Week #3: ‘Ceterus Parabus’

Karl FitzgeraldCommentaryLeave a Comment

Tohm Curtis

As per week #1, the assumptions are what make Economics the ‘School of Thumbs’. This week though in a Finance subject we looked at the ‘supply and demand’ model of interest rates. It was a curious exercise in skepticism vs. standardisation.

Basically it said, that Money Supply and Money Demand are inversely related to interest rates. The higher the interest rates, the less demand for borrowing funds, but the more funds lenders are willing to supply. So the RBA can influence interest rates to try and achieve an interest rate ‘Equilibrium’. They were suggesting that banks would get shy about lending funds as the interest rates were lowered.

This didn’t seem to reflect the real world at all, so I raised my hand and said ‘Does this model work in reality? I mean if you look at housing, the lower interest rates and higher demand push the asset prices up, so banks are more than compensated with the value of the interest rather than the interest rate?’

The (abridged) answer was ‘Ceterus Parabus’ – the model assumes that asset prices remain constant (they don’t). It actually helped me understand what Michael Hudson meant when he said ‘A house is worth what a bank is willing to lend for it.’ One could make the argument that as interest rates drop, the banks have to lend MORE money (increase supply) to inflate the asset prices to account for the drop in revenue.

My point rests though in the dangers of ‘standardisation’ in Education, that is there is no real time allocated to skeptical inquiry, most of my fellow students spend the lectures scrawling endless notes. The crucial omission that we assumed ‘Ceterus Parabus’ could very well have been missed by my diligent note taking peers – they could graduate into the real world thinking that the model actually worked.

I don’t know if I’m right or wrong, they don’t teach me that (yet), but the point is that the models and formulas and functions are emphasised often at the expense of discussing the soundness of the assumptions they are based on.

Land Policy Failure Breeding Nationalism

Karl FitzgeraldHot IssuesLeave a Comment

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Creative Commons License photo credit: Maria Gertsovskaya

From South Africa to Bolivia to here in Australia, the failure to approach land as a human right rather than a speculative kite is breeding dangerous undercurrents amongst those excluded from ‘the property game’.

The young firebrand South African ANC youth leader Julius Malema again fired up the masses with these comments:

“You need land to do everything. Without land voting means nothing,” he said.

Malema said South Africans can vote until they are purple.

He said as long as they did not have the economy of South Africa their votes were useless.

“You vote and you still go beg,” he said.

An economic democracy is vital. We need our birth rights, our earth rights. Speculative privileges have superseded those fundamental rights through distortions in the tax system. Julius went on:

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Malema said he was told one should not talk politics of land and property or nationalisation because it would scare investors away.

“They invest in countries where there are civil wars. ” he said, adding that people should not believe the “lies” that investors would be scared off by talks of nationalisation.

Malema said Investors did not care about people and that they were interested in making profit.

Last night’s Today Tonight rang loud on the fear of Chinese investors buying up Australia. If a higher and flatter Land Tax was implemented on land valued yearly, the profits that attract foreign investors and agri-business would be greatly wound back.

Foreign investment in property is unproductive. No matter how much money is invested, investors can’t make any more land. The profits inherent in land as a scarce resource are the magnet for investment. It has little to do with providing housing for slum dwellers.

With our system there would be a re-balance away from land based profiteering and towards the provision of housing for a steady rate of return.

Nationalisation is not necessary. What is vital is capturing the community created rent (that capitalises into the massive property based profits). Private possession of land is still sacrosanct.

The catch is that this possession is based on the yearly payment of a land rent back to the community (once known as the government) in respect for the privilege of being a custodian of that piece of land. Outright ownership for 99 years is no longer reliant upon on a huge loan to banks.

The ANC has ignored the warnings of South African colleagues such as Godfrey Dunkley that bureaucratic land reform is a slowly imploding mess (witness Zimbabwe, not matter what the role of the IMF/ WB). Legal stouches and community infighting hamper who gets the land by the river and who gets to live next to the dusty quarry.

No farmer no matter what skin colour will voluntarily give up land they have cared for. Perhaps Mugabe and SA’s Zuma need to look at the speculative elite rather than race. Even then, we can’t put the blame on those lucky few, it is the system that needs changing.

Market forces directed by the tax system can do this much more effectively.

After 30 years of neoliberal dominance it is time that the people stood up and promoted an economic policy that delivers reward for effort for businessmen whilst simultaneously protecting the environment with a True Cost Economics system. Read more

News Flash! Today Tonight report the obvious!

Casey JenkinsCommentary1 Comment

Happy New Year!

Creative Commons License photo credit: Patrick Hoesly



I know! Shocking isn’t it?

This evening, according to advertisements, they’ll be reporting on a matter almost as ground breaking as those stories we know and love along the lines of ‘Junk Food! It makes you fat!’, ‘Credit cards – they could put you in debt ‘ or any number of scintillating exposés on dodgy builders (when they’re dodgy, they’re dodgy!), underwear (it comes in all different colours!) and models (they’re pretty!)

They’re airing a story about how speculation and hoarding of property drives up land and rental prices.

It looks like they’ll be laying the blame for this at the feet of foreign investors (blast those evil foreigners!). I wonder if they’ll suggest our Government reform the taxation system? With a fairer land tax, one that was higher and flatter, property hoarding and speculation by investors, foreign or otherwise, would cease.

They may not stretch to flagging such viable solutions, but still, it’s encouraging to see that even prime time Aussie telly has cottoned on to the fact that land hoarding is artificially inflating our property prices. Something Earthsharing revealed yonks ago in the ‘I Wanna Live Here’ report.

Week #2: Can I have some Context?

Karl FitzgeraldCommentaryLeave a Comment

tohmprof

It’s week 2 and already I know I like my Finance subjects better than my Economics subjects. The key difference is: Context.

I have a sneaking suspicion that Economists have made Economics far harder to teach (and understand) than it needs to be. For example ‘Marginal Propensity to x’ where ‘x’ can be ‘consume’ ‘save’ ‘tax’ etc. Surely there is an easier way to convey the meaning than ‘Marginal Propensity’. I’m sure there are hard nosed Economists that think the distinct nuance is somehow important, but for your lay person, just call it the ‘tendency’.

If I were to be uncharitable, I would say that the Economic emphasis on blinding with scientific language and writing as many lecture slides in pure mathematical symbols is designed to distract students from the fact we are talking about a model of reality, not reality itself.

But being more charitable, I just think it’s because Economics is concerned largely with aggregates. It is a ‘Barn Dance’ for which we are learning what people are ‘supposed to do’ when the RBA lowers interest rates and what not, but there’s very little chance you will ever encounter an aggregate*, so its pretty safe to never mention the actual context of what we are talking about, hence we can have a lecture slide that says nothing more than:

Y = Co + kYD + Go + Xo – (Mo + mY)

Where YD = kC – (kT + To)

Interestingly, the Economics stream doesn’t provide formula sheets in exams, ensuring we expend most of our energy just memorizing these formulas of dubious real world value.

Finance though, will deal with a customer, which is an individual (or an individual making decisions on behalf of the organisation) and thus has no particular concern with aggregates. Thus the emphasis is on the application and being able to explain the concepts in plain English. The formulas are only of concern in knowing which one to use when, and thus Finance do provide a formula sheet. (curiously they are also easier to remember).

The thing that yet alludes me in my Economics subjects, is that I can’t envision what sort of decisions I can make based on these formulas. The only one is setting an interest rate, which will be handy if I end up being Governor of the RBA. Finance again, thanks to the miracle of context is all about making decisions. There is practical value to calculating FV (future value) and discounting it back to PV (present value) given a required rate of return, it would help somebody make a decision.

*A point easier to illustrate with racism, you can easily make the general statements that Australians are as an aggregate ‘loud, classless, jocular, larrikins’. Yet as an Australian moving to India, would you like your new manager to base his treatment of you on what he “knows” about Australians. In other words, would you rather be treated as an individual or an aggregate?