Archive for the ‘Economics’ Category

A brief primer on money

May 27, 2009

In a barter based economic system, there are generally two quite difficult problems to solve. These problems are generally known as something along the lines of “coincidence of wants” and “store of value”.

Coincidence of wants is the n^2 problem. Briefly, in a barter economy there are O(n^2) exchange rates where n is the number of goods in the economy. If one of those goods is used as money (everything is traded into and out of that good), the number of exchange rates drops to O(n). This tends to reduce the problem of market thinness where markets function poorly due to a lack of participants.

Store of value is just that – people generally want to store the “value” of the stuff they create, both through time and space. It is difficult for a dairy farmer to sell 1000 gallons of milk a year from now, across the country. It is much easier to sell the milk locally and travel across the country at the appropriate time and to the appropriate place with cash in hand.

To solve both of these problems, money should generally be small, durable, value dense (both in terms of volume and weight) and resistant to inflation.

The carrying capacity of the Earth

April 3, 2009

In talk about environmentalism, the term carrying capacity in relation to the earth often comes up.

While I don’t think anyone has a firm grasp on the theoretical carrying capacity of the Earth, I can get within one or two orders of magnitude.

Fundamentally, the earth’s carrying capacity (assuming the goal is to maximize the quantity of human life) is governed by three things: oxygen in the atmosphere, availability of fresh water and availability of appropriately nutritious food. Fresh water isn’t particularly a problem – people are (with sufficient wealth) already extremely good at creating filtration systems capable of eliminating fresh water as a limiting factor for growth.

The oxygen issue is actually not as much of a problem as it might seem – the optimal diet for humans is photosynthesizers, as such a diet most efficiently conveys the sun’s energy into human bodies. I am optimistic that said food source could be tuned sufficiently so that the sun’s energy striking the earth would be the limiting factor in human carrying capacity.

To get an idea of what the earth is capable, imagine all life as we know it stripped away from the surface of the earth, which is flattened and filled in, and covered in a constant surface of 10 meter deep algae grow tanks, which are consumed for food.

While this solution ignores the earth’s core as an energy source, it is probably within a few orders of magnitude of the maximum number of people who could possibly be supported on the planet.

Obviously, we are no where close to such a situation. Given humanity’s fractious past, it is unlike that we will ever approach such a state.

Update: I am not suggesting that this would be a particular enjoyable experience for most of the people involved. It is merely an exercise that attempts to introduce at least a modicum of rigor to the issue.

The gift of the classical liberals

March 18, 2009

In history, there have been largely three theories about how to distribute wealth, generally associated with political movements.

The first theory (chronologically) is the conservative theory. This theory says that the people who should control wealth are those who are the strongest militarily. This is a very stable solution, but it doesn’t really work all that well – it generally keeps societies at their Malthusian limit; people who are strong militarily are generally much better at taking wealth from others (a negative sum game) than creating it (a positive sum game). There are very few people who believe in this theory, and those that do are generally in charge of very poor countries.

The second theory is the classical liberal theory. This theory says that the people who should control wealth are those who are the best at making new wealth. This actually works out really well – giving lots of wealth to people who are really good at making wealth tends to result in them making… even more wealth.

The third theory is the progressive theory. This theory says that the people who should control wealth are those who are the smartest. On its face, this actually sounds like a good idea. In practice, being smart doesn’t mean that one is good at increasing the amount of wealth in the world – it typically means that one is deeply concerned with displaying how smart one is. There is a pretty deep problem with this theory, and that is that historically, people have only started to believe in the progressive theory after lots of time on the classical liberal theory. What ends up happening is that either another culture takes over, or the nation consumes more than it produces until there is nothing left and then it moves back over to the conservative theory, after a great deal of pain and suffering.

While the conservative theory is attractive in its stability, it is the classical liberal theory which truly deserves to shine – it is far and away the best way (that we know of) to increase the welfare of a nation.

Whither China’s Surplus

February 24, 2009

Just read a post at Broken Symmetry called Famous Last Words.

This is a typical doom-and-gloom piece about how China will overtake the US in x years with its GDP growth or, in this case, its reserve (growth implied) as evidence.

I just don’t buy it anymore. China’s $2.2 Trillion in reserves could, with multiplier effects, have meant $6.6 Trillion for China’s citizens – or about $6600 per person, almost 43 times the poverty level.

Instead we are supposed to worry that China… could do exactly that some day in the future? Except that we just learned a very painful and obvious lesson – if you start selling debt in bulk, the market price of that debt plummets. I have no idea what the price of US Treasuries would tumble to if China tried to sell off its debt in short order, but I would not be surprised if $2.2 Trillion turned into $1.5 Trillion quite quickly (remember, there are only $833 Billion in existence as of today).

The only real reason I can see for the current Chinese policy is one that is domestically focused. Specifically, my guess is that the Chinese don’t want China to turn into a liberal democracy (there are already signs that it is moving in that direction). The Chinese are probably afraid that a wealthy populace will start demanding things like right and equal treatment under the law… and before you know it, they’ll be Canada. So instead, China is sucking the country dry to subsidize their manufacturing sector and relying on US demand to fuel their supply.

Which means that the growth China has had is Chinese manufacturers taking over the US and European markets, but they simply can’t grow faster than the US and Europe after a while, because there is little organic Chinese demand for goods, do to Chinese poverty.

I’d love to hear a plausible alternative explanation, but so far, that’s the only one that makes sense to me.