Sunday, April 8, 2012

Economic Growth Without Population Increase

Growth Without Growth

The world's population is trying to stabilize. Population growth in some Western counties has stabilized at or slightly below replacement rates and this has been perceived as a problem because our economic models are all based on growing populations: more people means more sales.

A fundamental problem facing modern economics is to formulate a plan that enables infinite economic growth with a constant population. I first posed this problem back in 2008, but now I have a plan to suggest.

First, allow me to set the stage by asking, "how can a finite number of people produce and consume an infinite amount of goods and services?" The solution to this problem is found in software. Real people will control populations of simulated people (avatars, after a fashion) that produce and consume simulated goods and services. This scenario is already within the realm of possibility.

The real problem is not in creating a simulated economy. The problem is in moving simulated money from a simulated economy into the real world. There are already online simulation games (RPGs, role playing games) that allow players to move real money into a simulated world. But economic growth in a simulated economy creates money of dubious value: funny money. Moving large amounts of funny money into a real economy could debase real currency and create real inflation.

The Future is Upon Us

In truth, we already have elements of a simulated economy. Financiers call the instruments of a simulated economy "derivatives." And because banks create money through loans and limited capital reserves, to the extent that profits from derivatives are due to leverage (loans), much of the profits from derivatives are the same kind of funny money that a computer simulation would generate. This means that moving money from the derivatives market to the real economy of real goods and services has the potential to debase our currency and create inflation.

Consider a few numbers from The Ascent of Money: A Financial History of the World by Niall Ferguson. (If you do not have time to read the book, watch the PBS version.)
World economic output = $47 x10^12 (47 trillion dollars)
World stock and bond market = $119 x10^12 = 2.5 times world economic output
World derivatives market = $473 x10^12 = 10 times world economic output

If the world derivatives market were liquidated and the money used to buy goods and services, then the price of goods and services would skyrocket because too much money would be chasing too few goods. This would lead to inflation, perhaps hyperinflation. Warren Buffet has called derivatives "financial weapons of mass destruction." I suspect derivatives are even more dangerous than Mr. Buffet has indicated.

What Does This Mean to Us?

If Texans are to become world leaders in economics, it would be good for our economists to become increasingly proficient in programming, in simulations, in complexity theory, autonomous systems theory, game theory, and derivatives. We need to become leaders in both real economic growth and simulated growth because simulated growth might truly be a part of our future.

Additionally, you and I should demand that our elected representatives protect our currency. If the derivatives market is not controlled, it could destroy our life savings.

Robert Canright

This post is part of the Economics Project of the Texas Ascendant Campaign

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