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07 Price with Place

Local Markets

Ideally one might expect an economy to consist of a single market, i.e. bids and offers are matched across the entire economy, but in reality this is almost never the case.

Many bids and offers are limited in there scope by such factors as geographic constraints. An offer to sell bread in Athens will not be considered by a buyer in Paris although they both use the same currency. There are many markets in particular commodities, and other valuables, which are local. Where we work has to be reasonably close to where we live, so labour tends to be traded locally. Social communities often trade basic commodities in local markets.

This means that an economy can consist of a number of semi-isolated markets each with its own amount of valuables and its own amount of money.

Given that it has been said that in a market;
  • if the amount of money bid increases or the amount of valuables offered decreases there will be market shortages or price inflation, and
  • if the amount of money bid decreases or the amount of valuables offered increases there will be market surpluses or price deflation,
there is the possibility of prices that will vary independently from one locality to another, leading to price disparities.

Bread may sell at a higher price, in a local market where there is a lot of money to spend, in comparison to a local market where there is a lot less money to spend.

Bread may sell at a lower price, in a local market where there is a lot of bread on offer for sale, in comparison to a local market where there is a lot less bread on offer for sale.

The Merchants

Imbalance of available money and valuables within and between localities leads to price disparities between them and the rise of merchants, who seek to profit by transporting valuables from one community to the other.

Merchants create new demand in the community with less money or more valuables and new supply in the community with more money or less valuables, profiting from the difference in price.

This may lead to price rises in the community with less money or more valuables, and price drops in the community with more money or less valuables.

If there are many merchants competing then the price rises and price drops will be greater and the merchant's profits will be reduced.

In the community with less money or more valuables
  • consumers get less valuables at higher prices,
  • suppliers expand and benefit.
  • The economic class divide widens.
In the community with more money or less valuables
  • consumers get more valuables at lower prices.
  • suppliers contract and lose out.
  • The economic class divide narrows.
This can be observed between many nations of the world. Poorer exporting nations have wider class divides while richer importing nations have narrower class divides.

In an ideal world the markets rebalance, in the real world they are often manipulated in ways that postpone the rebalance. Merchants have an interest in sustaining the imbalances on which they profit but it would be wrong to think they are the only beneficiaries of such inequalities.

Global Markets

Globalisation

Over time the size of a self sufficient social unit has increased possibly from social structures like the family, through the village, the county and the nation, and now the world.

A global economy should create improvement through economies of scale and specialisation. Scale should naturally be limited by the restraints of transportation costs. However even if one achieves optimisation of scale across an industry there may be inherent dangers in the lack of redundancy in the optimal system which can lead to a potentially more fragile and unstable economy. (When a world economy has problems they are bigger than the problems of a village economy or a nations economy and one cannot run to the next village for help!)

Although a global economy should improve economies of scale, in reality what has happened is production has simply relocated to the areas which are forcibly containing the cheapest labour. Forcibly contained cheap labour has caused some industries to de-localise that would otherwise have not done so, the cheap labour effectively subsidising transport costs. i.e. apples leave countries where people go hungry for countries where apples rot on the ground.

To create a true global economy one must allow the global movement of labour and one must reassemble local economies destabilised by forcibly contained cheap foreign labour.

Globalisation is the final step in seeking greater specialisation and economies of scale but what we see today is not real globalisation, it has been distorted by restrictive labour practices, namely that labour forces are contained within national boundaries so restricting the free choice of employer and employee,
  • giving employers with captive cheap labour an economic advantage and their employees an economic disadvantage,
  • while giving employers in areas of expensive labour an economic disadvantage and their employees an economic advantage,
thus distorting the natural selection of good firms over bad, a good firm being one that creates optimal value for customers, shareholders and employees.

The result of this unfree market is a crisis because money is not circulating. Money comes from customers primarily into the pockets of shareholders, who can not possibly spend the profits they receive as a result of the captive cheap labour, so they look to invest it, i.e. lend it to somebody. In the China case via a convoluted route it went back to the customers creating a debt crisis.

The Global Trade Failure

If a financially poor but more productive society, like China, trades globally with a financially wealthy but less productive society, like the US, then trade chains will form to move;
  • produce to the financially wealthy society, and
  • money to the more productive society,
Whole industries will be built on the basis of this global trade.

But if there is not flow in the other direction, i.e. the global trade chains don't complete and form global trade rings, the end result over years will be a financially poor less productive society and a financially rich more productive society.

Liquidity Dries Up

As cash depletes at one end of an incomplete trade chain, the lack of money primarily stops us from participating in the incomplete global trade chain and we are left with two choices;
  • Either create the local exporting industry to complete the global trade chain and bring the money back, or
  • stop buying, the effect of which is to destroy the incomplete global trade chain. Whole industries will be forced to shut down.
So are we going to shut down the troublesome trade chain are are we going to complete it?

The lack of money secondarily stops us from participating in local trade rings that have nothing to do with the incomplete global trade chain. i.e. liquidity dries up. So global trade chain non-completion causes local trade rings to break up and fail also.

Dealing With This

When local liquidity dries up there are various ways of dealing with it;
  • Borrow money - Borrowed money can be used to allow local trade rings to complete but then interest must be paid.
  • Create money - The government borrows money from the central bank uses it to repay debts or spend it on local projects but this money will lead to inflation once it reaches the market. We will explore this further when we look at why the US likes the Dollar to be The World Reserve Currency. Another way to create money is to have the central bank buy junk from other financial institution for more than it is worth.
  • Introduce a local currency - Local fiat currencies issued by municipal councils in Germany helped revive local economies during the depression, they worked but were stopped by national authorities. Such currencies served to maintain local trade rings and isolate them from larger scale economic problems but also they make national trade difficult and served to default on the national debt.
With all these solutions the objective must be to encourage the growth of trade chains that will complete and discourage the growth of trade chains that will not.

If the governments tries to make money more available but fails to determine where that money will go, it might well go down the failed trade chain that caused the problems in the first place. i.e. if quantitative easing money ends up subsidising the housing boom or going to China that will just postpone the crash and make it worse.

Money must go to facilitate and maintain currently functional trade rings and to provide a possible completion fragment for the initially failed trade chain. i.e. export products to china.

Lowering interest rates makes money available indiscriminately. i.e. Don't give more credit to consumers for houses. Give credit to companies exporting to supply China. Help them expand their markets.

China

Why does China keep the Yuan cheap and continue to accept western currencies? Because wages are so low in China that there is no home market yet. Those running businesses and with power wish to continue making fortunes. At the moment the west is their customer but no doubt as Chinese wages rise the home market will develop and the Chinese people will begin to benefit from their own hard work.

Unless western industry can recover at this time we can expect a shortage of products and hence inflation.


(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.





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