WHEN THE FUNDAMENTALS ARE WRONG THE CONCLUSIONS WILL BE WRONG TOO!

Comment to
http://www.nytimes.com/2011/11/29/opinion/nocera-germany-cuts-off-its-nose.html?_r=1

It is fine to learn from past historic events, but unfortunately this is not a 1930tieth crisis and the major problem is not the most indebted Southern European countries but the fact that all the Old Industrialized Countries continue to be uncompetitive. In that situation there is no chance of a speedy recovery and to continue to prop up everybody and everything will just weaken those countries that we expect to help us out of the crisis some time in the distant future!

A part from the fact that this crisis by now has lasted almost 4 years where the suggested remedies have been tried and retried without producing the desired results it is important to understand the real cause of the malady.

http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

There is a lot of focus on what we should do in the present disastrous situation, but it is conspicuous how little energy is used to understand the fundamentals. It is just assumed that we have been overspending!
It is thought inspiring that on the basis of that assumption the best remedy should be to continue spending by bailing out even the most inefficient countries that furthermore have cheated!

By now it should be obvious that something is fundamentally wrong. Up to the point where the crisis emerged the Old Industrialized Countries had had growth rates of 2 – 4 %. If all the unveiled “overspending” shall be accounted for it will amount to much more than 4 % a year since the last dotcom crisis! The implication of this is that ALL the Old Industrialized Countries have had huge and growing deficits for years. Such deficits does not build up in ALL the Old Industrialized Countries at the same time without there being a fundamental flaw!

Wishful thinking!

Charlemangne  http://www.economist.com/node/21540244/comments#comment-1141128 
writes as if Angela Merkel is in a position to save the Euro. Angela Merkel lives in one of the truly democratic countries where it is the Bundestag and the citizens that decide what is best for the country.

Although stopping the absurd propping up of unwilling and uncooperative Southern European countries will have grave consequences, it is hard to imagine that the German electorate will sacrifice their own rather stable position in order to continue the dubious attempts to maintain a status quo situation.

It is not only the South European countries that are in trouble. All the old industrialized countries including Germany are in trouble. Apart from the present attempts to construct a viable solution through a new treaty, the focus should be redirected from the “howling and screaming money industry”  to  the much graver problem, namely that the old industrial countries no longer are able to earn enough money to maintain their present socio economic position.

The fundamental and much graver problem, that even the best functioning European countries no longer are competitive, are getting too little attention.

The cause of the economic crisis has up till now primitively been explained as the result of too much spending, how can anybody be satisfied with such a primitive explanation?!!!

The economic crisis and the production crisis are in reality two sides of the same coin

    http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

until that is understood and accepted no real cure can be implemented!

Comment to: Four Things to Fix

http://www.nytimes.com/roomfordebate/2011/08/16/a-chance-to-reshape-the-economy/four-ways-to-fix-the-economy?emc=eta1

Wishful thinking!

If insight and good will were the dynamics of development, the human race had reached the perfect nirvana ages ago!

It is important to have visions and suggestions, but the driving forces of society are fundamental mechanisms. Even if you understand those fundamental mechanisms, it is only possible to change the direction of society if such a mechanism is in a balanced state where a small push can make it alter cause.

In France at the time of the Revolution the feudal forces had been so oppressive that it resulted in a brutal revolution, and short after a regression to dictatorship (Napoleon). 

In Denmark the intelligentsia of the nobility saw what was coming and started a process where the land laws were changed and the peasants freed from serfdom. No violent revolution took place and instead a modernisation process was started leading to one of the most societal advanced countries in the world. 

The positive development in Denmark was instituted by changing the fundamental flaws of society and subsequently a dynamic process developed making way for a massive popular cultural and educational ideology that contributed to changing the feudal society to a modern democratic society. 

Had the fundamentals of  landownership not been changed to the satisfaction of both the nobility and the peasants, a smooth and non violent transition would not have been possible.

To understand the fundamental mechanisms of today go to.

http://unifiedscience2.blogspot.com/2011/07/origin-of-long-term-growth.html

http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

http://unifiedscience2.blogspot.com/2011/02/single-algorithm-can-save-western-world.html

Comment to "Who Is to Blame if Shares Continue Steep Declines?"

http://www.nytimes.com/2011/08/15/business/whos-at-fault-if-stocks-continue-to-plummet.html?_r=1&ref=global

Thank you for an informative and well written article.

I will join the blame chorus!

My blame falls upon the prevailing economic understanding.

The theories have not been able to mirror what has happened in the real world. Consequently the economic indicators did not flash warning lights as the gap between “paper value” and real (production) value gradually widened.

Of course somebody exploited this by selling various sorts of junk, but had the economic understanding and the economic indicators been functioning there would not have been an overwhelming amount of loos cash that chased ever higher returns, returns that were without connection to the rate of real value creation.

The old industrial societies have gradually lost competitiveness ever since globalization started.

We look at share prices as indicators of national economies, but the firms and their shares are international!

It is today scientific documented that only those firm activities that are situated in a country benefit that country!

The basis for prosperity has seeped away from our national economies!

For a deeper understanding of this read:

http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

http://unifiedscience2.blogspot.com/2011/07/origin-of-long-term-growth.html

There are still an awful lot of loos “paper value”/money and debt out there, and as long as interest rates are kept unrealistically low the markets will continue to gyrate wildly.

Continuing to keep interests artificially low is the same as robbing ordinary people and the comming generations.

No sane doctor would just continue giving blood transfusions without doing anything about the injury that causes the continued bleeding!

Real remedy must come from Western politicians!!!

A comment to
http://www.economist.com/node/21525900

Real remedy never comes from politicians.

Politicians can change course, politicians can stop holes, but to ask politicians to remedy what the market and the academics cant find solutions to, is to admit that there are no real remedy available.

At present there are two options, the politicians can continue making stop-gap solutions as they have done ever since the crisis started in 2008.

The second option is to stop repeating the mantra about a temporary crisis which will pass. (The crisis is now called a new crisis, a “double dip” which implies that “we know what this is all about!)

When it has dawned to even the feeble minded that this is not a monetary crisis but basically a production crisis, it will be time to reconstruct the legislation 

http://unifiedscience2.blogspot.com/2011/02/single-algorithm-can-save-western-world.html 

so that the western societies again can become competitive.

In the meantime the biggest challenge will be to keep society in balance and that is not done by bailing out financial firms but by balancing all of society.

What are looming heavily in the horizon are political upheavals when the middleclass is squeezed enough!

The only way of keeping the societal balance will be by letting inflation run until the western countries are in balance with the international community.

Hopefully the new legislation stipulated in 

http://unifiedscience2.blogspot.com/2011/02/market-for-ideas-within-firms-or.html 

will start to generate the jobs and the competitiveness needed if we are to avoid a 3 world war between the old industrialized countries and the new industrialized countries.

Remember that in democracies it is the (angry) majority that rules. Of course a war will not solve anything, only postpone the inevitable decline (as did the 2nd World War to the British Impire), but tell that to a dissatisfied, angry and agitated electorate!

 http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

The origin of long term growth

(Written at the time of the .com bubble 12 years ago,

but just as relevant in 2011 and now in 2020!)

                      On top of the traditional neoclassical understanding of the economy there have, during  the last 10 years, emerged an understanding of knowledge related growth. Although such an understanding, which originally was based on the work of Poul Romer, explains some of the observed growth phenomena. That understanding is still too superficial to explain why some countries over time become more developed than others.

                      200 years ago Denmark and Egypt were having equal size populations and equally developed agriculturally based economies. Today Denmark is on nearly all accounts except size among the world leaders, while Egypt is a developing country without very much development!

As it would be narrow minded and stupid to think, that the above stated difference is due to the different cultural and ethnic origins of the populations, there must have been something very fundamental and important happening to those two countries!

 For ¾ of those 200 years Egypt was ruled by foreigners, first by the Ottomans and later by the French and the English. None of whom had any interest in fundamentally changing the country, and for the last half century fundamental change has been impossible due to the up hill struggle against the population explosion.

Approximately 200 years ago Denmark too was a feudal agrarian country with virtually no manufacturing capability of its own. What happened was that some of the leaders within the nobility observed what was taking place in other parts of Europe, and in order to improve agriculture and avoid a local revolution, they decided to work for a smooth transition away from the feudal society. Denmark was lucky, because historic events especially economic events helped the country to a development where the farm population prospered and consequently developed educationally and politically. Farm exports became the driving force leading to a gradual, but also rapid mechanisation of the agricultural sector and later to a mechanised production as such.  A process was started where the surplus product was distributed more and more evenly, eventually leading to an industrial society with a high and broad educational standard.

The ideological/political explanation for this Danish development was naturally the want of equality and justice, but in actual fact it was something quite different that was the fundamental driving force behind this remarkable development in a small country without any other resources than its population and its arable land.

Firstly protectionist behaviour by England and France forced the Danish farmers to develop their production methods while the farmers of those countries had no incentive to change, as they due to the import restrictions could keep their market share without making any changes. Then later competitive pressure from producers of grain in Central Europe hit the European markets by way of the new railways, and the same was a little later the case with grain from the U.S.A. transported on rail and by steamships. This development forced the Danish farmers to abandon export of grain and instead use the grain to produce dairy products. The manufacturing of farm and dairy machinery led to a broader industrialisation, and as industry in a small country like Denmark cannot survive based on its home market, the only  possibility for the industry were to compete on the international markets.          

 The relative high wages of the well organised workers in Denmark, forced the manufactures to stay competitive by way of continuously developing and renewing the production apparatus, thus reducing the amount of costly labour.

Already David Ricardo wrote: "It is when the market price of labour exceeds its natural price that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family", but what David Ricardo did not anticipate was that  this good conditions for the labourers, when combined with the pressure from well organised labourers through their organisations and associated political parties,  led to a higher educated labour force capable of inventing and using more advanced production methods, leading to higher productivity, higher wages and still better educated labourers/employees! In other words the pressure resulting from high wages/taxes lead to a positive developmental spiral of business as well as of society.

With the emerging understanding of knowledge related growth, many politicians talk of improving education, and in some cases they even try to do something about it, but it is only when the parent generation experiences personal growth and prosperity and therefore also experience that education in actual fact leads to better living conditions, that their children are motivated to rise above their present social and educational level. In many countries including the U.S.A. where there are huge social and educational differences, very little is in actual fact done towards a broad improvement of the educational level.  

It was Adam Smith who defined that the surplus product was the motivation for the manufacturers to continue producing, Although already David Ricardo defined the extra surplus product as the economic surplus coming out of being technologically ahead of the competitors, this was more or less ignored as it was assumed of less economic importance because it only was of economic benefit to the leading producer until the other producers caught up.

When the employees and society acquires a greater share of the surplus product from the producers by way of higher wages and taxes, the producers are forced to innovate in order to stay in business. By educating the population and developing the infrastructure society establishes an efficient foundation for further development and competitiveness!

Northern Europe, where the above stated mechanism is most clearly at play, is improving living standards and infrastructure, at the same time as being competitive to the U.S.A.  

If we take a look at the development of other European countries than the Scandinavian, after “the second world war”, Germany, Switzerland and Holland prospered at the same time as they revaluated their currencies! Revaluation is in fact the same as raising the states and the citizens/workers share of the surplus product, at the expense of the exporting firms. Those firms are then forced to create extra surplus value by way of innovation in order to stay in business.

That general long term growth is driven by an economic pressure on the manufacturers by way of higher wages and taxation has great implications for the political strategies. The best way to help business grow is not to subsidise or protect any firm or work for lower wages, but to develop the infrastructure and make all public functions as efficient as possible, to optimise the educational system, to finance supplementary education of the workforce and to massively finance public research.    

The present perception of economic growth is “what is good for business is good for the country!” but that is not always the case. In the present situation American firms can stay profitable at the same time as society runs huge budget and balance of payment deficits and society are incapable of upgrading infrastructure and education sufficiently. When the American society is not capable of supplying enough experts and bright young people, such persons are just imported from other countries, thereby hiding the inefficiency of the educational system. In the present downturn a lot of these experts have gone home to their native countries, and the American firms have found out, that the citizens in those countries can do much of the work, brain work too, that has hitherto been done in the USA, and at much lower wages! 

2011

Although the above statements are correct they are not functioning in the “Old Industrial countries” any more. The internationalisation of those economies has set the companies free to run away from high wages and taxation and leave their home countries behind.

Unfortunately it is not possible to turn the development back. 

http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html

The only possibility is to speed up the societal, political and legal development towards an international economy based on the exchange of ideas.

http://unifiedscience2.blogspot.com/2011/02/market-for-ideas-within-firms-or.html

The alternative (that regrettably by now is the most likely) will be conflicts and even war between the “Old industrialized countries” and the “New industrialized countries”.

The established economic powers and institutions will naturally be opposed to radical changes, but when they realize that the alternative will be the break down of the economic system as such, resulting in their loss of wealth, they might be willing to radical changes.

  

    

Too much information

The following was my response to the article:

http://www.economist.com/node/18895468

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MONEY MAKES THE WORLD GO ROUND!

“AN APPS MARKET FOR INFORMATION” 

At present all information is free, but as time and accuracy is valuable people will in future be willing to pay for high class, filtered information.

How can high class information be efficiently filtered from the cacophony of low class information noise?

In future Google and others will create markets for valuable information. 

Imagine a reader taking the trouble to filter through a specific subject. After having used valuable time to carry out that job, the reader invests money in pointing to the best information, on the “Google Valuable-Information Market”. (The first to invest pay the double or triple amount compared with the following investors.)

Users of the “GVIM” pay for quarrying the subject, and from the different “paid for/chosen” contributions, the user himself choose a specific contribution and perhaps too invests in that contribution.

Google gets, as usual the advertising income and the account keeper proceeds.

All the money paid / invested in different answers to the specific problem goes to those investors that invested in the highest ranking answer to the specific problem.

The first investor gets X?%, the following investors split the rest of the proceeds. Such payments will tickle in over a 5 year period. 

If the split proceeds are less than X?dollar a year per investor, no payment will be due that year and will consequently be rolled over to next year.

Later on a new and better answer is perhaps created, and the whole process starts all over again.

Such a system is a specific solution based on the "Market for ideas" algorithm.