Whims and Time in Economics

Here is a simple way of categorizing possible socio-economic theories into lottery and non-lottery types, and how they use time in their selection of goals.

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For any new socio-economic theory, the logical starting point is to choose the goals that the socio-economic system will try to achieve. Just like one designs a refrigerator with certain goals, or a bridge or any other man-made thing, a socio-economic system needs them as well. Without goals, the system would be built from the ground up instead of the top down. Ground-up designs serve to preserve the status quo, or to try and satisfy several competing constituencies. If the real purpose of some novel socio-economic theory is to curry favor of existing important clients or groups, ground-up is the way to go.

The ground-up approach does not run headlong into the problem that a top-down theory has: figuring out what goals to design to. There aren’t any that come from anywhere, except someone’s whims. So the choices in designing some new socio-economic theory are two-fold: find some favored group to design the system to prefer and reward more greatly, or come up with someone’s whims as to a rule or principle that the system should adhere to.

Most ground-up socio-economic systems just grow and evolve, without anyone ever trying to codify them into a set of simple principles that are coherent and serve as the driver for the entire theory. Instead, there are some slogans that are used, or perhaps exposited on, that are repeated as a sort of justification of some particular part of the mash-up that such a ground-up system usually represents. When one group grows more strong, the slogans are re-used in a different context, or a few different ones are chosen from the bag of nice-sounding slogans. These are used as justification for the modifications of the previous system.

Since these systems have functioned in most parts of the world for most of human history, why would there ever be a need for a top-down system? The difficulties in coming up with such a system are very great, as they have to take into account all manner of details of human psychology, civilizational development, technology and its changes, and more. Systems which are a mash-up of existing customs simply work because everyone knows how the system works and can follow it, and the means to modify it arise out of power of various sorts, such as political influence, financial pressure, military or police force or some other. Once some center of new power arises, the positive feedback loop starts to work and the power of the new center grows, modifying existing ways of organizing the economy and the society. Society evolves and the existing mass of economic customs evolves to match it.

Nice economic treatises can be written proclaiming that the existing system is the best of all possible systems, so that there can be a feeling of completeness and rationality among all those who care about such things. The treatises can be written for any particular system, as long as the system is more than just a hodge-podge of uncorrelated and inconsistent customs that are not stable. Having such justifications often means that some goal is chosen which will serve to justify, more or less rationally, the main contentions of the existing system. Choosing a goal for the purpose of validating some existing ground-up system does not accomplish the same as choosing a goal and then deriving from it a top-down system. They are of opposite natures.

For a novel top-down system, the most significant problem is the lack of acceptance. No matter how appealing the chosen set of goals are, nor how consistent they are implemented across the whole of society, there is little motivation on the part of those in power to make changes in more than a superficial way. The preservation of existing power is a very strong urge, and since power dictates what economic system will be used, typically something like the status quo, it would seem there is almost no point to developing a novel socio-economic system. Only if the existing power structure were near collapse, leading to a vacuum, would there be any chance that a new theory might be accepted. And even in this situation, a socio-economic theory that favors the new holders of power would be better than one which was created without reference to the existing order of things.

Putting the acceptance problem aside, one benefit of developing a socio-economic system from a clean slate is that the science of economics might actually be started, with some clear basis. This set of methodology might then be used to analyze and decompose some of the ground-up systems that have been or might be proposed. A whiff of science, as opposed to more development of details, could actually improve thinking in this area. In might even lead to a surprise, if some existing socio-economic theories prove to have a good fit with the more top-down approach, even if they have arisen as justifications of existing customs.

Where would a goal for a novel socio-economic theory come from? Anyone interested in creating such a theory could likely invent several, and they would each be no more than this: some random idea, which might be called a whim, that the mind of the individual thinker comes up with. In keeping with the previous discussion, such an idea would have to define who does the production, how is the distribution allocated, and what restrictions are there on consumption. They would not have anything to do with the details or mechanisms by which these three choices were brought into being, or what type of structures were invented to enforce or preserve them. Such structures might include ownership laws, social obligations, financial institutions, governance forms and obligations, police powers and so on. All these are details on the three main choices, and for any set of choices, there could be multiple ways of having written records, hierarchical political structures, tax laws, or whatever. The details are simply the details, and bothering to emphasize them just obscures the fundamentals of the theory, which are those three choices.

The selections of these three choices might be graduated on simplicity, with the simplest being that everybody has to do some fixed amount of work, with some measure as to what constitutes work; everybody gets an equal share of the production, and consumption is limited by the need to save x percent of the production whenever there is a surplus over some fixed threshold. The theory has to define the two ‘everybodies’ in these statements, and perhaps has to figure out how to vary x year-by-year. The fixed amount of work has to be defined as well, even after some equivalence has been created between different types of work. The total amount of production scales with this fixed amount selection, but pushing it too high would mean that there was the possibility of exhaustion of individuals. Most likely there would have to be some rules on the tradeoff between leisure time or non-productive time in general, and time devoted to production.

Another extremely simple theory has production being doled out by a lottery of some structure, and distribution given by exactly the same lottery, with either one draw for both or separate draws for production and distribution. There are no end to the lottery ideas that can be used. They could be based on attributes of the individual, such as some genetic traits or some learned traits, or on the parentage of the individual, or on the geographic location of the individual, or pure chance. A combination of these effects could be used.

These two classes of theories, the non-lottery ones and the lottery ones, cover a wide range of possibilities. There is no justification for choosing any one over any other, in the top-down point of view. They are all whims, in other words, just the selection of some individual designer of the theory, based in fact on his experience and education. The universe does not tell us what to do. The individual designer could delegate his choices to some historical sources, of which there are many, but this simply means that they are either some older whims of some person, or they were the result, covert possibly, of a need to justify the advantages of some particular power-holder or power-holder-to-be at some past era.

Time comes in at this point through the back door. A previous socio-economic system with a justification, or some previous whims of some possibly very convincing authors, might be used by some designer of a novel socio-economic theory to derive his new system. But there is another way that time should enter. Almost all theories, certainly the ones which are based on justifying some status quo, but also ones which are based on some individual system designer’s whims, are based on current time. They talk about selections based on what exists now. One alternative is to choose a goal with a long-term perspective, and then try to derive the rules for production, distribution and consumption from that. A long-term perspective might state that the chosen rules should be selected to maximize the length of time existing resources will last, or maximize the growth rate of technology over the next long duration, or support the improvement of the genetic stock of mankind, or preserve some ecological properties over some long period, or many others. Mankind has not devoted much theorization to long-term perspectives, in fact, almost none. Maybe this type of socio-economic theory would provide some insights that the short-term ones do not.

Balancing Productive Efficiency and Other Social Goals

Allowing larger firms to crush small ones might be good from one measure, but not from another. A socio-economic theory needs to determine what measures to endorse and which to relegate to second-order choices.

Typically a larger organization can be more efficient than a smaller organization with the same outputs. They might have larger factories, larger shipping quantities, larger supplier discounts, more political pull to obtain tax breaks, better and wider distribution networks, and more besides. In general, there can be a positive correlation between size and efficiency, meaning that their costs can be lower for the same goods. This typically implies that unless there are some compensating advantages, such as individual location, the larger organization can drive the smaller one out of business.

In the larger socio-economic picture, is this always desirable? Is production efficiency the single goal that needs to be always sought? The question harks back to the question about what should or could be the goals of any new socio-economic system. This has the same two answers: one is that the status quo is best because those who benefit from it have the power to change it, and the power to approve it, and since they are benefiting the most, they find innumerable reasons to preserve it. Perhaps the most powerful one is that no changes are necessary and no uncertainty arises. The other is that there are various normative goals that could be set, but they are somewhat arbitrary, and depend on the individual who is determining what is ‘best’. Each individual was raised with some implicit preferences, and these suborn their thinking so that some particular, but arbitrary, arrangement is the one they recommend. Neither of these has much to offer.

Perhaps one way to start considering alternatives to the ‘Wild West’ system in which the bigger company usually kills the smaller one is to make a list of possible goals. The Wild West system of the maximization of production efficiency ignores the other two components of a socio-economic system, as described previously. These are distribution and consumption. The same Wild West system can be applied to distribution, with the largest distributor crushing all smaller ones, or absorbing them. Consumption is different, although it could be slanted to use much of the same words. Via the many social mechanisms where disparity is promoted, especially the positive feedback ones, consumption could be restricted more and more to those on the top of the disparity pyramid, which could be called, almost as a joke, maximizing efficiency of consumption.

A basic idea of the Just Deserts socio-economic theory is that rewards from effort should be related to the quality and time of the effort, rather than from other effects, such as a lottery of results, corruption being involved, various feedback loops, and so on. If the reward-effort correlation is too little, motivation is damaged and one of the drivers of social improvement is lost. If the reward-effort correlation is too great, motivation is again damaged and replaced with different motivations, such as might involve some moral crimes or other distortion of agreed-upon social arrangements.

This goal involves rewards allocations, and does not talk about the milieu in which these rewards and the associated effort are embedded. It talks about how to compute rewards based on both instantaneous effort and past effort, such as was involved with training or otherwise preparing for the current bout of effort. But in some socio-economic arrangements, because of the presence of more productive capital or because of special social arrangements such as hierarchies of control, there would be more production on the average from the expense of some individual effort. That efficiency would relate to the individual, not to the aggregate of individuals. Let’s use a simplified example to illustrate and explore this feature.

Suppose there is a nation completely isolated from all others, having 100 citizens, all capable of work, and it lives on only one product. The product is made in a large factory or alternatively in a set of smaller ones. The large factory employs ten workers in production, and uses ten more workers to build and maintain it. It makes 100 units of product in one unit of time, which is just what the nation needs. The smaller factories employ fifty workers, and use fifty more to build and maintain them. Together they also make 100 units of product in one unit of time. Clearly the efficiency of the large factory, or more specifically, the average production efficiency of the individual workers in that factory, is five times that of the smaller ones. If production efficiency per individual was the goal chosen by this nation as the basis for its choices, the large factory would be preferred, and there would be twenty workers employed, and eighty without anything to do. On the other hand, if production efficiency on the average was the goal chosen by this nation, the smaller ones would be equivalent in this measure, as both produce one hundred units per unit of time, and the nation has one hundred workers.

This example is easy to interpret, as it discards all the details that obscure the problem, which is the usual distribution of talent among workers, the distribution of ability to work among citizens, and a multitude of other real complications. The example does show, however, that a seemingly small change in the measure of the goal makes a tremendous difference in what alternatives can be considered. Production efficiency in a plant versus production efficiency in a nation sound similar, but are actually quite different in effect.

One aspect of this situation is that there was also a hidden assumption that the desired consumption level was one unit of production per citizen per unit of time. For some production items that might be the case, and for others, not. If all one hundred workers worked at one of five large factories, then the nation would produce five hundred units of production per unit of time, and this surplus might be distributed one way or another. Perhaps the surplus would be beneficial and perhaps it would be harmful. There are also ways to implement a type of full employment, where workers rotated in and out of the large factories employ, having to do only 20% as much work but each one resulting in the same amount of production as if they worked 100% of their time in the smaller factories. Another aspect might be that two or more large factories produce surpluses which can be stored for use in bad times, and then shut down temporarily when inventory becomes saturated.

Even an example simplified in the extreme has complexities that need more details to be added in order to be able to develop any insights. If the national goals included maximizing production efficiency of the nation as a whole, with no surpluses needed or desired, there are two ways to do it and also combinations of them, where there could be one larger factory able to produce 50% of national production and several smaller ones together making the other 50%. What kind of criteria might be used to be able to judge which of these is desirable? If we are bent on developing a system based on the just deserts concept, then the case which employed all of the workers would have all of them receiving the same rewards, and the case which employed only part of them would have more rewards going to those who were employed and less to those who were not. We have in this example created a situation where all workers are equally capable and equally interested in working, but by some lottery, only a part of them have employment and the associated larger rewards. That might not seem to be in keeping with the just deserts socio-economic theory, but the theory does allow for lotteries to determine rewards, but only to some extent.

If the rule is to correlate effort and reward to a certain degree, then the theory must take into account the situation where there is no opportunity for effort. Perhaps other theories assume there is always opportunity for effort, and this may be their downfall. One insight might be that situations with lotteries being a large factor in determining effort or rather opportunity for effort to be expended, just as situations where lotteries are a large factor in determining productive efficiency per individual, some sort of rectification is needed. Lotteries are not necessarily efficient, nor do they have any other moral benefits.

One tentative concept for the socio-economic theory of just deserts is that opportunity lotteries should be restricted to some small change in reward, perhaps something in the ten to fifty percent level. This implies that there would be some way of measuring what effort might be applied if an individual won an opportunity lottery, but that is a discussion which needs much more time and thought. The question of how regulating or rectifying an opportunity lottery might affect motivation needs to be addressed, as well as how the rectification process worked and how it could be structured to avoid gaming. How could it be possible to tell who would work if they had opportunity, and who is simply hoping to avoid work by playing the opportunity lottery.

 

Seeking Clarity in Economics

Economics is a grab-bag of different items, and if someone were interested in coming up with a new comprehensive theory of economics, it is not possible without including a huge amount of social arrangements.

Economics is such a muddle as the main concepts have not yet been well defined or accepted as the main concepts. An incredible amount of work goes on in accounting details, while the important points remain obscure. To seek clarity in economics, these main concepts must be defined and made very explicit.

One can paint the label of economics on a wide variety of topics, and many of these topics have great amount of detail in them. One problem with making definitions is that in order to achieve clarity, there has to be some agreement on what the principal topics are, and then let the rest be subsumed under them. First some negatives need to be listed. Main topics in economics do not include: money, debt arrangements, productivity, taxation, pensions, investments, and precious metals. These are subtopics that need to be looked at as part of a larger picture. They are details, and although the details may be more involved and therefore more interesting than the big picture, they are still details. Until the big picture is chosen, they remain unconnected and rather incoherent, even if the details that are discussed are defined with precision and clarity.

The principal concepts are products of activity and consumption of those products. This is what ensures life or death, and quality of life as well. Everything else is details about how these two items are distributed among the population, and how they change with time. Production and consumption are done by individual humans. Activity is any action by a human. Some actions can be highly productive, such as the finding of a new source of food, and other activity can be destructive, such as setting fire to a new source of food. Consumption is any activity that uses up some product.  Intermediate consumption, which is used to produce some other product, is bundled under production, not consumption.

It should be obvious that starting with these definitions does highlight something essential, but it should also be obvious that economics is not a stand-alone subject. Certain details, with carefully prescribed limits, can be treated separately, but the big picture of economics includes all the social arrangements that affect production and consumption. Thus there is no subject of economics from the big picture point of view. There are a hundred little prescribed subjects of economics, but they should really be connected to the big picture of socio-economics, or whatever name is preferred for the larger subject of how production is accomplished and how it is distributed for consumption.

Socio-economics is all about the rules or customs that might be used to make arrangements for production, distribution, or consumption. It would likely be useful to creating a new economic, or rather socio-economic, theory, if there was a breakdown of the topic, so the way would be clear to connect all the myriad details in various categories of economics. Rules for production could also be called a theory of labor and capital, as those are the two components for production. Alternatively, the time of an individual can be spent in production could be the measure. Productivity, the rate of production per unit of time, can be increased by the availability of what might be called the tools of production, which could be any of a thousand things involved with construction, manufacturing, agriculture or any other subset of production.

Productivity, in some areas of production, can also be increased by some psychological effects, which can be referred to as motivation, or attitude, or interest in the production. In other areas of production, there is little variation due to psychological variables. A third area that affects productivity is the skill or talent of the individual. Besides individual variation, there is an effect due to training. Given this simple division, one of the top categories in socio-economics could be called production, and the subcategories under this, time arrangements and productivity factors.

In time arrangements, a slightly deeper description is the arrangement of who does what production and for what time. Inside this are the social arrangements that set the rules or customs for who does what task of production. On the productivity side, there is the question of who uses what tools of production, and who receives what training. If there is a social hierarchy or some way in which some individuals make decisions for others, there is the question of who makes the decisions as to who works, for how long, at what task, with what tools, and with what training. Then there is the question of who enforces these decisions, if they are not done at the individual level, and how the enforcement is accomplished.

The second of the top categories, distribution, is often linked to production, but there is no reason for this as they are separate actions that can be taken with no consideration of one another. Alternatively, there can be linkages of many different types, set up by rule or custom. To be very clear, for each unit of production, there is some distribution of it. Who gets what, under what circumstances and who decides and who enforces these choices, mirroring what has to be defined for production.

For both production and distribution, there can be more or less centralization of the decision-making. Systems can be defined with as much decision-making down at the lowest levels, and alternatively, there can be a society-wide set of rules or instead, a set of decision-makers who make choices, revising them as they choose as well. If the society is working according to certain rules, what are they, and how are they changed with time, by who and in what manner. If the society has a group of decision-makers, how are they selected and how are they changed.

Consumption is the obvious third top-level category, but it does not have as much detail as the former two. With consumption, there may be some rules as to timing, as to when consumption can be done or how much product that is distributed needs to be saved or preserved, for those items which are not perishable in short periods. Rather than put re-distribution under one of the consumption options, it seems more coherent to put it in the distribution category, and leave only the choice of consume or save under the consumption one.

Rules for either of these three top-level categories can exist, meaning that, if they are complete enough, all the individuals can understand how these processes would work, if the rules are followed. Owing to the complexity of almost any society, the rules cannot be complete, and there has to be some method by which different interpretations can be judged. There also needs to be a choice of who codifies the rules, and how the society comes to accept them.

There would seem to be a blurry division between a set of rules that require some individuals to make judgments about their implementation, and a set of individuals who make decisions in lieu of rules. How much arbitrariness is allowed, or in other words, does the set of decision-making individuals have to follow some unwritten rules or customs, or can they just decide randomly? Another aspect is the complexity of the rules. If they are very simple, all can understand and remember them, but some interpretation may be necessary frequently. If they are very complex, few can be aware of them in all their detail, and there would need to be an available source within the society to know the rules and to explain some aspects of them when a situation arose that required it.

The implications are that someone interested in devising an economic theory cannot simply do that; instead a socio-economic theory has to be devised which has multiple social arrangements within it and many separate rules. It would be mandatory for the socio-economic theory to describe the decision-making hierarchy for deciding on production, for deciding on training, for deciding on distribution, for deciding on savings of production, for deciding on the production of productivity tools and their distribution or use. It would have to describe how enforcement power was arranged for and how it could be used, with details as to what limits would be necessary. It would have to describe how rules, if there were any, were to come into being, how they would be communicated to everyone who needed to refer to them, and whether the choice would be simple rules with a set of interpreters or complex rules with a set of explainers. Then the enforcement question relative to the rules needs to be answered. Once these choices were made for a socio-economic theory, the next level of details could be examined.

These requirements seem formidable, but if they can be done, there is a further question as to how could such a socio-economic theory be judged. If there were many of them, which ones might be preferable? What are the criteria by which such a theory should be measured? There are many factors that could be used to make a prioritization of such a set of theories. Finally, what would be the use of such a theory? If any society is already functioning with one, why would the status quo not be the most attractive? One that was already accepted and tested might have these grounds for being chosen. In other words, we are back to the question of what is the goal of a socio-economic theory? Perhaps it has no answer.

Constructing Taxes with Feedback

It is possible to balance trade in the way Adam Smith envisaged it, but it needs to be done with some clever methods of affecting trade.

Feedback taxes are those which have rates that change according to some condition, and could be used to drive that condition to some chosen value. They cannot be constructed without some thought, as improperly designed feedback taxes can have undesirable effects, such as instability or abuse. Here we will discuss the construction of one example, a tax on trade, which is assumed to be done for the purpose of driving trade between two nations into a balance, at least in some types of goods.

For an example, take the situation where one country wants to establish a trade balance with another country in manufactured goods. Exactly what constitutes manufactured goods has already defined by the customs laws of the first country, so there is no question as to what they are. Exactly what constitutes manufactured goods from the first country is also well defined by customs law, so the task remaining is to try and construct some taxation rule, perhaps with subsidies, that uses feedback to accomplish this task.

What is not desired is to have this balance be achieved by a ban on trade between the first country and the second country. While this would accomplish the stated goal of the tax, to balance the trade in manufactured goods between the two countries, it causes two problems, at least, or one problem with two aspects. This might be called the Adam Smith problem. In his famous book, The Wealth of Nations, Smith discussed how two nations might improve the welfare of both by each manufacturing what they did best, meaning for lowest cost, and then trading their individual products. This maximizes the total goods produced and the total consumption in each nation. Of course, this type of trade does not exist today, and it is replaced by a situation where one country manufactures all goods, trades them to the other in return for debt, which is gradually turned into ownership of property in that first country. Smith did not deal with unbalanced trade, and to take advantage of his insight into how to mutually benefit, it might be possible to construct a tax in such a way that it does not eliminate trade between the two countries, but brings it into balance in the sense that Smith envisaged it.

One aspect of the Adam Smith problem is that trade could be driven to zero by taxes that were too high. The other aspect of the Adam Smith problem is that some item, chosen by the first country as its desired manufactured good, would be produced at low quality, so to take advantage of the benefits of the tax law. The second country, in order to maintain some trade, might simply buy goods of low quality or with other flaws. This defeats the purpose of Adam Smith’s insights. In order to function, the tax would have to affect all manufacturers equally, to the same degree, so that competition would ensue between them. Competition would eliminate low quality production in favor of goods, by manufacturers in the first country, which were higher in benefit to cost ratio that others. So one guideline for constructing a tax is that it cannot be too specific, but must equally cover all manufacturing.

Specific item taxes are designed to benefit some individual manufacturers or some group of manufacturers, and do not conform with what Adam Smith proclaimed as a means for improving production in a mutual way. Protection such a tax might provide would serve other purposes, such as ensuring that some vital product was always internally available, and could not be cut off in an embargo by other nations. This does not necessarily improve the economic situation of a pair of countries that are affected by such a specific item tax, as would be the intention of a tax designed to utilize the benefits Smith deduced.

A flat level tax, such as 50% of value, has major disadvantages relative to one which has feedback built into it. When such a tax is imposed, it comes as a shock to the economic arrangements of those manufacturers involved. If the tax is across the board on manufactured goods, the shock is universal. Companies typically do not have such flexibility, unless they are extremely profitable, and can stand to work with substantially reduced profit. On the other side, imposition of a flat tax provides a shock to the consumers of such products, as the amount available would be reduced abruptly, as manufacturers cut back in response to less revenue.

There would be some adaptation within the trading market after the imposition of a flat tax. It might take considerable time for the market to adjust to this tax, as some manufacturers go out of business and others reduce production. Prices would also have to be adjusted, as there might be negative income when the tax is imposed. A new point where supply and demand balance has to be found. This point is not necessarily where productivity is maximized or the total benefit of both countries added together is maximized. Because the tax level chosen is arbitrary, it is very unlikely that it would happen to be chosen just where productivity was maximized. On the other hand, if the tax were adjusted frequently, this introduces such instability into the market that production would certainly fall. Uncertainty has costs, and these costs can undermine the profitability of even an efficient manufacturing firm.

One way to mitigate the economic shock of taxation is to introduce it gradually. A small tax to start, with annual increases, allows the manufacturers and consumers of the manufactured products traded between these two nations to know what their additional costs will be, and to therefore plan on this basis. This reduces the uncertainty. It does insist on changes in trade levels, with each gradual change in the tax rate. This cannot be eliminated as the entire goal of the tax is to change trade levels. Whether a single abrupt change can be tolerated is a question; slow gradual changes allow businesses to change what they manufacture, change customers, or make production changes that affect costs.

One way to approach more closely the Adam Smith ideal of each country manufacturing what they can most efficiently produce is to have a universal tax on manufacturing trade, with a gradual change, but one which is automatically adjusted in amount. The adjustment rules can be tailored to both produce balance in trade volume and be slow in changes to allow business planning to be maximized. Such a combination might look like this: an increase of 5% in each successive year until the trade imbalance drops below some threshold amount, then an increase of 1% in each year until the trade imbalance drops below a second threshold amount, followed by a change of 0.1% in whatever direction the trade imbalance indicates. In this final phase of the tax situation, if the trade from country two to country one is positive but small, the tax would increase by 0.1% each year until that reverses. If the trade from country two to country one is negative but small, the tax would decrease by 0.1% each year until it reverses. At the end of this process, the tax level would be fluctuating by a small amount each year, not enough to cause any significant disruption of business on either side of the trade exchange, but only affecting marginal users and producers.

The feedback trade tax is also resilient to changes in costs. If one of the two countries invents some novel transformation of the manufacturing process for some particular item, the trade would shift to take advantage of this transformation. If the transformation were done for a particular good which was highly traded, the trade imbalance might slip out of the final band and enter the second band, where incremental changes are larger. These incremental changes would accumulate until the entire spectrum of manufactured goods was adjusted, leading again to a balance of trade, but in a different allocation of products. Thus, the procedure is robust against any type of change.

If both countries adopted such a feedback trade tax, would there be any possibly different results? The problem with feedback taxes occurs if the steps taken are large. In this case there could be instabilities, resulting in taxes swinging wildly year to year. When both countries are introducing changes, this is more likely. The clear barrier against it is to have the incremental changes in both countries be small, so that if it happened that they both aligned, the changes would not be too abrupt.

The advantages of such a tax comes from its components. A gradual change allows business planning. A target value of zero net manufacturing trade allows the Adam Smith efficiency gains to be fully experienced. Tapering changes allows a stable state to be approached. Automated changes in tax levels allows changes in manufacturing efficiency to be accommodated in the most efficient way possible.

One way to gracefully accelerate the change to a balanced trade situation would be to take the tax collected and distribute it as a subsidy to those manufacturers in the first country who are exporting to the second. This subsidy would speed up the change to manufacturing larger quantities. Another way to make worldwide trade more efficient would be to apply a tax in the first country to all countries which trades with it. This would allow a more efficient distribution of manufacturing around the world, instead of only in the two countries in the example.

Debt and its Administration

If there are to be public agencies involved in capital formation, they need to have some method by which corruption can be avoided. Perhaps there is only one.

In a different post, debt was debunked as an important consideration in economics. It is just one of many accounting rules that affects, along with the others, what the distribution of the products of a society is. Debt may have an interesting history, but that does not make it special in the bin of things that affect distributions. Why it is singled out for such prominence does not appear to be obvious.

Like every other transaction, debt is a two-sided one. Some access to society’s products is transferred from one individual to another when some new instance of debt is thrown into the accounting mix. In other words, some products, perhaps unspecified, are transferred from one individual to another. Since society is composed of individuals, they are the only consumers of products in the final analysis. Groups of individuals can be given many different names, and then the group can be the recipient, but the group’s allocation is transferred further to its members, according to whatever rule the group has chosen to use. The ramifications of some group’s ownership of rights to some of society’s products can be onerous to list, involving contingencies, inheritances, rights of refusal, and anything else clever people can think up. These do not need to be considered in the overview of a new economic theory. The point is simply that there are products and individuals to whom they will be distributed.

One of these groups can be a nation, meaning some geographic body of land, and all those who have rights to some products owing to the nation. Those who have rights is a group which is figured out by those who have rights to do so, and these typically are the same thing. In other words, it is a circular loop. Citizens, if we use that term to represent the individuals with claims to the products of this particular piece of land, determine in one way or another, their own membership in the group. Again, clever people can think up all types of ways to make such a membership complicated, but again, it is of no consequence to the creation of a novel economic theory. Most groups have some rules by which existing membership controls new membership, so nations or other blocks of land are not much different from other types of groups. The labels for membership are different, but the concept of membership is simply that.

Debt is a transfer of some particular formulation of product access rights from one individual to another individual, or perhaps groups of individuals on either side of the transaction. It is a curious thing that when the groups are large, like nations, or with obscured membership, like banks, there are statistical lists of the amount of debt granted. Likewise, for individuals and most groups, there are lists of debts owed that can be accessed under some conditions. The other side of the picture is not so transparent. Individuals who have granted debts to others do not have this publicly listed and available to anyone wishing to enter into a transaction with them. Thus it is hard to know what the average creditor has for debt. This means that while some statistics are available on debts owed, there are less on debts owned. Although this may be curious, it does not affect any development of an economic theory.

One aspect of debt that may differ from some other rules is the clear specification of timing of transfers. All transfers have some timing requirements, for example, taxes need to be paid by some deadline. Debt has deadlines for making some payments that can be more extended than others. This has use for some business arrangements, and for some personal situations.

An economic theory needs to cover capital formation, motivation, efficiency and productivity, and distribution arrangements. There can be no debt granted if there has not already been some capital formation. Capital formation comes from distribution arrangements. If some individual or group has not been granted an excess of society’s products, they will not have the capital to grant a debt. So, prior to the institution of debt, there has to be some arrangements for some individuals or groups to accumulate more than an equal share of society’s products, or else some individual or group has to reduce their consumption below what their allocation is, and thus save some capital. This is the heart of capital formation: some individuals or groups must consume less than they are allocated, either by them receiving an excess of their consumption rate, or by them reducing their consumption rate below the allocation rate.

Debt is granted for charitable causes, to assist some individuals or groups, or for profitable causes, so that the grantor can in the future possess even more of an excess of goods over his consumption rate. This latter situation is one of the positive feedback loops that leads to ever-increasing disparity in the distribution of society’s products. Determining how to adjust these loops so that the goals of maintaining and improving motivation and efficiency is a principal goal of any economic theory. One way, no limits at all, has been experimentally tried for a few centuries and it leads to extreme disparity which stifles both motivation and efficiency, as well as undermining the stability of whatever social arrangements were used to support this process. Another way has been tried for a few decades in a large arrangement, and in small situations for much longer, and that is to abolish it. This leads to shortage of capital formation, as well as eventual motivation disarray. So it is clear that some middle way is necessary.

Middle ways have been tried, and they can only be tried when some governance exist with the power to overrule any arrangements made between individuals and groups, so as to further efficiency, motivation, and capital formation. This typically proves to be unstable, as the governance tends to be corrupted as disparity grows, which is exactly where it should be uncorrupted and working to regulate it. This, of course, is the second famous positive feedback loop, which involves more corruption of government when disparity increases, and the corruption tends to increase disparity even more.

These obvious and well-known points indicate that economics and politics cannot be treated separately in a theory. Thus, an economic theory must be as well a political theory. Exactly what a political theory would include is not clear. One aspect is capital formation, just as the economic theory must include it. Capital formation can occur as part of the first positive feedback loop, where debt is used to increase disparity, or as part of the second positive feedback loop, where political corruption is used to increase disparity. However, it is not necessary for there to be large disparity for capital formation, if the political theory side contains some feature which will make it work. Note that capital formation is not solely the accumulation of capital, but also its use, meaning its allocation and management.

Corruption is possible on the part of whoever is in charge of capital collection and allocation within a governance agency involved with capital. Corruption means simply that some individual has two agendas, one being the agenda of his position, which is to improve the productivity of society by allocating capital under some rules for its return, in other words, debt, and the other being a personal agenda, which is to improve his own position, the position of some others that he favors, or some group that he is a part of. If a political theory is to be created, it must cover how to deal with this most common situation, of the administrator of capital with dual agendas.

Some obvious alternatives for the management of the administration of capital and debt are to have multiple individuals involved, to have watchdogs monitoring the behavior of those individuals, public scrutiny of those individuals, transparency of the personal situations of those individuals, clear and strict regulation on how such individuals are to make their choices, and others. Each of these is also subject to corruption, and it is certainly possible to conceive of a whole league of the corrupt, each aiding and abetting the others in the concealment of it. For every device that is used to prevent corruption, there is a counter to it, involving yet more corruption. Since corruption was or is rampant in most societies, historical and current, there is no clear miracle cure for it. One thing is clear, however, corruption takes time to install itself in any administrative organization. If there were regulations stating that those involved had something like term limits, or were subject to some periodic review or vote to stay in the position, then this might be another defense against corruption.

One idea might be universal term limits for anyone in a position where corruption might be an issue. Term limits are typically despised by individuals involved in some administrative position, as climbing to a high level in an administrative hierarchy takes a long time, as does becoming efficient at the position, as does finding and training good subordinates, as does many other miscellaneous tasks. However, term limits is the only solid defense against corruption, provided it is close to universal.

Inverting Caveat Emptor

Caveat emptor has some lingering support in our modern times, but perhaps it should completely be replaced by something more appropriate.

Caveat Emptor is the latin phrase meaning ‘buyer beware’. It is supposed to somehow be crucial for a free and open market to exist. All it means is that deception is allowed in market transactions, and it is the buyer’s responsibility to ferret it out and then make transactions based on valid information. It may have been very well suited to the early market economies of Adam Smith’s time, but perhaps it is not very well suited for our times.

In olden times, there wasn’t much that could be done, other than warn buyers by having them repeat this mantra. In some cases of deliberate fraud, blatant and obvious, some council of respected individuals might do something against the dishonest seller, if he/she had not already left the market and disappeared. On the other hand, they might just look at the seller and repeat: ‘Caveat emptor’, meaning it was his fault for not verifying the claims of the seller.

For most transactions, there was little option for dishonesty. A bag of corn could be weighed, so that the weight could not be faked. The corn itself could be inspected for spoilage. What else could go wrong? There were some transactions on olden days that might be counterfeited, such as coins. A scrupulous buyer might insist on a density check for gold or silver. Sometimes these checks might not be available.

Animals which were sick could be inspected, or left in a pasture for a day or so to observe their behavior. Pots could be tapped to search for imperfections. Fabric can be laid out in the sun to see its size and quality. Caveat emptor actually worked fairly well in these situations.

Services were usually done by local people, whose workmanship was known widely. It may have been excellent or mediocre, but asking others in the neighborhood about the workman involved would tell you which of these you might be getting. When ancient economists started theorizing about trade and the improvement of efficiency that arises from the specialization of labor, they were living in times or not long after times when these processes worked well. Thus, the very simple theories that were proposed were accurate for the times they were embedded in.

Skip forward to modern times. There is a weird tradition in English jurisprudence that says that precedent is everything. It’s not a common practice in most other countries, but in the English colonies it holds forth. Perhaps that tradition spills over into other areas. Economic theories that were appropriate for times centuries ago are still looked on as having validity in the extremely different world we live in. Why would that be? Perhaps the explanation is as much psychological as theoretical. A number of explanations can be hypothesized, such as each generation learning these theories from the prior generation, who held respected positions. No questioning was permitted. Thus, from one generation to the next, theories from long ago are memorized and accepted, and the task for economists is to justify them. Certainly, other hypotheses as to why antique economic theories are still propounded today, almost without dissection, can be postulated. It doesn’t matter what the justification for these theories is, only that they might no longer have any shred of utility or validity.

In today’s markets, various items are bought to complete each individual’s or each household’s quorum of things to own. Everybody has a residence, which has to have various components, such as a place to cook, a toilet, a place to clean oneself, and others. Everybody has a mode of transportation, such as a car or a bicycle. Everybody has a communication device, such as a telephone. Each of these things has various grades, and individuals and households work or do other actions to try and maintain their items or to upgrade them. Individuals and households in declining situations have to figure out how to cope with their decline as they slip down in the gradation of items owned or rented.

There are strong laws in some jurisdictions relating to transactions with these items, but the regulations for this are far from uniform, either geographically or by category of item. Take for example, residences. For purchased residences, there might be laws stating exactly what information about a residence has to be provided to the purchaser, and by exclusion, what does not have to be. There are other sets of regulations about the condition of the residence in order for it to be allowed to be sold. As an example of the former, information about property lines and easements has to be provided, and if they are not or are provided with errors, the sale can be rendered void and all monies returned to the proposed purchaser. Different jurisdictions might require other information to be provided related to the condition of the property. As an example of the latter, houses cannot be sold for occupancy if they are in unsanitary condition, contain dangerous elements in the electrical parts, and so on. It may well be that many places have neither of this type of requirement, but for the purpose of this discussion, residence transfers of ownership provide an example where such regulations and laws can play a role.

This is the opposite of caveat emptor. The owner is forced to inform the proposed purchaser of some conditions and details about the property, and to put it into some passable condition before the sale goes through. It may also be that the jurisdiction gives the proposed purchaser the right of inspection by experts, which is again not something that necessarily existed centuries ago.

So, in the modern era, what might be the best set of regulations for the purchase of items, not just residences, but items of transportation, communication, hygiene, or anything else? Consider the background story first. The economy of today in industrialized countries has taken advantage of the specialization of labor concept in the fullest extent, so that items manufactured are often made by giant corporations, who mass produce items for a wide market. On the other side of the transaction are individuals and households who purchase these items. There is such an immense disparity between buyer and producer/seller that the antique theories of caveat emptor are almost laughable.

In the market today, many items that are sold come with some specifications. The specifications assist a buyer to know if the item meets his needs. They often come with a warranty, meaning that a period of time has been designated during which the producer/seller still has obligations to the buyer, such as to replace the item if it fails for some limited list of reasons. But there are few regulations concerning how warranties should or must be written, nor for how long. Neither are there regulations concerning what must be included in the specifications. They can be as complete as the seller wishes to make them, and if they are only partial, the buyer can refuse the transaction.

One could say that caveat emptor has been translated into specifications and warranties. The other piece of the ancient market, where the buyer can find out the reputation of the seller or the experiences of others with whatever the seller is providing, translates today into reviews. But reviews are not mandatory and are virtually unregulated.

Why are there not clear and efficient regulations describing what sort of specifications must be provided, what type of warranty must be provided, and what types of reviews need to be accomplished before any sales of a new item are permitted? The knowledge of exactly what type of warranty were required by regulation, for example, would tend toward efficiency in the market, as everyone would know what warranty existed, how to apply for it, what costs were involved, what delays were allowable, and any other details. Having a uniform warranty for all manufactured goods would simplify manufacturing as well, as there would be clear information as to what targets to set for reliability and the various failures of reliability, such as burn-in problems, wear problems, and manufacturing faults. It might even drive more research into the problems of manufacturing items, especially newly designed items, so that they would have the required reliability and therefore only rarely invoke the warranty clauses.

It would also simplify warranty claims, as the regulations concerning them would be clear, and violations of the standardized procedures might be subject to some fine or other response to a failure to live up to the regulatory standards. Perhaps an industry would arise to handle warranty claims, as they would be much more uniform and therefore able to be processed by specialist organizations or agencies. It would also make the selection of items easier, as the longevity of any item would be that which was standardized. Reliability would no longer be a separate factor in making product comparisons.

Other aspects of the purchase of items would be similarly simplified if caveat emptor were completely relegated to the past, and a more appropriate model for sales standardized. Every simplification of life in a complex world has its own benefits, beyond the intrinsic benefits, as too much complexity is a burden for individuals to deal with. Exactly how to implement such standardization remains to be figured out.

What is Important in Economics?

There seems to be a lot of unwarranted attention in economic theories paid to what are no more than accounting schemes.

As an exercise, consider a comparison between three imaginary villages. Everything will be simplified so that the comparison won’t be confounded by extraneous factors. The villages are mostly identical as well, so comparison won’t be difficult. Let’s start by describing one of the villages; the others are the same in every factor that is mentioned. They have the same housing, the same stores, the same prices in those stores, the same transportation, the same living conditions. That’s the beauty of the example. Nothing is different between the villages except what is called out below.

There are ten identical households in a village. In each of the ten identical households there is a wage-earner, who works regular hours and brings home income, which is used by the household to purchase their necessities and some extras. Each worker in the ten households gets the same wage as the other nine, pays the same tax as the other nine, has the same debt, and the same requirements for necessities, such as shelter and food. There aren’t any significant differences between the ten.

In village 1, workers receive a hundred units of money a week. They spend ninety on necessities, save five and use five for extras.

In village 2, workers receive a hundred fifty units of money a week. They spend ninety on necessities, pay interest on their onerous debts with fifty, save five and use five for extras.

In village 3, workers receive a hundred twenty-five units of money a week. They spend ninety on necessities, pay taxes with twenty-five, save five and use five for extras.

These conditions do not change and nothing external disturbs the arrangements.

Which village is better off?

Households in village 2 have great debt and are forced to spend one third of their income on debt interest and never get a chance to pay it off.

Households in village 3 and burdened with onerous taxes which consume twenty percent of their income. They have no way to escape from these taxes.

Households in village 1 have no debts whatsoever and are fortunately free from taxation.

In this example, nothing changes, so the only way to make a comparison is to look at current conditions. There is some emotional attachment that certain people have with debt, so they would necessarily regard village 2 as worse off. Other people have a strong feeling about taxes, and would therefore regard village 3 as worse off. These are not rational reactions.

The only thing that affects the life of the people in the households in these three villages is the amount of money they have left over to spend on necessities, savings and extras. It is identical in the three villages. The three villages have exactly the same standard of living. They would not be separable if you went to the villages, looked them over, and tried to compare them. In each house you visited, life would be the same in the three villages. You could count their possessions, discuss their activities, compare their health, examine their educations, and every last one of these would be identical. You would be unable to discern any difference from any observation of their lives or their environment. The paint on their houses would be the same, the depth of the tread on any vehicles they have is the same, the trimming of their lawns is the same. The commute times are the same. The electric usage is the same. The water and sewer systems are identical.

The purpose of this example is to make the distinction between irrelevant differences and important ones. Net income is important. Whether that income is affected by debt or tax or anything else is irrelevant if the net income is the same. The level of debt is not worth noting. The percentage of taxation is irrelevant. These are simply economic accounting processes and there could be many other variations, besides the simple debt interest and taxes that subtract from gross income to make net income. They would be irrelevant as well.

Why then is there so much concern about debt and taxes, if they are only accounting labels for subtractions from gross income? Even gross income is irrelevant, except as an input into the accounting for the weekly payment to the workers. Village 2 is paid more than village 3 which is paid more than village 1, yet the higher wages mean absolutely nothing.

It may be true that there are a hundred ways to structure a debt, and economist can have some good times figuring them all out, but it means nothing in comparison to net income. Taxes can also take a hundred forms, and there can be a vast amount of clever thinking expended in arranging them. They are irrelevant in all forms. What matters is net income and how it relates to the expenses of the household.

The units of the payments are also irrelevant, as money is simply another accounting device. What matters is the purchasing power of the money, and if had a different label or unit, it would make no difference in our example.

We are not going to be able to construct a just and decent economic system if we concentrate on accounting intricacies and financial constructs. Yet that is what most economics discussion does concentrate on. To make a good economic system it is really necessary to look past these gimmicks of rearranging the distribution of economic benefits and drill down on what is important. It is the final distribution of benefits that makes the difference.

Perhaps some schemes for rearranging benefits are simpler and easier to implement than others. The simplicity or complexity of such schemes are largely irrelevant. These schemes should be regarded as only the means to accomplishing the end, which is the final distribution of income. Labelling various schemes or the details of various schemes as just or fair or real or the inverse of these attributes does absolutely nothing except obscure what economics should be concentrating on: final distributions.

Someone’s infatuation with one of these particular schemes, that is, with one of the means of determining the final distribution, should not be allowed to interfere with the assessment of the final distribution. That final distribution is what should be assessed and the design of it is what should occupy most of the thinking of an economic theory. Perhaps some of these schemes can be more easily explained, but that does not mean anything at all. Some of them might be more easily propagandized, and again, this means nothing.

The final distribution of incomes is the principal subject matter of a just deserts economic theory. There are two ways of approaching the subject, a micro and a macro approach. The micro approach answers the question of how the details of the distribution affect the recipients. Does it motivate them? Does it ring true with the actual utility provided by those receiving the benefits? The macro approach answers the question of change. How does some distribution arrangement lead to a growth in the total annual benefits production. What is the tradeoff between the diversion of benefits into savings and the growth rate of benefits?

There can also be a long discussion on the mechanisms by which savings happen. There can be mandatory rules for savings, or forced savings which happen earlier in the income stream than the receipt of the residual benefits by those they are going to. There can be various supplemental benefits for savings, or threats of future calamity if savings are not at a certain level. These make as much difference as the debt and tax levels. In other words, none at all. What matters is how much goes into savings, which is another name for capital formation.

The discussions of how savings, or capital formation, is translated into increases in productivity, also known as increases in benefits, is something that needs to be part of an economic theory. Exactly how the savings are implemented or enforced or encouraged is not a top-level consideration. What matters is the determination of what happens to productivity when savings are different levels.

After the theory finishes with both the micro approach and the macro approach, from the broadest perspective, then it might step down a notch and figure out how the few simple quantities that make up this overview might be implemented. Note here that the key word is implemented. To be precise, the word implemented does not mean anything except the generation of details to make something happen. If the overview figures out that five percent savings is right for a balance between immediate consumption and future consumption, then all the rest of the work is simply determining some accounting schemes, such as debt, taxes, withholdings, or whatever, to make that happen. Any economic theory which starts at the bottom and tries to work upward is necessarily doomed to failure. There is simply no way sets of details can be mashed together to make up a coherent theory.