Globalization Reconsidered

If you take any introductory economics course, the instructor will explain to you a concept known as “comparative advantage.”  The idea, famously described by David Ricardo in 1817, defends free trade on the grounds that even if one country is better at producing everything than another country, it is to both countries’ advantage to trade.  Ricardo gives a hypothetical example involving England and Portugal, in which Portugal is able to produce both wine and cloth more efficiently than England.  In England, it is harder to produce wine than cloth, while in Portugal it is easy to produce both.  It is then cheaper still for Portugal to specialize in wine and import cloth, even though it is cheaper in absolute terms to produce cloth.  This is because there is an opportunity cost to producing one product versus another.

There are several problems with this.  First of all, as Herman Daly has pointed out, Ricardo was assuming the immobility of capital across borders.  He believed that there was a “natural disinclination” among people to leave their country of origin to establish businesses abroad.  He apparently could not have conceived of the globalized world today in which major corporations headquartered in the United States would outsource their manufacturing sites overseas to exploit cheap labor.

A Matter of Interest

It’s been a while since my last post, but I thought I’d throw out another interesting idea I’ve been studying.  I’ve made posts about monetary reform here, and talked about the idea of debt-free money, as advocated by the American Monetary Institute.  However, while that proposal tackles the debt problem, it still takes interest as a given.  It’s come to my attention recently that interest needn’t be an essential part of the monetary system.

Under the current monetary system, most of the money supply is created as debt.  When banks create loans, they take a fraction of their deposits to loan out.  But after they loan  the money out, that money stays in their ledger as money to lend out further.  Essentially, that money has been duplicated – created out of nothing but debt.  But banks only create the principal for the loan, while charging interest on it.  Where does the money come from to pay off the interest?  It has to come from other loans.  Thus, we have a game of musical chairs in which debt must be paid off with more debt.  So long as the music keeps playing, the cycle can continue.  But if a shock occurs in the system, as it inevitably does with the 18-year land cycle, money is literally destroyed as people default on their debts.  Wealth is then transferred to the lenders as people who default on their debts have their wealth repossessed.

Money and Taxes

One of the principle arguments leveled against Georgism is the allegation that land values would not be a sufficient tax base to raise the revenue needed for the functions of government. While this argument in itself is questionable, it misses a much bigger point. The government has spent more than it takes in for a long time. Of course, under our current system, this is cause for concern. We worry about all the debt we are incurring, which is in fact an inevitable consequence of our current monetary system. The federal income tax was actually initially passed alongside the Federal Reserve Act as a means to pay off the interest on our national debt. The portion of tax revenue devoted to paying off this interest has grown continually since then. If we keep going down this path, it will eventually eat up our entire federal budget.

However, there is another way. If we simply nationalize the Federal Reserve, the government can then issue its own debt-free money for use on wealth-creating public projects. So long as the wealth created is equal to the money created, there is no inflation. Government could theoretically finance all of its functions in this way without having to take a single dime in taxes. It would not be mortgaging our children's future with more debt, but would simply be providing money for the production of goods and services.

The Abundant Society

There are few words in economics more feared than unemployment. The irony is that many who fear unemployment also hate their jobs. What they really fear is not unemployment, but poverty. The fact that the two are so closely linked often leads to what I call "work fetishism," the valuing of jobs and work as an ends in themselves, rather than means to an end, namely prosperity. Consider, for example, those who decry labor-saving machinery. Such machinery can increase productivity and thus create more wealth. Yet it is feared by the workers, because it might cost them their job. It will, of course, increase the demand for mechanics and engineers to operate and maintain the machinery, but the unskilled laborers are out of luck.

But what if it was in everyone's interest to look after society's well-being instead of just their own? What if the two were one in the same? Suppose society itself were a publicly traded stock, in which each of us had an equal share, that paid dividends?

The False Dilemma

Most credible economists today agree that America needs a stimulus package. It appears as if we will get a watered-down version of one very soon. The package needs to be a lot bigger than it is. But, critics cry, what kind of debt will we be leaving our children? What happens when China stops buying up our debt? Debt is indeed a serious concern, but not as great as the looming threat of another Great Depression.

But this is a false dilemma. It is possible to solve both problems in one fell swoop. The problem lies in our monetary system. Ever wondered why our government has to borrow its own money at interest? The power to create money is a power as great as any branch of government, and sometimes greater than all three branches combined. Therefore, by having our central bank partially privatized, as is the case with the Federal Reserve, the government has abdicated this power to the bankers, and allowed itself to be held hostage by this power.

We Were Warned

All I hear about these days is the housing crisis and the resulting recession. I can only listen to this for so long before I have to speak up. The fact is that we were warned about this long ago. Not by Alan Greenspan or any number of top economists today. No, I’m talking 130 years ago, when an economist named Henry George wrote his magnum opus, Progress and Poverty. In it, he explained the crucial and underappreciated role that land plays in the economy. In a time when we have such a serious housing crisis, it would serve us to take heed.

So what is this land connection? To understand that, we must first understand what in economics is known as rent. This may prove somewhat difficult, as the economic definition is different from the way we commonly use the term. The difficulty is further compounded by the fact that neoclassical economists have expanded the meaning of the term from what it originally meant(largely in an attempt to obscure Henry George's ideas). As it was originally understood, rent meant the economic return of land to the landowner, just as wages were the return of labor, and interest the return of capital. What is unique about rent is that it requires no effort on the part of the landowner to increase in value, but rather is determined by activity of society as a whole. We all understand this, which is why homeownership is considered such a good investment. If a new park is built nearby, the land value goes up. If a new grocery store opens nearby, the land value goes up. Of course, if there is an increase in crime or pollution, the land value goes down. In fact, land value is a great economic indicator of just how prosperous and well-functioning a particular area is. Any money the government spends on public works mysteriously ends up in land values.

Solar Entrepreneurship

Here in America, we are rightfully proud of our free market system. We won out over the Communist menace that threatened the word, and free enterprise prevailed. The world recognized the justice and sanctity of private property, and we have upheld it everywhere, from land to natural resources to ideas. But an unspoken socialist threat still lingers beneath the surface. Or, should I say, up in the sky. Yes, the sun glares down upon our free soil, mocking us with collective ownership. How is it that in a society that recognizes that natural resources are best left in private hands that we could be so foolish as to leave such an important celestial object to the commons?

Well, enough of it! I intend to put this socialist nightmare to an abrupt end. I, Jonathan Cobb, intend to claim my personal ownership of the sun. Our brightest economists insist that it is best for society that all natural resources remain in private hands, to prevent a tragedy of the commons, and as a good capitalist American, I feel it is my civic duty to right this wrong. To seal the deal, I can assure you that a satellite carrying a flag with my name on it is headed straight for the sun, and as soon as it is planted on the sun(or is incinerated, which still counts), I will officially be the sun's owner.

The Law of Rent and You

Economics has always been rather esoteric for most people. Most people's knowledge of the subject is limited to the law of supply and demand, of which they have the most vague understanding. Any understanding beyond that is usually aligned with their political ideology. If they're conservative, they follow the supply side theory that lowering taxes create more jobs and helps the economy. If they're liberal, they follow the Keynesian idea that government spending projects can stimulate the economy. But there's one important economic principle that even economists today have long forgotten or ignored, at the expense of their discipline. That principle is the law of rent.

Before I lay out the law of rent, it bears mention that "rent" in the economic sense is not the same as what is meant in its common usage. We commonly apply the term to apartments, cars, videos, and various other commodities. In economics, its focus is more narrow. It is applied mostly to land, though it can also be applied to things like natural resources or the radio spectrum. Rent is the difference between what a factor of production is paid and what it would need to be paid to remain in current use. Applied to land, it essentially refers to the profit to be gained by virtue of its ownership. Essentially, land rent is equivalent to land value.

Poverty

We've all seen the scenes of bony-looking children in some desert surrounded by makeshift huts that we wouldn't dream of living in, accompanied by some announcer's appeal to our sense of guilt. "For just $1 a day you can sponsor a child like this," they say. While such philanthropy may give us peace of mind with the sense that we're doing something about the problem, such gestures of kindness do little to address the wider causes of poverty and hunger. This individual child you sponsor may gain a competitive advantage over his peers, but he will still live in a poverty-stricken area, and his peers will be no better off.

So what is the cause of poverty? In the conservative mindset, poverty is the fault of those living in it. Many a cynic has implored that these poor hungry people might have a chance for success if only they would stop having so many children. In our own country, they claim that they are "lazy" and simply don't want to work. Sometimes they will claim that our welfare system has made them dependent and given them a disincentive to work. Without completely discounting all of these explanations, suffice to say they do not explain sufficiently the extent of poverty that exists in the world, nor its distribution.