In The Beginning
I am not an economist but I had that feeling that New Zealand was not doing very well. It was 2003 and when I began looking for answers it seemed that indeed New Zealand was not doing well and in fact it was running down hill and had been doing so since around 1950.
The answer seemed to lie in Economic Growth and perhaps GDP was the measure to use. Not because it was the best measure but because economists had been using it for many decades and for all countries so we could at least get some idea of how we were doing compared with the rest of the world.
So I emailed a few of my friends and explained that we ought to get some growth into the economy and stop sliding down hill and start moving back up to where we once were.
The next Saturday at the squash club, when we were sitting down for a small ale, my very good friend pulls my email out of his pocket and says, "Well, what are you going to do about it?"
And so the Foundation for Economic Growth was born.
When I found more information about GDP history around the world I had the information for the graph you see on the Home Page. New Zealand since 1950 had indeed been a disaster and although it looked as if the David Lange and Roger Douglas government had managed to pull things around and start the upward growth spurt and National had not done anything to impede the natural growth capabilities of lower taxes and more freedom. But the new Helen/Michael Labour government seemed to us to be aiming in the opposite direction.
During 2004 we set up our Society with the original 15 members from amongst our friends and signed up a further 45 members in the ensuing year or two.
We were off to good start! Or at least we thought so.
Sep 4, 2007, 15:28
The Search For The Truth.
Then of course we had to find out how our economy worked and was it as simple as just increasing GDP. Like all the real economists I discovered that the answer is, "Yes and No".
Yes, GDP was a good measure of wealth in a country and since it had been widely used and calculated for all countries for more than 100 years it showed lots of interesting comparisons as countries became more or less wealthy compared with each other over the years. Argentina, for instance, was right up there with us (we were at number 2) in 1900 but had plummeted to number 100 by 1950 and is only recently pulling itself up the table and is still well below us today. We were level with Australia in 1973 at around number 17 but since then Australia has gone up a few places and we have declined to 38. People in Australia were wealthier than us. They were living in a high waged society. No wonder so many Kiwis were shifting over the Tasman.
It surprised me to learn that their is no natural order of things and that in fact countries could stuff things up and make their people very poor. Just like Mugabe is doing for his people in Zimbabwe at the moment. Other countries could break the habits of many generations and suddenly start climbing the wealth mountain in dramatic spurts - like Ireland for instance.
So, on the face of it we should increase our GDP growth rate and if we could maintain it at a higher rate than other nations at around the same level as ourselves we would become a country of wealthy people once more.
No, because there is so much behind the simple GDP number that we need to understand. For instance, part of the make up of GDP is growth in government. So a burgeoning public sector would help show an increasing GDP but as we learned, larger governments produce poor people. (This is obvious when we consider the socialist countries of last century.) When the government ran everything the growth was reversed and countries with some wealth became poverty stricken.
But to get back to the main line we did manage to find out what would increase GDP and the wealth of all citizens. And we found out that economic growth made everybody wealthier. Sure, wealthy people got even wealthier but everyone else got wealthy as well. Thus economic growth would make our poorer citizens wealthier. The other big advantage of running a society aimed at economic growth was that it had to be a very free society and it had to have a very small government. This provides much opportunity for the least wealthy citizens to work hard and become as wealthy as their ambition dictated! And studies showed that although there was always a bunch of people struggling on low incomes in every society - in the wealthy growth oriented countries this bunch of people was always changing. That is, people didn't remain poor. Some of them became wealthy and thus served as an inspiration to others. Others might make mistakes and find themselves (temporarily) down but not out!
Sep 4, 2007, 14:46
What Is Economics?
Way, way back in 1972 I went back to 'Varsity to study Economics 101. I found myself studying Maths around broadly sketched Supply/Demand Price curves. I was quite good at this but I didn't learn much economics.
This was a fortunate experience because when I came back to study Economics this time, I decided to teach myself from the InterNet and I have managed to miss out on the standard indoctrination.
A lot of modern economics revolves around econometrics, which is using maths to explain how economies work. Unfortunately this doesn't work in the real world. The reason for this is twofold:
1) In Economics we cannot perform reproducable experiments. In Science, such as Physics, we can do an experiment, for instance, which shows that as we apply pressure to a fixed volume of a gas the gas will reduce in volume. And if we keep the temperature and everything else constant during this experiment we find that the same thing happens each time. When someone else does the same experiment they get the same result. When everybody finds that there is a straight line relationship between pressure and volume our hypothesis becomes a law. And it will remain so until someone finds something else when performing this experiment. This is Science.
Physics is a science but economics is not. In Economics we cannot perform experiments where we hold all variables constant except the one we want to measure. Economies have too many variables and are too fluid to even contemplate such a course of action. There are techniques (Multi-variate analysis) for comparing a number of continually varying attributes but this gives approximate conclusions and works best with just a few variables. Economies have thousands of variables which makes it impossible to measure or even estimate all of them.
2) Physics is concerned with the real world which consists of 92 natural elements and few man-made ones. They are made up of atoms which are very small. A million carbon atoms is about the same as a human hair for instance. So when we start experimenting with materials in Physics we are looking at things which consist of an enormous number of atoms. A cube of hair as long and as deep as the width of one hair for instance would consist of 1,000,000,000,000,000,000 atoms if they were all carbon.
The world of economics is concerned with human actions which are on completely a different scale. We have billions of differing actions and only thousands or millions of examples of identical ones. Quite the opposite set of circumstance from real world materials as studied in Physics. The same kind of mathematics is not suitable for dealing with both phenomena. Trying to use calculus on economic data will not produce real world results like it does in Physics.
So econometrics (the maths of economics) doesn't work very well in predicting the future.
Economics in the real world is the study of human actions. It is the study of people interacting to satisfy their needs. Early societies learned that if they could agree on what to use for money, people could become more specialised and instead of the baker exchanging five loaves for a pair of sandals he would sell his loaves for money and then use the money to buy sandals or anything else as and when he needed things.
So society changed from simple tribes and bartering to complex civilisations with large towns and many human interactions. Specialisation increased to meet the needs of the times.
Economics is the study of all these human interactions.
Sep 3, 2007, 12:46
But, what is money?
Many different things have been used for money but the thing that worked best was gold, closely followed by silver. These metals were rare so had value to people and could be divided up into different sizes to become coins of particular weight and value. Unfortunately people being people and not angels were inclined to cheat a little and perhaps file a little off each coin. Kings were also inclined to mint coins with more and more base metal in the gold and thus defraud the populace. If only we could be trusted!
Later in civilised society people started to leave their gold for safe keeping with goldsmiths and receive a receipt for the amount stored. Since anyone could take the receipt back to the goldsmith and reclaim the gold the receipt became a proxy for gold and thus paper money was born. How convenient. We no longer had to lug around heavy weights in the form of coins. China discovered this over 1000 years ago - they called this paper, "Fly Away Money".
After a time the goldsmiths realised that they did not have to have as much gold in the store out back as they had pieces of paper issued to customers. The chance of everyone wanting their gold back at the same time seemed very small so they started using the gold as if it was their own and as long as they kept "enough" on hand to meet redemptions they were making a fortune and had no problems.
Thus was born the modern banking system.
The original banking concept consisted of two types of deposits. The first was a temporary deposit where the customer could call at any time to reclaim his gold and this type of deposit was really storage for which the bank could charge and the bank would KEEP the gold in a safe place and return it on demand. On demand deposits returnable at any time and stored for a fee. The gold deposited would be acknowledged by giving the customer bank notes to an equivalent amount. Thus bank notes issued would equate to gold in storage.
The other type of deposit was a time deposit where the customer would lend the gold to the bank for a set period, such as one year, and receive interest payment for doing so. The bank would then lend this money to a third party who would pay a higher rate of interest and promise to return the gold at a certain time. The depositor would receive a certificate showing the details.
Sep 2, 2007, 18:08