Something about prices II. The introduction of Multi Component Pricing for milk…

I’m tinkering with the idea of a kind of periodic table for prices. Below, a very rough sketch of what I have in mind relating to administered prices and market prices as well as the sectors of the national accounts (cost prices, shadow prices etcetera have to be added).

Gardiner Means defined the difference between market and administered prices (quoted in Gu (2012) on p. 13):

“In an engineering economy prices are fixed by administrative action for periods of time. Price is determined before a transaction occurs. In a trading economy prices are developed in the process of trading andprice is not determined until the transaction occurs. In an engineering economy supply and demand never equate except by coincidence“.

Earlier I discussed how the Dutch central bank introduced the ‘risk free interest rate structure’ for Dutch pension funds (an administered price and covered by the yellow triangle in figure 1). Today I’ll discuss a company-company administered price: the ‘Multi Component’ farm price of milk (covered by the pink triangle).

Figure 1. The Administered Prices/Market Prices matrix for the institutional sectors of the National Accounts 

The representative consumer has to die

Recently, Robert Lucas, who was called an economist, died. This is not about him, but about his kind of economics as tweets and obituaries show that it is not yet generally understood what kind of science the neoclassical macro-economist like him produced. Their most egregious failure: after decades of work, they do not even have a shimmer of anything which could pass for a neoclassical way to estimate the macro economy, even when their ideas are squarely at odds with the macro economy as we measure it. Theory without measurement.

Lucas used – like many others – the concept of the representative consumer. A macro economic model which presupposes that the economy consists of 1 person, A Robinson Crusoe model – or fantasy? Which is faulty, as the essence of a macro economy – its foundational essence, its sine qua non, its deepest core – is that a macro-economy consists of multiple persons who are interrelated by economic, political and legal ties. And by monetary ties, too. Money is undefined in the 1 person economy of much neoclassical macro. I now: nowadays we have HANK models, Heterogenous Agent models which have more than 1 consumer/producer, like: capitalists owning all the capital used to employ others and workers only owning capital they use themselves, to give it a Marxist twist. That’s better – but not yet good enough.

What’s special about macro-economics? Macro economics studies interpersonal concepts like:

Something about prices I. ‘Risk free’ rates as administered prices in the sense of Gardiner Means.

On this blog, I’ve stated that economics needs a ‘periodic table of prices’. There are many different prices beyond ‘market prices’: Cost prices, Administrated prices, Government prices, Factor prices and whatever. We need a grid which enables a classification. As I, clearly, do not seem to be your average inspiring charismatic direction setting economists, nobody followed up on my statements…. With this blog, I want to start my journey towards the framework, to boldly go from where people like Frederic Lee, Philip Pilkinton and Gyun Cheol Gu have brought us. More about them in later blogs. Today (and in two blogs to follow): the prices which I encounter in my own research.

I’ll focus on three topics: multi factor pricing of milk, risk free (not) interest rates and cost-, market, insurance and liquidation prices of hay. What kind of prices did I encounter? Just market prices – or is there more to exchange that just markets? To answer this, we first have to define market prices.

Modern Monetary Statistics

This ECB graph below, showing the interrelation between credit and money in the Euro Area (source) is thoroughly (Post-)Keynesian in nature: Modern Monetary Statistics (MMS). I’ll return to that. First, what does it tell?

Modern money, 1579 edition.

Old charters still shed light on recent monetary developments…

While in the Leeuwarden archive, investigating 19^th century quantities and insurance prices of clay soil hay in central Friesland (a coastal part of the Netherlands) I got sub-focused and found myself thumbing through the Frisian ‘Charter books’ (internet version here). These books contain all Frisian government ‘oorkonden’ from the end of the fifteenth century onwards. ‘Oorkonden’ literally translates as ‘ear messages’. And they were: before Sunday mass or, later, sermon, they were read aloud in churches. These charters sometimes have a monetary nature. I happened to stumble upon some from 1579, the most revolutionary year in the entire history of Friesland (but see also this). Why and how did the new, revolutionary, and, more important, modern government get involved with monetary matters and why and how is this related to recent bank insolvencies?

Merry Christmas and a happy Colchis challenge!

Eurobonds – there they are.

The EU-commission issued a tweet (below). Another step towards EU statehood. A large one. Since around 1500, access to credit was key for European (later: all) states waging war. The early development of central banks was intertwined with the history of national wars. Look here for the Wikipedia page on the history of the Bank of England -it literally starts with a ‘crushing defeat’ of England by France. Credit was needed to win. Government borrowing had to be enabled by central banks, the monetary system had to be able to function as a ‘weapon of war’. The ECB, however, is not allowed to provide credit to governments (even when it can keep interest rates low and make government debt ‘risk free’). And the EU is, or was, not allowed to issue its own bonds. A peaceful union. Which changed. There has been a lot of talk about Eurobonds, but suddenly they are there. And again war is midwife of change. Don’t underestimate this. The EU might as well aim to raise 800 instead of 80 billion Euro. Think trillions.

Inflation and policy: conceptual models matter

Summary: to understand inflation we should not use the neoclassical ‘one good, one worker, one sector, one piece of physical capital’ or Y = f(K,L) concept of production. We should use a concept looking at nominal production (Y(n)) with multiple interrelated sectors (‘S’), multiple products and capital conceptualized not as a physical entity but as ownership rights of land (including natural resources), depreciable capital and ‘non produced’ capital like patents and marketing rights: K’. These ownership rights enable as well as restrict access to and use of land, natural resources, depreciable capital, patents, markets and financial capital while the relations between sector show how shocks are propagated: Y(n) = f(S K’, L). Estimated models using such a concept exist and lead to quite another analysis of inflation than the neoclassical model.

Inflation, even when on the wane, is still unacceptably high.

Monies

What’s money? Wrong question. The right question: ‘which kinds of monies do we use for which purposes?’ as there are different kinds of money which are used for different purposes. Here, I want to stress that ‘receivables’ are: money. And are, at the moment, mainly used for inter-company purchases. The quarterly balance sheets (below) of Alphabet (formerly Google) show that, as of September 2020, Accounts Receivable had a value of almost 35 billion dollar. Accounts receivable are privately issued money. They are backed by the law but not created by banks or governments. They are created when a buyer promises to pay and a seller accepts this promise, a promise which can be legally enforced. But it’s not the payment by the debtor which defines the moment of the sale. The actual sale is legally finalized when the seller accepts the promise of the buyer. That’s the moment when ownership changes hands. Receivables are stated in a unit of account, they are a legal means of exchange and they surely are a store of value (that’s why they are included on the balance sheet).

Graph of the day. Youth unemployment in the EU

Unemployment in the EU is still going down a little. But youth unemployment, a slightly more sensitive cyclical indicator, is rising. The most distinct geographical pattern behind the average: the combination of high levels of youth unemployment (>20%) with clear increases in Greece, Italy and Spain, even when total unemployment in these countries is still going down or stable. France shows a remarkable decline in youth unemployment but is still in double digit territory. Average youth unemployment is lower than in 2008 but the >20% rates in several countries are unacceptable. The EU labour market is not tight, at this moment.

What’s Left?

One of the successes of the right is their identification of the left with a sorry pastiche of ‘woke’. But the left is more than outspoken, individual awareness of the role of identities, however constructed and defined, whoever constructs and defines them and whatever role they plays in group dynamics of power and in- and exclusion. Which leads us to the question: What’s Left? I’ll state some points. Some points (many of which are related to social , economic and political in- and exclusion):

• One person, one vote and universal unrestricted suffrage (incarcerated people should have the right to vote too, for instance). Voting rights should not be tied to income, wealth, property, race, gender or education (all of these variables have been used to restrict voting rights). Universal voting rights have been a huge success of ‘la gauche’.
• The eight hour working day. There’s a nice wikipedia entry about this
• Free, accessible and high quality education for everyone until at least 16 years of age
• Cheap, accessible and high quality health care for everyone
• Affordable, high quality, energy producing but not necessarily detached housing with access to running clean water, sewage systems, clean air and green surroundings and within walking or at least cycling distance from schools and sports facilities and designed to foster interactions with neighbors and to enable community care
• Healthy, non-polluted environments outside, at work and in these houses
• Full employment
• Care free retirement (the age at which this starts might be over 65…)
• Policies aimed at enabling people raising children to manage the financial and practical burden of the combination of paid labour and family responsibilities
• government ownership of natural resources like oil, natural gas, aquifers and the like – let’s say anything more than 40 meters beneath the surface
• Taxes on unearned wealth, like the value of unimproved land and inheritances
• A long term environmental strategy (climate, biodiversity, nature). This is about survival.
• free speech, fee unions and other non-profit organizations
• thriving businesses which, however, have to be bridled in the political arena and which have to follow the rules (labour, environment, food safety, quality, liability – the list is long). Sensible patent policies.
• A state which does not care about gender or race and which can be sued if it does
• Which brings us to mechanisms of in- and exclusion. Many of these mechanisms will be countered by the combinations of full employment and access to education, health care and housing. But we will have to fight for this. Hard and long and mean fights.

Let’s be woke about that.

Inflation and wages in Greece

Consumer price inflation in Greece is, at the moment, 12% (graph 1). This is high and surely bankrupting quite some families. The high level of inflation is surprising, as Greek inflation was quite low and often even negative in the 2012-2022 period. The questions are: (A) what caused this sudden increase? An overheated labour market and runaway wages increases? And: (B) how can we get inflation down again? Does the ECB have to tank the economy to crush wages? Below we will investigate these questions.

Graph 1. Consumer price inflation in Greece. Source: Elstat.

Neoclassical induced financial fragility. Central bank pension fund regulation edition.

Financial wizardry recently caused massive problems for UK pension funds and the Bank of England. The Bank of England forces pension funds to take part in ‘LDI’ contracts which aim to insure possible future liquidity problems. These contracts however lead to real liquidity problems, which forced the Bank of England to intervene to prevent a market melt down. The solution became the problem.

Deputy Governor John Cunliff of the Bank of England stated:

“The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning… In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

Notice the ultra short periods whichm presumably, are specified in the LDI contracts: ‘Cash, Now!’. I haven’t read any of these contracts, if somebody can provide me with one: please! I do not see any reason for such ultra short periods.

This did not just happen in the UK. Related problems in the Netherlands in 2020 forced the ECB to intervene, to prevent a market melt down. This led Anil Kashyap, in a November 2020 speech at the Bank of England about the March 2020 crisis, to issue the next warning (emphasis added):

Liz Truss. Or: how not to pay for the war

The Dutch September HICP inflation rate was 17,1%. One year ago it was 3,0%. Below, I will argue that this is a sign of kind of war economy, not of a cyclically overheated economy. Ways to mitigate inflation were pioneered by the English economist John Maynard Keynes in his ‘How to pay for the war‘. it’s useful to go back to his ideas.

The first version was published in three parts in The Times of november 1939. It was partly based on his experiences in World War I and partly on the new system of national accounting (extended and improved by Keynes). The ideas weere based upon the idea of a monetary economy where consumer spending and consumer prices, production and producer prices and the use of factors of production and factor prices (wages, profits, interests, rents) are intertwined. During a war, this system could lead to consumer and producer price inflation resulting in war time profits on one side and poverty on the other. He proposed changes to the system which would mitigate producer and consumer price inflation as well as war time profits. Fun fact: it’s about the opposite of the Liz Truss UK budget. The central idea of Keynes: we have to understand inflation not just as an increase of consumer prices but as interconnected changes in consumer, producer and factor prices, financed by income as well as borrowing/(forced) saving. Especially during a war, the connections will change in unwanted ways, policies to mitigate this can be enacted as long as we understand inflation as a system of interconnected expenditure, output and factor prices. Fun fact: Keynes acknowledges ‘Prof von Hayek’ for the idea of a post war levy on capital.

Rosa Luxemburg on Czarist Russia

After reading her contemporary Alfred Marshall, reading Rosa Luxemburg (born in Poland, 1871-1919) is a joy. The clarity of the prose, the consistence of the arguments, the sheer knowledge of events and facts. She backed an anti-imperialist socialist agenda coupled with – no, based upon – differences of view and discussion in combination with cultural and linguistic diversity. In my view, she would have backed the growth of international food supply chains binding Ukraine, Russia, Turkey and Morocco, among other countries together. But she would have despized the cartelization of the inernational grain trade (five companies rule the roost) and the preponderance of financial and shareholder interests. One of the points where Putin had to back off is the agreement that he will not attack ships transporting Ukrainian grain.. Might Luxemburg have seen this as an annti-imperialist glimmer of hope and a token of the growing power of non-western countries? Or as a cynical proof of the power of international grain trade cartels? About this we can be clear: she would have been totally against the Russian cultural assimilation policies in the Donbas. Here an excerpt from the Junius pamphlet, written when she was, during world war I, in jail. For me, it t rings some bells, even when you have to change ‘Dardanelles’ into ‘Crimea’ and ‘Austria’ to ‘USA’.

Russian imperialism, like that of western nations, consists of widely diversified elements. Its strongest strain is not, however, as in Germany or England, the economic expansion of capital, hungry for territorial accumulation, but the political interests of the nation. To be sure, Russian industry can show a considerable export to the Orient, to China, Persia and Central Asia, and the Czarist Government seeks to encourage this export trade because it furnishes a desirable foundation for its sphere of interest. But national policies here play an active, not a passive, role. On the one hand, the traditional tendencies of a conquest-loving Czardom, ruling over a mighty nation whose population today consists of 172 millions of human beings, demand free access to the ocean, to the Pacific Ocean on the East, to the Mediterranean on the South, for industrial as well as for strategic reasons. On the other hand, the very existence of absolutism, and the necessity of holding a respected place in the world-political field, and finally the need of financial credit in foreign countries without which Czarism cannot exist, all play their important part. We must add to these, as in every other monarchy, the dynastic interest. Foreign prestige and temporary forgetfulness of inner problems and difficulties are well known family remedies in the art of ruling, when a conflict arises between the government and the great mass of the people.

Neoclassical clunkers. How economists’ ideas about risk aversion are duping pension pundits.

(Part of) the Dutch pension system will, if everything goes according to plan, soon be replaced with a new neoliberal system based upon, among other things, measured neoclassical ‘risk aversion’. However – economists are not yet able to measure this – which will lead to big problems. let me explain.

The present system consists of:

• a social democratic element (the ‘first pillar’), a kind of not means tested basic income for everybody above 67 financed by taxes.
• Next to this is the corporatist ‘second pillar’, largely based on Christian social thought, which consists of non-government non-profit sectoral or, sometimes, company based pension funds which pay funded pensions. These are financed by mandatory pension savings by workers and their employers.
• The ‘third pillar’ is based on classic liberalism and consists of voluntary pensions provided by private financial companies and funded by contractual savings.

The idea is to transform the collective second pillar part into a would be individual system, organized along neoclassical lines. How does this work?

Towards a ‘periodic table of prices’

I do not have ‘physics envy‘. I do not want economics to look too much like physics. But I do have chemistry envy. I want economics to have something like the magnificent periodic table of elements, for prices. Input prices, output prices, mark up prices, shadow prices, market prices, administered prices, government prices, expenditure prices, asset prices, monopoly prices, monopsony prices – all of these and many more neatly ordered in a relatively simple table. Somebody still has to write the book about it but there sure are elements available. One can think of the work on prices by Frederic Lee. Or about the work of Gyun Cheol Gu, who provides us with this extremely useful overview of ideas about pricing (PK means: Post Keynesian):

Inflation: should we take away the soup bowl?

The graph below has been constructed by economists of the European Central Bank. It’s based on national accounts data. It shows that present day inflation is profit driven, not wage driven. Money flows to profits, not wages. What does this mean for monetary, fiscal and income policy, taking some other aspects of inflation into consideration? Quite a lot.

Should Ukraine be part the EU?

Ukraine applied for EU membership. The application has been accepted, the long journey towards membership has started. Good? Bad? Let’s first be honest about the EU. And the Russian empire – which of course is the main motivator behind the Ukrainian application.

We can be short about the Russian empire. It is large, resource rich, not exactly a failed state but governed by a closed self- enriching criminal gang of with fantasies about a Russian greatness which never existed. It’s also an economic dwarf, undemocratic, technological regressing, it has dismal demographics and a low life expectancy (especially for males). For the last twenty years of so, been extremely aggressive towards, especially, small neighbors. And its a stated aim of Putin to expand all this beyond the borders of Ukraine, whatever the means.

The EU is different. It’s not just an economic entity. It’s a military entity, too. According to the treaty:

If a Member State is the victim of armed aggression on its territory, the other Member States
shall have towards it an obligation of aid and assistance by all the means in their power, in
accordance with Article 51 of the United Nations Charter. This shall not prejudice the specific
character of the security and defence policy of certain Member States.

Commitments and cooperation in this area shall be consistent with commitments under the North
Atlantic Treaty Organisation, which, for those States which are members of it, remains the foundation of their collective defence and the forum for its implementation

European life expectancies in times of Covid. A long term story.

Life expectancies in Europe went down in 2019 and 2020 in all countries bar Norway (figure 1). They tended to go down more in countries with a relatively low life expectancy (figure 2) – strong and outspoken tendency. Correlation is not causation. But it can be argued that health and morbidity and life expectancy are influenced by health outcomes during, especially, childhood, including in the in-utero environment (look here, especially 3.1 b and 3.1 c. Look also here). If that’s right the data suggest that an important way to mitigate the (long term) consequences of Covid-19 is to have a strong long term public health system and policy (including policies aimed at diminishing poverty).