Transcript CH 14-16 macro gnp money

Ecological Macro-economics:
GNP and Money
Questions for Next Three Classes
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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)
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Read about the crisis daily!
What is Micro-economics?
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“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?
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Focus on economy as whole
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Aggregate demand, GDP
Unemployment
Growth rate
Price levels (inflation)
Goals of Conventional
Macroeconomics
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Continual economic growth
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To provide for ever-increasing numbers of
people
To improve the environment
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To end poverty and distribution problems
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Environmental Kuznets Curve
Conventional Kuznets Curve
To provide enough jobs
Goals of Conventional
Macroeconomics
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Stabilize prices
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Why do we want stable prices?
Who suffers most from inflation, debtors or
creditors?
Provide full employment
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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 2000.
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?
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The invisible hand
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Allocative function of prices
Say's law
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Supply creates it's own demand
Why Do we Need
Macroeconomics?
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Great depression
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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?
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Inflation
Why Do we Need
Macroeconomics?
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What is major factor in determining aggregate
demand?
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Distribution
International trade
Emergence of Macroeconomics
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Response to crisis
Created new indicators
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GNP
Unemployment
Inflation
New policy tools (or at least new
understanding)
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Monetary policy
Fiscal policy
Emergence of Macroeconomics
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New Institutions
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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 nonmarket goods
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Fair distribution
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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?
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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?
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Depends on what it is intended to measure
Defensive expenditures
Depletion of natural capital
Changing costs, e.g. computers
What are alternatives to GNP?
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MEW
ISEW
GPI
What’s the problem with these measures?
GNH
Quality of life
Does GNP Measure Welfare or
Costs?
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Inelastic demand
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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?
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Medium of exchange
Store of value
Unit of account
End in itself?
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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’
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Increasing exchange value. Money as an
end in itself. No entropy, no limits.
• Financial speculation M-M’
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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
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– Interest payments and the need for growth
How is new money created?
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Credit and reserve requirements
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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
Money is destroyed
When bank is repaid
+ interest
Do Banks Create the Value that Requires New Money?
Counter-cyclical nature of
money creation by banks
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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
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Difference between the value of money and
what it costs to print
Who is entitled to seigniorage?
Virtual Wealth
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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?
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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
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Stock markets, real estate
Speculative exchange in the global economy
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Buying and selling of goods and services is about
$30 trillion per year globally
Buying and selling of paper is about 1.5-2 trillion
per day, or 500-700 trillion per year.
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Trading $1000/second, how long would it take to trade
2 trillion dollars?
How long has this been going on?
Speculation and instability
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Financial bubbles: Loans to purchase stocks,
real estate (leverage)
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Leverage about 30:1 for investment banks
15:1 for commercial banks
Positive feedback loops
International speculative flows
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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 byproduct of the activities of a casino, the
job is likely to be ill-done.”
-John Maynard Keynes
Financial capital and natural
capital
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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
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What happens to jobs when the stock market
crashes?
Great depression, tequila crisis, Asian flu
Financial capital and social
capital
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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
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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?