On Economic Basics: Investment and Trading; Free Trade and Regulation; Revenue and Deficits; Capital and Labor (1 Viewer)

[NWRatCon]

I'm not sure where this thread is going to go, but I wanted to start the discussion, and this seems to be the place to do it.

There is a lot of --- um, frankly, nonsense --- floating around (and not just on DP) that evinces a plethora of people with a near-complete lack of understanding of some fundamentals of economics - in the population as well as among government leadership, party apparatchiks and even DP posters. I thought it might be good to have a generalized discussion about some of these basic economic subjects to contextualize these debates, and provide a touchstone for those seeking understanding. This is intended to be a clearinghouse of sorts and informative, not a place for partisan bickering and posturing. I'm not personally an "economics expert", although I did study it in college, so I understand the fundamentals of economics and I read a lot. (I'm also trained as a financial planner, which colors my perspective.) And, of course, I have strong opinions, which I'll try to keep in check. My purpose, though, is to broaden understanding, not flog positions or belittle others.

I'll start by saying I'm neither a free-trade capitalist, nor a communist, but I understand both. (My handle identifies my economic proclivities - an Eco-Social Marketeer.) I'm personally heavily invested in the markets (stock, bonds, etc.), and believe that capitalism can be one of the greatest engines of broad prosperity and democratization of the economy. The key, though, is can be. It isn't inherently so (just as a car can be a great mode of transportation - depending on how responsibly it is operated - but can be deadly and has external effects that are not always considered). As currently trending, it is becoming less so, so my interest is in discussing why that is, and what can be done about it.

I'm planning other posts about the specifics listed in the Thread Title, but want to get discussion started more generally, and sooner. Crafting these posts takes effort, and time that is not always immediately available. I'm looking for other contributions, so feel free to throw in your own takes (as long as they further the discussion). I'm also extremely interested in questions. If I can't answer them or provide sources, I'm hoping others can fill in.

I want to start with the concept of "markets"; "a system where buyers and sellers interact to exchange goods, services, or resources." There are many markets we all participate in, either directly or indirectly. They run the gamut from the grocery store to the major stock and commodity exchanges. Many people want to pigeonhole one or another aspect of "the market" and assert that THAT covers all the bases. There are many different factors that affect "supply" and "demand", and thus influence various markets. It can be rather complicated and not explained simply, or simplistically. It is the nuances that make the process interesting.

Anyway, let's get to it.

 

[ataraxia]

I'm not sure where this thread is going to go, but I wanted to start the discussion, and this seems to be the place to do it.

There is a lot of --- um, frankly, nonsense --- floating around (and not just on DP) that evinces a plethora of people with a near-complete lack of understanding of some fundamentals of economics - in the population as well as among government leadership, party apparatchiks and even DP posters. I thought it might be good to have a generalized discussion about some of these basic economic subjects to contextualize these debates, and provide a touchstone for those seeking understanding. This is intended to be a clearinghouse of sorts and informative, not a place for partisan bickering and posturing. I'm not personally an "economics expert", although I did study it in college, so I understand the fundamentals of economics and I read a lot. (I'm also trained as a financial planner, which colors my perspective.) And, of course, I have strong opinions, which I'll try to keep in check. My purpose, though, is to broaden understanding, not flog positions or belittle others.

I'll start by saying I'm neither a free-trade capitalist, nor a communist, but I understand both. (My handle identifies my economic proclivities - an Eco-Social Marketeer.) I'm personally heavily invested in the markets (stock, bonds, etc.), and believe that capitalism can be one of the greatest engines of broad prosperity and democratization of the economy. The key, though, is can be. It isn't inherently so (just as a car can be a great mode of transportation - depending on how responsibly it is operated - but can be deadly and has external effects that are not always considered). As currently trending, it is becoming less so, so my interest is in discussing why that is, and what can be done about it.

I'm planning other posts about the specifics listed in the Thread Title, but want to get discussion started more generally, and sooner. Crafting these posts takes effort, and time that is not always immediately available. I'm looking for other contributions, so feel free to throw in your own takes (as long as they further the discussion). I'm also extremely interested in questions. If I can't answer them or provide sources, I'm hoping others can fill in.

I want to start with the concept of "markets"; "a system where buyers and sellers interact to exchange goods, services, or resources." There are many markets we all participate in, either directly or indirectly. They run the gamut from the grocery store to the major stock and commodity exchanges. Many people want to pigeonhole one or another aspect of "the market" and assert that THAT covers all the bases. There are many different factors that affect "supply" and "demand", and thus influence various markets. It can be rather complicated and not explained simply, or simplistically. It is the nuances that make the process interesting.

Anyway, let's get to it.

Sounds like it could be an interesting discussion- but I doubt you are going to get many contributions to it from at least one side of the current political divide. If it's not a discussion at the 4th grade level and with a lot of cussing and foul language, they will quickly lose interest. They will go on and watch WWE wrestling or Donald Trump or something.

 

[NWRatCon]

Sounds like it could be an interesting discussion- but I doubt you are going to get many contributions to it from at least one side of the current political divide. If it's not a discussion at the 4th grade level and with a lot of cussing and foul language, they will quickly lose interest. They will go on and watch WWE wrestling or Donald Trump or something.

It is in the "Academia" forum...

But I like a good disagreement. As long as it is substantively based.

 

[dmpi]

I'll throw in my two cents worth. If I had to simplify capitalism into one sentence. it would be: "Get people working making good and services that others want and are willing to pay money for". I see issues in three areas:
1) What we want is nebulous and ever changing. It's a creative process to find new product and ideas. Gimmicks and fads are hot one day but eventually fall out of favor.
2) Hard to make goods without raw material and resources. The earth has limited resources. We had to bid and compete for these. War has been started as a means to resolve these conflicts. Some people are born into wealthy families who has many resources.
3) Fairness. Capitalism will produce winners and losers and is more about competition than cooperation. Like it or not we judge ourselves through the eyes of others. Even in a hypothetical "fair world" where your income is directly proportional to your contributions there would still be discontent. Also skills and talents are not equal among people. Capitalism dictates that everyone should work as to their full potential. Some will do better than others. Also some people are born into wealthy families who has many resources. They're going to do better than someone born into a poor family.

 

[ataraxia]

3) Fairness. Capitalism will produce winners and losers and is more about competition than cooperation. Like it or not we judge ourselves through the eyes of others. Even in a hypothetical "fair world" where your income is directly proportional to your contributions there would still be discontent. Also skills and talents are not equal among people. Capitalism dictates that everyone should work as to their full potential. Some will do better than others. Also some people are born into wealthy families who has many resources. They're going to do better than someone born into a poor family.

Unregulated capitalism is like a game of Monopoly: no matter how smart you think you are, or how good you think you are at the game, after all the throws of the dice and random picks of cards from the community chest, the game is designed to have one or a handful of people eventually win, and everyone else loses. Some people think that winning at a particular game of Monopoly is proof that they are better and smarter, but that's silly. Although it may play some role, ultimately it's only a small part of winning the game.

The fact that the game is designed to eventually come out with a winner works great for family game night- because everyone eventually has to go to bed. But it doesn't work well to sustain a stable society.

 

[Visbek]

Anyone who doesn't know by now that...

• Trade is beneficial
• Trade deficits aren't harmful
• Tariffs won't reduce trade deficits
• Constantly changing tariffs is disastrous for an economy

...isn't going to learn, because they don't want to learn. They're just going to parrot whatever Dear Leader says -- even when he contradicts himself in a single sentence.

So... good luck.

 

[NWRatCon]

Anyone who doesn't know by now that...

• Trade is beneficial
• Trade deficits aren't harmful
• Tariffs won't reduce trade deficits
• Constantly changing tariffs is disastrous for an economy

...isn't going to learn, because they don't want to learn. They're just going to parrot whatever Dear Leader says -- even when he contradicts himself in a single sentence.

So... good luck.

Let's talk about "trade" (I'm stripping out the overtones). Trade is, indeed, the basis for all systems of exchange (particularly Capitalism). Trade is, indeed, beneficial - which is why every society has systems for it.

Historically, it was barter - and then "money" was invented, where a fixed marker was identified to substitute for the specific merchandise. This allowed trade to be conducted over greater and greater distances, and by more diverse societies. There were numerous items to which "money" was tied - in some, it was shells (ONE of the uses of Wampum), in others, salt, and still others relied on precious metals and gems. Of course, when those societies collided, the "money" was not always given the same value.

Over time, the concept of "currency" became more universal, and throughout Europe the Gold Standard (and silver) was adopted. But, again over time, the concept has continually been abstracted to the point that "crypto" currency is now in vogue. Unlike "official" currency, though, it is not tied to any physical object or standard. It can, literally, be wiped out by accident or by deliberate manipulation, as it only exists as a concept.

But, ultimately, all of these are "methods/mediums of exchange" that rely on both parties to such an exchange agreeing on a "value".

What we now term "trade" has evolved from the simple concept of trading goods in a barter-like exchange, to determining value as an abstract principle. Unfortunately, because of this, labor is often given less "value" than investment capital - as it is harder to quantify. But even fixed commodities can fluctuate in value (thus, the creation of commodity exchanges and "futures").

 

[NWRatCon]

I didn't get to the latter concepts of "trade deficits" and discontinuity of value that were also raised in your post. "• Trade deficits aren't harmful"

What tariffs do is artificially change the established "value" of a good or commodity based upon geography. Artificial in the sense that it is not based upon real-world circumstances (e.g., like shipping charges, or the distances upon which they are based). Relatedly, a "trade deficit" is a somewhat artificial construct. The reality is that a trade is a trade. Value is given for value received. The concept of a "trade deficit" (more properly the "Balance of Trade") is that there is some outside consideration that makes such a trade "uneven". There is not, actually, a monetary basis for making that determination, except in the abstract and on a "meta"/cumulative basis.

I happen to agree that trade deficits rarely have real world detriments, except cumulatively. This is really a hold-over conception from the age of Mercantilism. It has very little validity in a global or modern economy, as any such deficits are frequently balanced out by investments in other instruments, like Treasury bonds, which are not included in the measurement of "trade balances".

"An Imbalance of Savings and Investments​

To many in the world of economics, a trade deficit is about an imbalance between a country’s savings and investment rates.

This means that a country is spending more money on imports than it makes on its exports. Under the rules of economic accounting, it must make up for that shortfall. The U.S. can do just that by either borrowing money from foreign lenders or permitting foreign investment in U.S. assets.

This foreign lending and investment can be seen as a vote of confidence in the U.S. economy and a source of long-term economic growth, if the borrowed money or foreign investment is used wisely (such as in productivity growth).

This was the case with the U.S. for several decades in the 1800s.4 The foreign money went into railroads and other public infrastructure, which helped the U.S. develop economically."

Trade Deficit: Advantages and Disadvantages (Investopedia)

In the real world, countries that have excess funds available are quite willing to invest those funds in US government and corporate bonds, because they are viewed as stable. Indeed, the inflation and volatility caused by the on-again-off-again tariff policy is creating a real-world problem, because yields on bonds (which is what the bondholder has to pay out) is going up as investor confidence goes down. That means government "borrowing" is getting more expensive, and for no rational reason.

 

[NWRatCon]

I'll throw in my two cents worth.

Thanks.

If I had to simplify capitalism into one sentence. it would be: "Get people working making good and services that others want and are willing to pay money for".

It is really hard to simplify "capitalism" and/or distinguish it from other "systems", but I think this is a worthy definition. I agree the gist is "making goods and services that others want and are willing to pay for". I'm a little unclear on what you mean by "get people working", so I'd love to explore that further.

I think what you're driving at is that capitalism tends to incentivize efficiency in labor - people (labor) go where the money is. I'd quibble a bit about how efficient it is in doing so, but I take the point.

I see issues in three areas:
1) What we want is nebulous and ever changing. It's a creative process to find new product and ideas.

This is encapsulates the essence of "supply and demand", the core of capitalism and what drives "innovation". Most definitions of capitalism focus on "making money" - or "profit". It is not, however, about distributing money effectively or fairly, which is a good branch for discussion.

What gets confusing in many discussions of "capitalism" is attempts to give it too much specificity (I can do this myself), breadth or "purpose" ("good" or "bad"). The problem is that the "system" came into being before anyone tried to define it. We've been trying to catch up and explain it ever since. I think, though, it breaks down into these components: ownership (private), production (means) and markets.

Beyond that it gets immediately dizzying, though, as we start getting into the elements of each of those: types of ownership; what constitutes "means" e.g. labor/capital/management; ownership of resources - commodities vs goods vs services; and the interplay of regulation to address "fairness" and "externalities" (pollution, geography, public interests).

I'm going to take on your other two points later, but I gotta scoot. I've got "thoughts"...

 

[Chomsky]

@NWRatCon

Armed only with undergrad Mico & Macro, I feel a bit deficient in my ability to add to the discussion at the depth & level of the OP.

However - I am very much looking forward to the philosophical & technical discussion in determining whether "capitalism serves society", or "society forms to capitalism"?

Besides that, I'll just leave some reference on what I believe to be the salient issue of the moment -

Here:

Comparative advantage - Wikipedia

en.wikipedia.org

 

[NWRatCon]

@NWRatCon

Armed only with undergrad Mico & Macro, I feel a bit deficient in my ability to add to the discussion at the depth & level of the OP.

However - I am very much looking forward to the philosophical & technical discussion in determining whether "capitalism serves society", or "society forms to capitalism"?

Besides that, I'll just leave some reference on what I believe to be the salient issue of the moment -

Here:

Comparative advantage - Wikipedia

en.wikipedia.org

You, my friend, are as well-armed as I am. I particularly appreciate bringing Comparative Advantage into the discussion, as it explains much of the global economy and why international trade exists in the first place. (We can discuss "comparative relative deprivation" in another thread. )

To give it fuller explication, comparative advantage is "the advantage over others in producing a particular good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comparative advantage describes the economic reality of the gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress." A lot of jargon (I succumb frequently, too, for which I apologize). More simply, "In the context of international trade, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries. However, some contemporary economists contend that focusing solely on comparative advantage can result in the exploitation and depletion of a country's resources." What Is Comparative Advantage? (Investopedia).

I want to address both of those elements - "making things more cheaply and easily" and "exploitation and depletion of resources". Here comes the nerd!

First, I think most people recognize that labor in some countries tends to be cheaper and more plentiful in several other countries. Thus, "Made in Japan", was supplanted by "Made in Korea", then "Made in China", and, most recently, "Made in Vietnam, India, Indonesia". The reality is that labor is cheaper there because the laborers are plentiful (excess population), and the country is poorer per capita. But, as the countries in question raised their standards of living (by becoming more prosperous and more capable of providing social services), the labor costs went up. In this respect, capitalism is doing what it does best - increasing the societal wealth (but not its distribution).

Second, discussing comparative advantage leads to discussion of "marginal" vs "total" cost, or "why is it cheaper to produce items overseas and ship them into the country?"; and what the "global supply chain" really means.

Let's try a real world example: Textiles. Prior to the 1990s, the US textile industry was dominant, and had been for nearly two centuries. As late as the 1960s, 95% of American clothing was produced in the United States. That changed in the coming decades as "Between 1997 and 2009, more than 650 textile plant facilities close in the United States." A Timeline of Textile History (Textile Heritage Museum).

Why? "[C]heaper competition and inability to upgrade machinery and facilities," and "rising costs in labor salaries and health & retirement benefits and production costs". Upgrading machinery and facilities, and labor salaries and benefits are part of the "marginal" costs of production. Because those costs were lower in other countries, it became economically advantageous to move production overseas. Even the additional marginal cost of shipment was not enough to offset the savings that could be had (total cost). Thus, it was natural to move it where it was cheaper. That is also Why a major shift to US clothing production is unlikely (Reuters). "We don't have the labor, skill set, materials, and infrastructure to manufacture clothing and shoes on a large scale", [Steve Lamar, president of the American Apparel and Footwear Association] said.

 

[NWRatCon]

Moving to the second part of my response to Chomsky regarding "comparative advantage", "exploitation and depletion of resources". Another of the reasons that American manufacturing costs more is that we, as a society, put a premium on a "livable environment". Thus, in the 1970s, we passed the Clean Air and Clean Water Acts. We have endangered species lists, an Environmental Protection Agency. We maintain expansive National Parks. And we have minimum wage laws and social safety programs (e.g., Social Security, Medicare, Medicaid, Unemployment Compensation, etc.). While these are all laudable and beneficial to OUR society, they are of relatively less importance to other countries.

From a strictly empirical standpoint, the costs of these regulations are also "marginal costs" that play into international trade incentives. Part of the reason that labor in other countries is "cheaper" is that the workers are paid less, but also that their countries do not add the burden of maintaining their environments - thus the strip mining techniques that we forego as cheap but destructive are prevalent elsewhere; clear cutting of forests, excessive pollution, lack of flood control, etc. are common. These are the "exploitations" that some economists address. They are termed "externalities" in discussions of economic systems - such as capitalism - as well.

We make a choice to add to our costs by protecting our environment and providing additional benefits to our denizens. We could forego these benefits to make our labor cheaper, as some policy makers seek to, but do we want to live in that environment? That is another form of comparative advantage in a non-economic sense.