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Economics Shape Society

Economics shape society in different ways, but its forces are indisputable. There are different "schools" of economic theory. Our interest here at WelderDestiny is not to study economics for its own sake, so we do not necessarily need to get involved in the debates regarding which economic theory best describes reality.

Our interest in economics is to understand enough so that we can realistically predict how economics will form future society. In turn, this can tip us off about the subsequent impact on the work and the world of the Welder.

While technology is very important in how the world of tomorrow will look, the economic forces are probably more important. The importance lies in the fact that economics is nothing more than the study of human nature being applied to society at large. All human traits and foibles, as a group, are exposed in the realm of economics.

This web page is essentially a compendium of articles published in The WelderDestiny Compass that deals with how economics shape society. It assists those that want to follow our discussion regarding economics without having to actually read all the back issues of The WelderDestiny Compass. It will be updated every time we discuss how economics shape society.

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Compendium of Articles on How Economics Shape Society

As you read the compendium of the articles on how economics shape society within this page, please keep in mind that these articles also have reference to other articles within the same e-zine edition in which they were originally published. This may make the different articles below appear a little disjointed. If you would like to see the broader context of any specific article, please click through to the full e-zine to get a more complete picture.

The other advantage of looking at the whole e-zine is that there may be supporting articles posted there by some of our readers, and their insights may just be what you are looking for.

The Nature of Money

Issue #004 - January 25, 2017 - Titled: The Sharing Economy & Utopian or Dystopian Future Part 1

When money was “invented”, the fundamentals of the world economy changed in a subtle but important way. Suddenly a “currency” was introduced that was a representation of value, rather than having inherent value itself. As such, money is actually a “score keeping” mechanism to show who plays the financial game the best. The value of money is that it is the representation of a claim on goods or services. Money gave rise to banking, which has become the cornerstone of modern economies.

There are obvious differences between gold, paper money and electronic money, but from an economic perspective they largely act in a similar fashion, as long as the paper or electronic money is controlled to act in a way similar to gold. The main difference is a natural limit on the amount of gold available, while the limit on the amount of the other currencies needs to be artificial in nature.

Currencies within a banking system are mostly created through credit. Some of it by central banks, but most of it by the commercial banks. This system is called the fractional reserve banking system.

It is instructional to note that when money is spent, it is not “used up”. It merely moves from one bank account to another. Over time, money “builds up” in the banking system, much like the score builds up on a score board in a football match.

It is also interesting to note that money and value are not the same thing, although values are usually expressed in terms of money. For instance, when the value of assets such as shares on the stock market increases, there is no additional money created to reflect this value. Value is attributed, based on the ruling sentiment at the time. When the market sentiment changes, the values will also change, although no money was necessarily created or destroyed in the process.

In the interest of brevity, I have not gone into details regarding the economic principles discussed, but if you are interested in a more detailed description, please click here…

To read this article in the context of the full e-zine, please click here...

Money Flows

Issue #005 - February 01, 2017 - Titled: Bitcoin and Blockchain & Utopian or Dystopian Future Part 2

While the concept of “trickle-down economics” has taken hold since the time when Ronald Reagan was the American president, economies have always worked exactly the other way round. Value is added by lower economic classes, which then trickles up the socio-economic pyramid.

The money that reaches the top of the socio-economic pyramid is then exchanged for “investment assets” such as property or company stocks.

Vilfredo Pareto showed that as a general rule, 80% of wealth (not money) ends up in the hands of 20% of the population.

Businesses are the primary mechanism for recycling money down to the bottom of the socio-economic pyramid. In particular, jobs provided by the businesses pump the money down to the lowest socio-economic levels. This money is what is required for people to survive, as they spend it on their needs and wants, and re-starts the cycle of trickling back up to the top of the pyramid where the money can again be changed into wealth by the “capitalists”.

When most “jobs” in big business have been replaced by machines, then the mechanism whereby big business pumps money to the bottom of the socio-economic pyramid through employment starts losing its prominence. The only solution is that people lower on the socio-economic pyramid are forced to become “solopreneurs”. In the future, you will need to own your own job, rather than relying on a single employer to look after you.

Do you have the skills necessary to thrive in the solopreneur economy?

In the interest of brevity, I have not gone into details regarding the economic principles discussed, but if you are interested in a more detailed discussion, please click here…

To read this article in the context of the full e-zine, please click here...

Effect of Debt on the Economy

Issue #006 - February 08, 2017 - Titled: Nichetopia is the Future of Engineering

The other major factor to consider when talking about money, is debt. As we have previously discussed, when banks issue debt, they are in effect making money from thin air. The more debt, the more money there is in the economy. 

The interest rate is the cost of debt. As the interest rate goes down, asset values increase. These asset values are used as collateral for further debt, therefore this is a self-feeding mechanism. 

The problem is that this can happen in reverse when asset values fall due to economic shocks. This leads to credit crises. Due to the very high levels of debt currently, and the history of reserve banks printing money to support the banks during these crises, it is only a matter of time before confidence in the paper money system is lost. Exactly how much time, is anybody's guess. I am surprised that it has not already happened. 

I believe that the way in which government will try to restore confidence in the system is to introduce gold backed electronic currencies. 

If future currencies are to be gold backed, it will obviously result in a big upheaval in the gold market, and could conceivably destroy a lot of “paper wealth” in the process. This will not be a big problem if you are keeping your wealth in hard investment assets, rather than paper assets, just like the wealthy do! 

In the interest of brevity, I have not gone into details regarding the economic principles discussed, but if you are interested in a more detailed description, please click here…

To read this article within the context of the complete e-zine, please click here...

Economic Rent - the Window on the Economy

Issue #010 - March 08, 2017 - Titled: Google is Selling You

Ever hear anybody mention the “economic rent” on the finance programs on TV? Me neither! So, what is the economic rent? Here is my definition:

Economic rent is value added to an asset without the owner of the asset having to invest further capital.

Let us look at an example in real estate, to understand this definition better.

If we own a piece of land in an area that is zoned as “rural”, it may have quite a low value, even though it is quite large. Let us say that the market value is $50 000.

Let us say that the local government then re-zones the land for residential use. Suddenly we can sell the land to a developer for possibly $1 000 000. Where did this additional $950 000 value in the land come from? I did not have to do any additional work to add that value. It came from the people that will be using the land in the future.

The additional value was introduced because the “utility value" of the land increased, because it is now possible to generate a higher income out of that piece of land than before. This future utility value of the land is called the economic rent.

In other words, the future utility value has been capitalised into the price of the land. The easy way to think of this is that the increase in value of an asset greater than any amount of money that I invest into that asset, is an increase in the economic rent. This economic rent change often results from the efforts of other people, so in effect they are paying for my economic rent increase.

Sometimes the economic rent can be taken from one party and bestowed on another party. As an example, think of the taxi industry. Taxi licenses were initially issued to regulate the taxi industry. Due to these licenses being limited, they started having a higher value than the price they were originally purchased for. This is an increase in the economic rent associated with the licenses. Taxi customers paid for that increase. At their height, New York taxi licenses were worth more than a million dollars.

Enter Uber, the ride sharing company. Uber enabled essentially anybody to become a taxi operator, while addressing the trust and security issues inherent in a service such as a taxi service. Almost overnight the economic rent value “trapped” in the taxi licenses started to evaporate. The enterprise value of Uber has however grown to around $18 billion. The economic rent enclosed in the taxi licenses are now enclosed in the Uber platform.

So, we hear you ask, how does this affect the welding and fabrication industry? I am glad you asked!

In many areas, our industry is highly regulated. This regulation enabled business models that captured economic rent that was linked to the regulation. Think of the economic rent associated with code compliance. Think of the economic rent associated with qualifications and certifications. Think about how your personal "market value", or the business model of a company you are involved with, is affected by the current regulations and associated economic rent. Now think how such economic rent could be impacted by a "welding Uber".

In the interest of brevity, I have not gone into details regarding the economic principles discussed, but if you are interested in a more detailed description, please click here…

To read this article within the context of the complete e-zine, please click here...

Ineffective Economic Measures

Issue #018 - May 03, 2017 - Titled: Ineffective Economic Measures

While it is human nature to manipulate measures to give the answers you are looking for, it is only reasonable to expect that the effectivity of economic measures will change with a fundamental change in economic models. 

In previous editions of The WelderDestiny Compass, we looked at a number of ways in which we anticipate the economic models to change. In particular we concluded that the future of engineering jobs was going to be neither utopia, nor dystopia, but rather "nichetopia". To take a look at that edition, click here...

This vision is in line with what many people call the "gig economy". In an economic system where most people have many different "jobs" on a casual, rotational or contract basis, the whole idea of economic measure through Gross Domestic Product (GDP) does not make as much sense as in the past. 

As people can easily access knowledge to do just about anything themselves, (just Google it, or Youtube it, or ask your AI) the economic drivers for personal services and even some products change. A lot of work that was previously "outsourced" will become DIY, as people have more unproductive time "between jobs". 

As an example, if I have a lot of unproductive time, I may decide to mow my own lawn, rather than employ a gardening service. Or, I may decide to fix my own computer rather than take it to the computer repair shop. 

Also, as the "sharing economy" takes off, there will be much more efficient use of assets, resulting in less product sales. (Think ride sharing, accommodation sharing etc.) 

In all these examples, the nett effect is for GDP to decrease, although the actual economic activity has not changed. In fact it has increased, but because less money is changing hands, the GDP measure shows a decline in economic activity. The GDP measure is giving us the wrong information. It has become ineffective as an economic measure.  

With a decrease in GDP, the normal taxation models will come under pressure, leading to governments attempting to broaden their taxation base. The only real place to address these changes from a taxation point of view will be consumption taxes (e.g. value added tax; goods and services tax etc.) and land taxes.  

A "value added land tax" actually has the best potential to even the playing field between the rich and the poor, but this is unlikely to prevail, because it is the rich that have the strongest influence over the political agenda and consequently what ends up in the tax laws.

To read this article within the context of the e-zine it originally occurred in, click here...

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