Discussions on the Economics of Poverty
Part 2. Mexican Pizzanomic Theory
A nation's prosperity requires a vast and active productive capacity, and this can happen only when there is a vast and active number of consumers who want the products of industry and have the cash in hand to buy them.John B. O'Donnell
This astute observation can lead to a rational analysis of aggregate supply and demand in an economy if only economists would admit their error in describing Q(macro) as a function of P(macro) [a function that is tautologically impossible] and turn to the variables that truly affect aggregate supply and demand.Eyler Coates
Perhaps you would be good enough to explain what you mean with reference to a nation in poverty for those of us who are not up on our P's and Q's.John B. O'Donnell
"A nation in poverty" is an irrelevant condition when one searches for the cause of that poverty. It is not the effect (poverty) that leads to its cause but cause that leads to effect.
Your observation relating production to the ability of the populace to buy that production is an overlooked cause of the wealth of nations. The value of productive capacity is as much determined by the ability to sell the produce of that capacity as it is to the existance of the capacity itself. Therefore the economically viable society has the right to claim a portion of the value of production capacity as it is partly the cause of that value. However, determining the best division of value between society and the other claimants cannot even be addressed until the existance of that cause is accepted.
For example, would the ability to produce ten billion cars a day be worth much in a society that can only afford to buy one car a day? The answer is obviously -- no. But, in allocating the profits of productive capacity, economic theory only considers dividing the value produced between the capitalist(s) who own(s) the capacity/capital, the labor who uses that capacity to build cars and the owner of the land the factory/capacity occupies. If the other factor (the economic viability of society) that contributes to the value produced were to recieve its share then the economy could grow at a much more rapid pace and the very concept of involuntary poverty could well be eliminated.
The problem would then become one of determining the proper allocation of the value produced among four factors of production -- land, labor, capital and society -- not the long believed three of land, labor and capital. Until economists relinquish their false assumptions of the cause(s) of macro-economic growth they will not be able to conduct a true causation analysis. My reference to P's and Q's was to the practice of economists to falsely depict the supply-demand functions of macro-economics in a fashion similar to micro-economics. In the case of micro they are well founded in their depiction, in the case of macro they only obfuscate the search for the true causes of economic growth and distribution within an economy at large.Eyler Coates
If the worker/consumer is paid only enough to buy beans and rice to live on, there will be great demand for bean and rice production, but for little else. If the worker is not paid a good wage, there can be no prosperity.John B. O'Donnell
Although this appears to some as self-evident, there is actually a distinction of import that must be made here. That distinction is the difference between wages and effective demand. Effective demand only requires that the populace be able to afford to purchase the goods and services produced, not that that ability must come from wages. In fact, if wages are held low, the variable costs of production are also held low, and that is one of the variables that cause economic growth. [I would like to thank Don Dale for pointing out to me in some private e-mail that it is not the increases in the "monopoly tax" from my proposed re-division of the "fixed cost/variable cost" ratio that causes an increase in production, it is the reduction in variable costs that does so.]Eyler Coates
What you cite is no doubt so at marginal increments in a developed economy. But in an undeveloped economy where the disparities are gross, such minor adjustments might provide a slight stimulus to the overall economy, but it would not seem to be something that could be relied upon to correct a general condition of abject poverty.John B. O'Donnell
Again, when looking at causal relationships, it is folly to grab at extraneous variables. The principle is known as "Ockham's razor." Until it is known what causes economic growth it does no good to assume the causes are different in developed and undeveloped economies. While your opening observation is right on the mark, introducing irrelevancies only obfuscates the importance of your observation.
The resources that allow the demand function to increase do not need to be from wages, they can come from elimination of income taxes with a corresponding reduction in nominal wages and from a "Citizen's Dividend."Eyler Coates
The impoverished are "lucky" in that they pay no taxes and therefore do not qualify for a "citizen's dividend."John B. O'Donnell
When the analysis of economic cause and effect is not constrained by economists' penchant to depict Q(macro) as a function of P(macro) then the only "taxpayers" become those who exercise a privilege granted by government (society) and no individual is then required to pay any tax. As to the "Citizen's Dividend," I have no idea where you picked up the notion of the impoverished not "qualifying" for this stipend, but it is a total fabrication on your part. The dividend is to be distributed to all citizens with only an age condition imposed to prevent the creation of a "baby production business" and to ultimately replace our fraudulent Social Security scam.
The tax reduction can only be accomplished by replacing the lost government revenue and that is done with my proposed "monopoly tax." But, in order for corporations to be able to pay this tax they must be relieved of the cost of paying workers the portion of their wages that are presently paid as income taxes. Thus the requirement for a corresponding nominal wage reduction. These two concurrent changes allow the reduction of the variable cost of production without changing the total cost of production.
The other source of ability for the society to purchase the things produced I call a "Citizen's Dividend." This is a distribution by the government to each and every citizen (Some adjustments for age would be required to prevent creating a "business" of having children and to replace the present fraudulent "Social Security" system.)
There are several ways of justifying this distribution. One is the simple expediency of the economic advantage it creates. (This is demonstrated in my pamphlet "Three Steps ...") A second is the philosophical argument to "pay" the populace that surrenders property. (i.e. -- recognizing that private property, however good it may be, is an invention of mankind, not an inalienable grant of privilege from God.)Eyler Coates
We are not talking about the value of the money. We are talking about the AMOUNT of wages relative to the cost of things. In their attempts to lower costs, it seems that producers are forever wishing to lower wages to the point where the wage earners cannot buy the products of industry. Wage earners, on the other hand, are forever trying to RAISE wages to the point where they can buy more. The minimum wage incorporates that struggle into a government regulation.
The American worker has THREE TIMES the buying power of the Mexican. That means he is better able to buy the products of American industry, which translates into prosperity for all, and enormous wealth for the capitalists. The Mexican, on the other hand, has insufficient wages to support a great economy.Jim in Boulder
So far, so good, but then again all that you have said so far is that if a country in general has a high real wage, then that people will be materially wealthy compared to a people with a real wage that is, on average, low. This is all pretty much true by definition.Eyler Coates
There are wealthy Mexicans, of course, but they maintain their wealth by extracting high profits. But if they paid their workers higher wages relative to prices, not only would their workers live better, but they themselves would be rolling in pesos.
The point is, this relationship between wages and prices varies. It is THREE TIMES HIGHER in the U.S. than it is in Mexico, and that, I say, is the explanation for a prosperous U.S. and a poverty-stricken Mexico. It is just the same as saying the U.S. worker is paid (at least) three times more than the Mexican worker for the same kind of work, prices remaining the same.John B. O'Donnell
While this does appear to be more an emotional outcry, it does contain an element of truth. The exception being that all things have limits, and the great exodus can continue only so long as there remains a viable society to consume. And then it stops, but there is little doubt that much harm, some of it quite permanent, will have been done in the meantime.Jim in Boulder
Two things. First, as I pointed out above, your statements rely on your method of converting the currencies being a good measure of living standard, and having done some work where I used both the market exchange rate and other methods of calculating a standard of living, I can assure you that the two often give substantially different answers. For example, average earning using the exchange rate as measured in China were supposed to be $500 a year. How can that be. How could anyone in the US live on $500 a year???Eyler Coates
As I explained before, your point is irrelevant, because I am not converting the pesos to dollars and then comparing what the Mexican could buy with those dollars in the U.S. I am stating what the Mexican worker could buy with his money in Mexico, and comparing that with what the approximately same American worker could buy with his money in America. Whether anyone living in the U.S. could live on the exchange rate equivalency of what an average Mexican earns is totally irrelevant to this discussion.Jim in Boulder
My oversight. You were indeed using a purchasing power comparison, and not what I originally thought.
Second and more importantly, don't you realize that what you are suggesting is a ponzi scheme on a grand scale? A should pay B a lot, so B can spend a lot in C's store, so she can pay D a lot so he can spend a lot in A's store. One thing about ponzi schemes that seems to pretty much always happen is that if you don't get in early you lose your shirt.Eyler Coates
A Ponzi scheme? Actually, what you describe as A-B-C-D-A is called the circulation of money.Jim in Boulder
No, A paying B who spends at C's business who pays d is the circulation of money. A paying B more so that they can spend more at C's business so she can pay D more etc. etc. is attempting to manipulate the circulation of money to get something for nothing. There is a difference.Eyler Coates
A Ponzi scheme is where early investors are paid dividends from the funds paid in by later investors. But in any case, both thoughts are totally irrelevant to this discussion. What is somewhat related to your point is the matter of owners/capitalists paying their workers a higher percentage of revenues.Jim in Boulder
And while not the same, I believe that the comparison is apt. In both cases people will get rich if they are in the loop early on, but not if they are in it later.Eyler Coates
The owner/capitalist would resist this, because he would feel that (1) he doesn't need to, since he can get all the labor he needs at the prevailing wage, and (2) such a policy would have the obvious and immediate effect of reducing his profits, which he is loathe to do. In fact, if he were the only one to do it, it would permanently reduce his profits and possibly reduce his own standard of living, if not bankrupt him. It is important to realize that there are some very wealthy persons in Mexico, and they are not particularly interested in doing anything that would appear to jeopardize their wealth. The only way this wage-price differential could be improved is gradually, so that economy-wide adjustments can be made, with increases in the amount of production to satisfy the increasing purchasing power.Jim in Boulder
And this is still the Achilles Heel of your solution, since you haven't done anything to increase productivity. I mean what makes you think that there is going to be any increase in goods? For more goods you are going to have to increase the supply of labor, capital, or the level of technology. I don't think that you can get much of a boost in labor supply in a nation where the unemployment rate is about 10.7% in normal times (1992 figure which predates the currency devaluation), especially if the vast majority of homes don't have the goods like washing machines and refrigerators needed to free up female labor. Significantly reducing the percentage of revenues going to capital can't be seen as doing much to help encourage more of it in the economy, and finally I don't think that carrying out your pizza economics is going to boost technology.
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