measured either in some constant measure such as an ounce of gold or 1950 dollars - any measure you choose - or simply in things. Some of which, of course, are not luxuries as much as they are simple equivalents of older things, such as cell phones and computer printers.

[protagonist]

Yes on a. No on b. You leave out the factor of wealth creation by innovation. Hand workers were replaced by machines, but there were more jobs in factories, and so many, many more good were produced that people could afford that employment went up. So did opportunities. For example -

A hand weaver in his cottage was displaced by factory looms. There were jobs in the factories for his children and for the neighbor's children who would have been landless agricultural laborers. Then there were jobs supplying the factories, shipping the goods, and selling the goods.

Fast-forward 200 years. The factory worker is displaced by the computer. But his son struck it rich in Silicon Valley. His daughter, meanwhile, has a nice little craft business selling handmade things to the luxury market, "guaranteed 100% hand-crafted and organic."

I didn't mean to close the circle that nicely, but one way to measure these things is population increase after a major wave of innovation. Another is the amount of household wealth measured either in some constant measure such as an ounce of gold or 1950 dollars - any measure you choose - or simply in things. Some of which, of course, are not luxuries as much as they are simple equivalents of older things, such as cell phones and computer printers.

Machines may have generated jobs during the Industrial Revolution, but that was only because they were clumsy and had shortcomings which were made up by employing people. The demand for handmade things is very small and could easily vanish because it is not an essential item, unlike food and goods. Besides, most "handmade" things today is made by machines, not purely by hand. It would be faster and cheaper if these things were also made by an automated process.

It is very improbable that the sons of all factory workers are working in Silicon Valley. It does not matter in any case because scientists have recently created a software that is said to be much more efficient than humans at scientific research, and could displace researchers and scientists from their jobs.

It does not matter that machines have generated huge amounts of wealth if this wealth cannot be redistributed through the market. The only way to ensure that this extra wealth gets around is to have a copious monetary flow through the system, getting wealth around, from those who make it, to those who need it.

Employment was one of the only ways people could gain money. As machines displace people from work, people no longer have the income from employment, which in turn means that they cannot utilise the wealth created by the machines, making everyone poorer instead of richer.

[The Grey Badger]

In fact that wealth has been distributed through the market. Note that by the middle of the 19th century the very poorest of women were wearing inexpensive, washable cotton dresses instead of having one expensive handmade linen dress, usually a hand-me-down, worn into rags. Note also that we all have the products of Silicon Valley in our homes.

Mechanization and computerization impact the existing generations at the time of changeover very hard indeed, but release enormous increases in wealth - for the general population as well as for the innovators (and I do not begrudge Bill Gates his wealth, nor did I begrudge Henry Ford his. The financial game-players on Wall Street, however, were fraudsters pure and simple and that's another topic.)

I do believe we are looking at two different time frames here.

[protagonist]

In fact that wealth has been distributed through the market. Note that by the middle of the 19th century the very poorest of women were wearing inexpensive, washable cotton dresses instead of having one expensive handmade linen dress, usually a hand-me-down, worn into rags. Note also that we all have the products of Silicon Valley in our homes.

Mechanization and computerization impact the existing generations at the time of changeover very hard indeed, but release enormous increases in wealth - for the general population as well as for the innovators (and I do not begrudge Bill Gates his wealth, nor did I begrudge Henry Ford his. The financial game-players on Wall Street, however, were fraudsters pure and simple and that's another topic.)

I do believe we are looking at two different time frames here.

I am talking about the present, not the past. In the past, machines were exploited for their shortcomings. For example, in the past, airplanes were driven by pilots. Nowdays, airplanes are driven by computers, making pilots redundant. The pilot who has been displaced from service will no longer have an income, because the computer that displaced him from work did not automagically generate another job elsewhere. Because the pilot no longer has an income, he cannot buy what he needs, and hence he is removed from the economy and cannot contribute because he has no money. The computer that replaced him might generate wealth by making flights faster and cheaper, but the pilot cannot access this wealth because he no longer has an income, and hence this wealth is simply left there, not getting to those who need it. This is just an example to illustrate what has been happening for the past decades.

[Samir]

I am talking about the present, not the past. In the past, machines were exploited for their shortcomings. For example, in the past, airplanes were driven by pilots. Nowdays, airplanes are driven by computers, making pilots redundant. The pilot who has been displaced from service will no longer have an income, because the computer that displaced him from work did not automagically generate another job elsewhere. Because the pilot no longer has an income, he cannot buy what he needs, and hence he is removed from the economy and cannot contribute because he has no money. The computer that replaced him might generate wealth by making flights faster and cheaper, but the pilot cannot access this wealth because he no longer has an income, and hence this wealth is simply left there, not getting to those who need it. This is just an example to illustrate what has been happening for the past decades.

The day machines replace every Job, is the day all governments must resort to socialism (or accept massive depopulation for refusal to distribute resources to sustain a greater human population). Jeremy Rifkin's book "The End of Work" and Marshall Brain's "Robotic Nation", both discuss the idea of a Post Market society where the labor market is ruled by machines. Until such a time, people should be retraining to work with the machines and preparing for a world without mass employment. Governments should be making it easy for people to do such and have a fiscal policy that is going to make the labor markets worse.

[protagonist]

That has already been happening. We have endless numbers of operators and managers who work with machines and software on a daily basis. This is not enough to stop the growing loss of income for many. The only way to ensure that everyone has an adequate income is to increase the unemployment benefit so that the unemployed can spend, too. Those who work will eventually be replaced.

[Samir]

That has already been happening. We have endless numbers of operators and managers who work with machines and software on a daily basis. This is not enough to stop the growing loss of income for many. The only way to ensure that everyone has an adequate income is to increase the unemployment benefit so that the unemployed can spend, too. Those who work will eventually be replaced.

We don't necessarily need to extend unemployment benefits. Much of the United Sates welfare system can be replaced by a Universal Basic Income (A Basic Income for All). Another option would be a Negative Income tax as proposed by Milton Friedman in his book Capitalism and Freedom. Small wage subsidies will allow people to choose to work less, and thus opening up some (at least part time) job opportunities for others. Though a Universal Basic Income would have to be accompanied by a big change in Tax policy. One ideas which has been floated around by some conservatives is the Fair Tax. The prebate that is offered is a form of UBI, though something may have to be done to sure of tax burden distributions and make sure it didn't discourage consumption to a point where it stunts economic development.

There are pleanty of market friendly public welfare programs we could impliment, for instance Uniersal Healthcare Vouchers. The Urban-Brookings Tax Policy Center also has some good information and policy reform ideas based on Taxation.

[protagonist]

There's not much point debating on minor points such as "what will we call this extra-employment income?" because for obvious reasons of prejudice the community will never adopt these measures to relieve the financial crisis. Just try getting Congress or Parliament to pass bills increasing unemployment benefits and see what happens.

[nautanki]

Dec 12, 2012 is the doom day.
US Government is experimenting with different viruses, such as swine flue, for mass killing of people.
There will be billions of people who will loose their life. Only extra wealthy people 1 out of 1000 will survive to see the next world.
The robotic machines will take on the labor jobs.
Gather as much money as you can before the doom day and gain more knowledge in this direction to survive thru Dec 12, 2012.

Chao