Constants in economy

Economics right now is like physics in the post Newton era. When Newton published his famous theory of classical mechanics it was a revolution, similar to Adam Smith’s Wealth of Nations.

But the model proposed by Newton had some limitations. It was only applicable to big objects and was lacking some fundaments to unite both quantum and classical worlds.

200 years had to elapse before Einstein discovered his Theory of Relativity that completed the way we understand the nature and led to unprecedented discoveries. Basically he introduced something that Newton’s model were missing – a constant. When you have a constant, you can precisely measure everything at once. It’s a huge leap in science. Einstein’s Mass–energy equivalence is maybe the most famous formulae in the world:

E = mc2

Where “c” is the speed of light in vacuum, a constant, Holy Grail of physics, the Archimedes’ Lever!

And that’s precisely what economics is missing right now – a constant that would link it all together – scarcity driven world (microeconomics) and world of abundance (macro).

When I was studying economic growth I couldn’t believe that there’s nothing we can use as constant. And during that self-imposed challenge, I tried to create a model that helps me to understand better the real economic growth.

I started by establishing the parameters that true economic constant should have to be valid for inclusion into the system. Basically the parameters are:

  • It should be compatible cross country/cross time. By this I understand that, for example a value “0.15” in USA in 1830 has the same value and meaning in Russia in 1995, no need of conversion
  • It should be independent and without possibility to introduce changes
  • It should be simple to understand

Since I’m not a professional economist I do have some right to mistake. So don’t be too strict judging me. After establishing above parameters I started to search for such a characteristics that match above parameters.

Money, gold, oil, platinum, antimatter (currently the most expensive substance on Earth)… all these elements are subject to changes over time or region so they are not valid for my purpose. The problem is that everything on Earth is not constant but relative, except… the Earth itself. We certainly know that there’s one Earth and we don’t expect to find anyhow soon another one nor we think to cut it apart as orange into 8 parts. So I tried to imagine a model where monetary system is based in this constant.

So if we have only one Earth, we have a scarcity that can be measured and it will remain constant over time. What if we invent new electronic currency (just like Bitcoin), but not expansive, like all currencies, but scarce, and the sum of M2 (coins and notes in circulation and other money equivalents that are easily convertible into cash plus short-term time deposits in banks and 24-hour money market funds) will always be 1.

If we believe in endogenous growth model, what we can expect from this?

  • Since productivity is growing, we may expect steady appreciation of the money (for each unit of money, you can buy more goods)
  • We may expect the same effects due to population growth (a scarce resource should be divided among more people – the cost of labor declines)
  • Above two statements will lead to problems – prices are flexible but salaries are rigid.
  • But may work perfectly in society where all workers are freelancers
  • The economic growth probably will decline – steady appreciation of money would trigger higher interest rates.

Clearly, as monetary system such model brings more problems than solutions. People usually like to be ignorant and prefer sweet lies rather than hard reality. Therefore countries like their ability to devaluate currency – you decrease salaries without creating a social unrest. Scarcity based currency is good only for mature societies.

But what if we look at above model not like a proposal for future currency, but like a proposal for a new economic indicator. Just like we use “constant dollars of years (lots of different years used)” we could use the above fictional currency to express everything in economy. For example:

  • How much did we take on credit from our planet (a global M4-M2 (M4 is M2 plus long term credits)
  • Difference in salary between UK worker in 1918 and Russian worker in 2015 in real terms (you can compare directly!)
  • Real appreciation of money
  • Real share of each and every person of Earth as a whole (finally, we people are shareholders)
  • Many, many other things!

Since through this indicator almost everything can be easily explained, economics would be much more open for all the people on earth, situation that will trigger more accurate demands to our Governments and would increase democracy and public control. But with current mess of formulas and indicators, based on different things, this is basically impossible.