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Socialist Economics and Cantillon Effect

Political Economy Essay 01 En Version

2024-04-07, PEE is personal essays, mainly recording recent current affairs policies and opinions on them.

§1 Overview

Internationality:

  1. Yellen's second visit to China.
  2. Israel's involvement in regional conflicts has escalated, evident in attacks on personnel from UNRWA and WCK, as well as neighboring sovereign states.
  3. ASEAN faces diplomatic rifts, with the Philippines aligning more closely with the United States while other member states maintain a relatively neutral stance.
  4. Terrorist attacks have struck both Iran and Russia in succession, while China's Dasu Dam in Pakistan also fell victim to an attack, reminiscent of a similar incident (car bombing) that occurred two years prior.

Domestic:

  1. Policy continues to favor credit expansion as a solution to problems stemming from previous credit expansions.
  2. Pension systems rely heavily on pay-as-you-go models and fiscal subsidies, with unresolved issues primarily stemming from distribution rather than funding.
  3. The real estate sector, particularly housing (excluding land), confronts systemic risks that have grown over the past two years.

§2 Vision of Socialist Economics

  As the first article in the series, let’s first talk about some basic vision of Socialist Economics.

  In Chinese, the concept of 'Economy' originates from the Chinese term 'jīng shì jì mín', encompassing not only financial aspects but also law, ethics, and more. In socialist theory, the foundation for maintaining social stability lies in ensuring the basic livelihood of the populace, encompassing rights to survival and development. This includes access to essentials such as food, clothing, housing, transportation, as well as spiritual fulfillment and opportunities for personal advancement. This framework bears resemblance to Maslow's Hierarchy of Needs. Moreover, laborers should not solely rely on market compensation (primary allocation) and public provisions (secondary allocation), but also deserve a certain degree of ownership status, encompassing rights to labor division and distribution. Not just representative system or even more indirect ways.

  Another perspective on understanding the socialist economy is as a solution to capitalist economic crises. We can conceptualize capitalism as a river, with the free market economy on one bank and a socially-oriented economy (or a hypothetical capitalist system without crises) on the other. The free market economy faces challenges stemming from Modern Monetary Theory and High Finance, risking collapse: On one hand, artificially inflated inflation rates contribute to asset bubbles; while on the other, laborers shoulder the burden of assets or financial derivatives in the form of liabilities.

  The bridge we choose to traverse to the safer side is socialism (or socialist mechanisms). Naturally, capitalism has its own crisis management methods, such as Keynesianism. One socialist mechanism is the establishment of a universal social security system. Initially, this entails expanding the workforce of government-affiliated institutions to extend the protection of national fiscal expenditures to a larger portion of the population. However, once most individuals have reached this safer side, the number of civil servants and government-affiliated institution staff should be reduced. This is because they not only receive living security but, more importantly, wield greater power than ordinary citizens.

§3 Cantillon Effect: Non-neutrality of Money

  Changes in the money supply have a profound impact on the relative prices of commodities, thereby influencing the redistribution of wealth. In essence, when the money supply exceeds the available goods, prices naturally rise (requiring more money). Let's dissect the process of monetary pricing. If the government doubles the money supply on a given day, and simultaneously market prices for goods and services also double, then the relative prices between all goods and services remain unchanged, indicating the neutrality of money. However, in reality, an increase in the money supply often doesn't immediately correspond to an increase in the availability of goods and services, and price increases for goods and services are often disproportionate.

If a country suddenly discovers a gold mine, the shareholders and workers of the gold mine would be the first to benefit from increased wealth. With more money in hand, they would likely increase their consumption of meat, beer, and clothing, subsequently leading to increased income for butchers, beer vendors, and tailors in turn.

While this transmission chain continues to operate, individuals who have not directly benefited from the initial increase in income through this chain may already be experiencing rising prices for consumer goods. The infusion of new money indeed drives up prices for goods and services, but the extent and which specific goods and services are affected depend on who receives the new money first. Therefore, as previously discussed, an increase in the money supply doesn't uniformly elevate prices, but rather alters the relative prices of commodities, consequently impacting the real economy and industrial structure.

  During the aftermath of the COVID-19 pandemic, the U.S. government resorted to indiscriminate economic stimulus measures by injecting money into the economy. While these measures were more uniform and sustained compared to the aforementioned example, the ultimate outcome only served to widen the gap between the rich and the poor. Consequently, ordinary Americans found themselves grappling with higher consumer prices and soaring asset prices. Our country's approach of targeted currency issuance fares even worse. The most viable options remain the universal social security measures and tax reforms mentioned earlier.

§4 Process of Monetary Pricing

  The money supply itself does not inherently determine the value of money. While the value of goods and services stems from their utility, the value of currency is derived from its objective exchange worth (particularly evident in credit currency, although precious metals possess inherent utility). Consider a scenario: if I value a hamburger at 1 dollar, and you value it at 2 dollars, with 100 burgers and 50 dollars in the market, how much additional currency should be issued? Conversely, if we collectively value a hamburger at only 1 cent, would it be prudent to withdraw a significant amount of currency?

  Currency typically adheres to the fundamental principle that a higher supply leads to a diminished value and reduced purchasing power. However, the price of precious metals tends not to fall below their extraction cost. If prices dip below the cost of extraction, mining activities cease, prompting prices to rise. This is in contrast to credit currencies, which, being mere pieces of paper, have no fixed lower limit to their depreciation. Overly devalued currencies often face difficulty re-entering market circulation.

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