Sunday, 14 August 2011

Growth and prosperity - social justice in economics

Growth is based on increased consumption and is created by increased productivity, however increased productivity is reliant on increased demand!

Increased demand is based on either:-

1. Consumer confidence;
2. A rise in the number of the population; or
3. More individual wealth

The economy is driven by consumer confidence which is based on innate sense; genius. Consumer confidence goes amiss when people take improper advantage of others and the system at large.

Material wealth is created through either improved quality in the supply or increased supply and sufficient demand in:-

1. Food (including high end produce);
2. Clothing (inc. high end);
3. Accessories (inc. high end);
4. Cars and the like (inc. high end);
5. Home (and office) appliances;
6. Luxury goods not previously specified

There is only so much wealth required for one to live as one would like and ultimately it will get to the stage where "growth" (not per capita) is contingent on population expansion, when there is not growth in an economy at the expense of other economies. Even "the next frontier", space, will ultimately have such 'limitations'. A population may not always grow in number in which case, theoretically at least, there will come a time when G.D.P. will stagnate and reverse; the economy will go into a so called recession. Fortunes will be rolled over in part to the next generation there will be greater monetary wealth per capita but less demand with a greater capacity for supply. In general people will be wealthier. On this score it would appear that G.D.P. in the economy is not a true reflection of prosperity G.D.P. per capita should be relied on as a more appropriate state of affairs.

If supply is increased and demand does not increase prices fall and profit margins diminish but overall prosperity in the nation is increased. This is an unlikely scenario however because people are notoriously greedy for more wealth security and comfort. One way to get around this problem in supply however is to increase competition the markets.

Capitalism is based primarily on the capitalisation or exploitation of ideas. Without genuine entrepreneurship capitalism fails in its objective, which is to create wealth. Ideas however are abundant in antiquity and will continue to be so into the distant future, until such a time as people have everything they could possibly want for in material terms. In the modern day it should be a fundamental requirement that enterprise (especially in the form of small and medium size businesses) is properly supported either through government finance, or private initiative (bank loans).

There is no growth value in re-investment of wealth only because, to put it in simple terms, if everyone re-invested their wealth there would be increased supply with no increase in demand therefore no return on such investment; there would be no new money in circulation. Money actually needs to be created year on year and the only people with the means to do this are banks (such is known in this instance as fractional reserve banking), the central government banks and nationalised banks. More money in the economy generally means more demand. Inflation is kept in check by increased supply and/or relatively higher interest rates. Increased demand and supply means growth in G.D.P. Of course the money that was created in loans needs to be paid back (with interest!) at some point and this will come from future profits in enterprise. Essentially in such a case there will be a redistribution in future earned wealth, with the old money earning a smaller percentage share in G.D.P than it otherwise would. Growth is guaranteed through the money earned by the banks on the money that was created (out of thin air!) for finance. That money filters down through the economy in the purchase of goods and services.

It's not a likely situation where there are too many banks and not enough 'other' businesses. Money means nothing in itself its only worth lays in the goods and services it is exchanged for: no goods and services no money! It should however be the moral and ethical duty on the banks to lend responsibly and not be charlatans offering services which appear to be highly creative and profitable but are in actual fact a disproportionate risk to stability and real growth in the economy. If banks are not responsible in their work then capitalism collapses, which is what almost happened in the financial crash of 2008.

Innovation and finance are indeed a way forward but never in forgetting about the little people in society. If there is to be proper investment into ideas and small to medium size businesses then the circuit becomes complete and riches and prosperity will flow. If the old money is re-invested into speculative entrepreneurship ("venture capitalism") rather than static investments (property etc.) capitalism would be all the better because such investment would necessarily increase the quality of goods and services thus increase peoples quality of life, even when the consumer has no more money in their disposable income. Re-investment of wealth and creation of jobs also increases growth (G.D.P.) if it is the case that the economy is being supported from the bottom in financing ideas with new money.

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