Ecological Macro-economics: GNP and Money

Questions for Next Three Classes ● Why is macroeconomics important, and how is it different from microeconomics? ● What is ecological macroeconomics? ● Is GNP a measure of value? (brief) ● What is money and how does it work? ● What is the role of speculation, and how has it contributed to the current crisis? ● What can we do about the current ‘crisis’? (a question for the next several weeks)  Read about the crisis daily!

What is Micro-economics? ● “The study of the individual parts of the economy, the household and the firm, how prices are determined and how prices determine the production, distribution and use of goods and services.” ● Is this accurate? ● Also known as price theory

What is Macroeconomics? ● Focus on economy as whole  Aggregate demand, GDP  Unemployment  Growth rate  Price levels (inflation)

Goals of Conventional Macroeconomics ● Continual economic growth  To provide for ever-increasing numbers of people  To improve the environment ● Environmental Kuznets Curve  To end poverty and distribution problems ● Conventional Kuznets Curve  To provide enough jobs

Goals of Conventional Macroeconomics ● Stabilize prices  Why do we want stable prices?  Who suffers most from inflation, debtors or creditors? ● Provide full employment  What is full employment?  What is the response on Wall-street when employment declines?

Headlines: Productivity Grew at Fastest Rate Since 1983 Companies' output surged at a 10.3 percent annual rate in the period, the biggest increase since the third quarter of 1983, a pace that was even better than the previous estimate of 8.8 percent. Meanwhile, workers' hours increased at a 0.8 percent rate in the quarter, the best showing since the first quarter of And unit labor costs fell at a 5.8 percent rate in the quarter. The combination of rising output and lower costs is a big reason why corporate profits were as strong as they were in the third quarter, economists said. "Businesses were able to increase margins and hold prices down," said Sung Won Sohn, chief economist at Wells Fargo Bank. "This is very good news for the economy as well as corporate profits. But employers have probably squeezed as much as they can out of this orange."

What Does Microeconomics Say about the Macroeconomy? ● The invisible hand  Allocative function of prices ● Say's law  Supply creates it's own demand

Why Do we Need Macroeconomics? ● Great depression  What happened (is happening)?  Idle factors of production: labor, capital, land  Reflexivity (positive feedback loops)  Distribution  Lack of aggregate demand ● What happens when there's too much aggregate demand?  Inflation

Why Do we Need Macroeconomics? ● What is major factor in determining aggregate demand?  Distribution  International trade

Emergence of Macroeconomics ● Response to crisis ● Created new indicators  GNP  Unemployment  Inflation ● New policy tools (or at least new understanding)  Monetary policy  Fiscal policy

Emergence of Macroeconomics ● New Institutions  New activism of fed  Social security  Social welfare  IMF  World Bank  ITO--> GATT -->WTO ● How does this relate to emergence of ecological economics?

Ecological Macroeconomics An end to growth –'optimal stopping rule' for the economy  Efficient allocation between market and non- market goods ● Fair distribution  Fair distribution of the commons  Fair return to labor and capital ● Job and income stability ● Price stability means to above ends

The Real(?) Economy: GDP

What is GNP? ● Returns to labor, capital, and natural resources ● Market value of final goods and services purchased by households, government and foreigners (net) in a given year ● Real vs. nominal ● What is opportunity cost of increasing GNP?

What are flaws with GNP? ● Depends on what it is intended to measure ● Defensive expenditures ● Depletion of natural capital ● Changing costs, e.g. computers

What are alternatives to GNP? ● MEW ● ISEW ● GPI ● What’s the problem with these measures? ● GNH ● Quality of life

Does GNP Measure Welfare or Costs? ● Inelastic demand  What happens to share of food and energy in GDP when quantities decline? ● Case of health care: Should we strive to maximize expenditures? ● Consumer surplus ● GNP is a measure of costs, not benefits

The Monetary Economy: Money

What is Money? ● Medium of exchange ● Store of value ● Unit of account ● End in itself?  Island of Yap and Fort Knox

Origins of money simple barter C-C’ ● simple commodity production C-M-C’ – Increasing use value. Self limiting.

Money as a medium of exchange IOU is destroyed or used again

Evolution of money capitalist circulation M-C-M’  Increasing exchange value. Money as an end in itself. No entropy, no limits. Financial speculation M-M’ – Obeys laws of math, not physics – No limits. Anti-entropic? – Does not create value – Redistributing value – Destroying value?

Where does new money come from? ● With a given money supply, what happens when the quantity of goods and services increases? ● Where does the new money come from? The fractional reserve system – Interest payments and the need for growth

How is new money created? ● Credit and reserve requirements  Reserve requirements: bank must have cash to cover about 5% of deposits  $100 dollar deposit allows bank to make $2000 in interest bearing loans

Money creation by banks + interest Money is destroyed When bank is repaid Do Banks Create the Value that Requires New Money?

Counter-cyclical nature of money creation by banks ● The speculative boom and impact on money creation ● The credit crunch and its impact on money creation ● Could we possibly come up with a stupider system?

Interest payments and distribution

Seigniorage ● Difference between the value of money and what it costs to print ● Who is entitled to seigniorage?

Virtual Wealth ● Aggregate value of assets we abstain from holding in order to hold money instead ● Is this part of the real wealth of the community?

Who should get the benefits from money creation? ● Money as a public good ● Reducing reserve requirements and financing government expenditure through seigniorage ● $90,000 interest free government loan to 18 year olds? ● Would it need to be a loan?

Speculation ● Stock markets, real estate ● Speculative exchange in the global economy  Buying and selling of goods and services is about $30 trillion per year globally  Buying and selling of paper is about trillion per day, or trillion per year. ● Trading $1000/second, how long would it take to trade 2 trillion dollars?  How long has this been going on?

Speculation and instability ● Financial bubbles: Loans to purchase stocks, real estate (leverage)  Leverage about 30:1 for investment banks  15:1 for commercial banks  Positive feedback loops ● International speculative flows  Rate of change and our understanding of the economy  Herd behavior  Tequila crisis, Asian flu, etc.

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by- product of the activities of a casino, the job is likely to be ill-done.” -John Maynard Keynes

Financial capital and natural capital ● What grows faster, trees in the forest, cod in the ocean, or money in the stock market? ● How do you maximize profits?

Financial capital and human capital ● What happens to jobs when the stock market crashes? ● Great depression, tequila crisis, Asian flu

Financial capital and social capital ● Social capital = the norms and networks that enable collective action. Trust. Social cohesion ● Any links between speculation, income distribution and cohesion? ● Do you trust the speculators?

Financial capital and built capital ● Investment in productive capacity might bring returns of 7%/yr. when the economy is doing well, while the stock market might earn 16%. ● Boom 90s and stock buy backs ● Financial contagions and the impact on built capital

What do we do about the current crisis?