Sunday, June 05, 2011

The Conformal Economy

In his book Cycles of Time, Roger Premrose carries further his analysis of the geometry of the universe, mathematical and geometric models of black holes and the origin of our universe. In this book, Premrose investigates the geometry of the big bang origin as well as providing a hypothesis about the ultimate fate of the universe. Will the universe continue to expand indefinitely, or does it go through cycles in which expansion is followed by contraction?

The explanation by Premrose is “conformal cyclic cosmology.” A geometry is conformal if its angular structure does not change when the distances are expanded or contracted. Consider a cube with a side of one meter. If we expand it to sides of ten meters, it is still a cube, with the same structure, thus conformal.

Because the early universe is conformal to the current universe, with the same physical laws and geometric structures, and the future expansion is also conformal. While one needs to be savant in physics to understand the Premrose hypothesis, the essential proposition is that the conformal geometry will cause the universe to stop expanding and again contract in an infinite cycle. The hypothesis is not yet a theory since it has not yet been tested by evidence.

There are geometries in economic theory, such as supply and demand curves, the production possibility curve, production functions, circular flows, and the histogram model of the law of rent. But there is also a geometry of the actual economy. This economic geometry is not a physical structure such as the angles of the hydrogen atoms in a water molecule, but rather an economic structure that is hidden from superficial appearance but forms an implicit reality.

The key economic geometry consists of the surplus generated by production. Neoclassical economics models this as a “producer surplus,” geometrically illustrated by a supply curve, a price line, and the area between the price line and the supply curve. That is the so-called “producer surplus”. You can see this visually in a web images search for “producer surplus.”

But neoclassical economics also understands that the long-run economic profits of firms in competitive industries is zero, after subtracting all costs, including normal returns to assets. Thus the “producer surplus” is an economic profit that does not go to the firm owner. It also does not go to wages if the labor market is competitive, as wages greater than normal will increase the supply of labor and drive the wage back down to normal.

The only other place that the surplus can go to in competitive markets is to land rent. Most of the “producer surplus” of an economy is land rent. Since no human being creates land, the title holders are not producers, but only receivers, and so it should be called a “non-producer surplus”.

As a surplus, land rent can be tapped for public revenue without hurting production and investment; indeed, the collection of land rent for public revenue is better than neutral, as the payment is based on the most productive use of land, pushing land to its most productive use.

A pure free market requires that the land rent be collected and distributed equally to all residents in the relevant community, either as cash or as public goods, including services. The equal sharing of land rent is the economic geometry of prosperity, economic justice, and sustainability.

But governments today have altered the economic angles of the surplus from production. They let title holders expropriate the rent, while imposing a tax cost on labor and capital. The geometry of destructive taxation is to shift up supply curves, making production more expensive, and to create a deadweight loss, a misallocation and waste of resources that reduces the surplus from both production and consumption.

Even worse, perverse taxation alters the dynamic geometry of economic growth. Much of the gains from economic expansion are captured by higher rents and therefore higher land values. Speculators buy plots of land to gain from the higher rent, and sometimes keep land in suboptimal use, thus pushing out margins of production to less productive margins, a perverse geometry that reduces wages and increases rent even more. This is malspeculation, a destructive land grab caused by massive governmental subsidies to real estate as artificially cheap credit and as fiscal subsidies, public goods paid for by taxing wages generates higher land values.

Meanwhile, to prevent inflation, the monetary authority reduces its excessive money expansion, so interest rates rise with the greater demand for investment and speculation. The dysfunctional economic geometry of malspeculators seeking large gains from leverage, using other people’s money, escalates land values to geometric heights that make real estate unaffordable by those seeking dwellings and work space. The most optimistic speculators see the geometry of ever rising land values and cannot judge when the peak will occur.

Comes then the stoppage of investment, as land value stop rising, the malspeculators panic and sell, and real estate prices crash, which also collapses the financial structure that is tethered to real estate loans and derivatives.

The fundamental geometric structure of the economies of the world have been conformal, unchanged for the past two hundred years. The growth of government regulations, institutions, and taxes are but a change in the size of geometric structures. None of the private and governmental developments of the past 200 years have changed the angles of the basic economic geometry - the private appropriation of the surplus, and the taxation of production.

The conformal economy results in an economic cycle of boom and bust. Malspeculation caused by the governmental subsidy to real estate creates an unsustainable boom, followed by the recession and depressed economy. Only a fundamental change in the economic geometry can eliminate the boom-bust cycle. That change is to stop taxing production and shift to public revenue from land rent.

The pure free market is like a cube whose lines form right angles. Government intervention - destructive restrictions and taxes - are like force applied to the cube to squeeze and twist it to create odd unstable angles. An efficiency tax shift to stop taxing production and consumption, and instead tap the rent surplus, will result in an economic geometry like the right angles of a cube, the sustainable, efficient, equitable and elegant economic geometry of the pure free market.


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