Tuesday, February 24, 2009

How Much Money Should We be Making?

Frugalnomics says that real wealth comes from the transformation of energy, and at the most basic levels - agriculture and crafts, it is fairly easy to work out what wealth is possible. But how do you judge the validity of wealth at levels removed directly from energy transformation?

Firstly, be sure that the wealth has a true energy transformation basis. Look hard at what source of energy or energies underpin the process, map the pathway of this energy up to the stage where your wealth is generated and consider the validity of that process. Don't forget your energy as part of the process - humans are pretty efficient transformers of solar energy through the foods we eat. That sort of covers the moral side of the equation.

Now consider the dollar value - how much money should we be making?

Part of the current financial crisis is due to expectations for excessive returns on investments. Financial packages were developed with promises of now, ridiculously large returns.

So what sort of returns should we expect? Australian Superannuation Funds as a group, have set a annual benchmark return of CPI plus 3% - or roughly 4% due to inflation and 3% for astute investment.

Similar pooled expectations from academic economists consider Inflation plus 4% reasonable.

So anything that offers returns of more than 7-8% per annum must be counting on smoke and mirrors ( or put another way - the cheating of less informed investors ) to generate these returns.

Where does the 3-4% come from? I think it is the sort of return that is derived from human effort - or the natural wealth increase from the transformation of energy by people. ie: this is the sort of return an individual can generate by their own sweat, and it puts executive salaries in a poor light.

Frankly, any management or executive position that is paid more than 4% greater than the staff being managed is being overpaid, as there is no way individual effort, as a manager, can generate more than a 4% increase in wealth.

Thursday, February 19, 2009

Facing Up to Frugalnomics

If you have been following the business press lately you will have been seeing articles talking about the capitalist bubble. Guy Rundle and David Hirst in The Age recently wrote good articles.

In summary, they point to the fact that developed economies really surged in productivity post WW2 with most of our current infrastructure like roads, bridges and train lines; pipelines, sewage, telecommunication and electricity services; and government departments and social services all coming into place.

Capitalism is argued to be a system where a large number of people can be persuaded to work for an income sufficient for daily needs plus a small amount of luxuries. This creates wealth because this individual human labour converts true energy. It is a pretty good source of productive capacity, but there are two limits. The first is the physical resources, the embodied energy, which can be exhausted ( mining, oil, etc.) or degraded ( agriculture ), and the second is that individual labour is a limit in itself.

Post WW2, Capitalism was modified. A spirit of consumption was encouraged. People were persuaded to shape their identities around consumption and luxury goods. This was designed to overcome the limit of individual human labour, and ignored the limit in physical resources.

It was also the first sign of a secondary economy designed to feed off the real economy, an economy of speculation that needed constant and expanding growth to camouflage its activity - a permanent bubble economy.

One outcome was an acceleration of energy conversion into social wealth, the infrastructure described above, but the other was a rapid depletion of natural sources of energy and this productive capacity and output stalled in the late 70's.

But by then we had a secondary economy of such size and political power that it demanded increased consumption to maintain its wealth. The problem though is that bubble economies are just that - bubbles with no real economy core. The consumption it required did two things.

It asked for the transfer of the conversion process to areas of lower wages - manufacture and processing of resources moved off shore to less developed countries - as this boosted apparent cash profits and savings. And it encouraged the transfer of these savings into speculation, shares and purchase of luxuries where it could be appropriated by this secondary economy.

And this is where we are now.

The bail-out programs of our governments are driven by the needs of the secondary economy and only marginally designed to support the real economy. And unless much more attention is given to sources of renewable energy and the rebalancing of our economies back to the conversion of natural energy as a source of wealth, the results will be marginal too.