Economy Musings

 I had two possible topics - on the desire for control and it's role in the poor decision-making of our powers-that-be, and another going over some idle thoughts I'd had about economics.

While I feel like I should write about control, I keep thinking about my little pet theory instead. So here we go:

When talking about economics, we often focus on the flow of money. And, as the term 'flow' implies, we tend to see it as a fluid.

I think I even heard of someone building a model once that simulated that flow (alas, my internet searches get swamped with models of water economics when I search for it). 

It flows in, circulates around, collects in a pool somewhere, flows out... all very fluid descriptors. And we use it mostly to track currency, but it's not necessarily about the flow of money.

To talk about it like water - there's a difference between water pooling somewhere, and a spring adding more water to the system.

Unfortunately, mapping out all the flows is more like trying to capture what 1000 Rube Goldberg machines are doing, all at the same time.

But let's get back to 'adding water to the flow'.

When I really think about it, I wonder how much of it is tied to basic food production like farming, ranching, or fishing.

Hear me out.

A farmer has a bumper crop one year. So they make a little more money than normal, and they use it to buy some new clothes. Eat out at the local restaurant a bit more often. Replace some worn out farm equipment.

And so on, and so forth.

That comes from having a bit more discretionary spending than normal, and it creates a little stimulus. If the entire town had a bumper crop, it can create a town-wide stimulus.

The local restaurant starts needing additional help to keep up with demand. The clothing retailers decide to expand their store. The blacksmith starts making more plows.

Then we get a bad year. A drought. Yields aren't as great, people start tightening their belts and sitting tight.

They don't have the excess funds to eat out with. They'll only replace farm equipment if it's a dire need. They put off any major purchases they can.

And so we have a bit of a depression. 

There are elements of supply and demand, of course. At the same time, people need to eat... so there's always some level of demand. Also for grains and cereals the ability to store most of the product for later means that crop values aren't necessarily dependent on a given year's harvest.

Still, I think there has to be some degree of relationship between a good harvest creating economic stimulus and a bad harvest causing a small depression. It can be affected by international trade, a good harvest when the market is glutted by soy beans means that the return on that increased yield may not return enough profit to create that small stimulus, and so on and so forth. 

I think it's more like - other elements of the Rube Goldberg machine may come back and affect that relationship, but at the heart of it food production can add more 'water' to the economic machine. It's like a spring, pumping more 'water' into the flow.

Now consider a similar scenario, but with a mine. 

First of all, all miners need to eat... and if they're mining they aren't growing their own food. So the industry is already related to agriculture, even if it's only peripherally.

But even if we put aside any correlation between mining production and agriculture, we have to ask the question - 

Who is buying the ore produced? Where is that demand coming from?

There's generally enough of an economy that there's always some low-level of demand. That essential farming equipment, for example.

But then village with a bumper crop has the resources to purchase more and better products. Pots and pans for their kitchens, farming equipment, etc. The blacksmith is working more and more, and needs more metal to keep up with demand.

The real thing is vastly more complicated than my simple little analogies, but the point here is that additional demand for mining product comes from having more people with discretionary spending.

For my earlier question, I would say that food production can act like a spring, adding fluid to the economic model... but mining is more like a windmill downstream from the spring.

Sure, that windmill will influences the region around that part of the stream. Maybe they add in an overflow pool to help regulate the flow of water through the stream, etc.

(In other words, the miners making money may create a 'stimulus' in their village just like the farmers did, but it's a downstream flow. They're shaping how the stream flows through their little area, not necessarily adding more water to the stream like a spring.)

Does a mine produce more 'water', increasing the size of the stream? Or is it just changing up how the existing stream passes through?

Let's try adjusting the 'bumper crop vs drought year' analogy by applying it to the mine. First of all, doing so takes startup capital. (Yeah, yeah... farming does too... but I think the land, seed corn, and farming equipment required to start is less than the land, digging equipment, and labor needed for a mine).

Anyways, they've gotten past all that and find a big vein of ore. They start producing more and more ore...

And on the surface, it looks similar to the farmer's bumper crop. They sell more ore, have more money circulating around, they can create a little local stimulus in the mining village right down the road.

But when we get into the laws of supply and demand - if the demand isn't there, then the price of the ore will go down and so will the profits. Unlike with food, people will not starve to death if they can't get any ore.

There is always some low level of demand for the essentials, of course. Can't make a good plow without metal. But having an increase of supply won't really create more profit unless there's enough demand to keep the prices high. Or you use economies of scale and are able to reduce the cost of production or something.

Like I keep saying, it's complicated.

But back to the ore from a newfound vein in our mine. Where does the demand for more metal come from?

Once you get past the bare necessities, it's people with discretionary spending.

(Yeah, okay... food production can reach the point where supply outstrips demand. Hell, we have government subsidies to discourage doing so. Given that it's essential to living, however, and given we have people around the world who are unable to get enough food, I think this is more an indication of a 'plumbing problem', i.e. something about the way the fluid is circulating around the economic system is causing it get blocked up or clogged and unable to flow. Whether that's because it's the wrong crop, or because of the costs of hiring labor to harvest the crops, or whatever other reason it's snarled up is something I'd leave to the economists to untangle. I just don't think it's truly a case of supply outstripping demand given that we have people around the world who are not getting enough to eat.)

Both of these analogies come pretty close to capitalism's 'means of production'. However...

The means of production are not, in and of themselves, the springs adding 'water' to the economic machine. Some of them may even be used to help shape something downstream, like my watermill analogy above. It's just changing where and how the stream flows.

i.e. to get the capital to start production you have to have 'water' from some other activity, so before you can build your iPhone factory you need to have profits from other parts of the economy. And I suspect if you were able to follow that stream, that it would come back to food production.

I wonder if there's any way to actually study that?

Oh, one more thing - I talk about a spring and downstream, but it's true that this complicated and fluid economic model circulates.

By which I mean that things will loop around and come back to the start. Makes it even harder to tell what is a true 'spring' adding water to the pool, and what is just taking that existing pool and moving it around back to the start.

I do think that one of our current issues is that quite a lot of that 'water' is pooling at the very end. Or top? It flows quite easily to the 1%, who then let it pool in their bank accounts and whatnot, and very little of it is then returning back to the source and circulating through again. Maybe just whatever the banks are loaning out against those stockpiles, assuming it's pooling in a bank in the first place.

Which would be fine, if the spring was producing enough to compensate for that. Otherwise the stream starts drying up, and less and less of it makes it through all those fantastical stops along the way.