Tuesday, July 08, 2008

Insight: $2 Moronity - Economics explained in pictures

I was lucky enough to catch Insight last night. And while I think we can all agree that Jenny Brockie has a rare talent for facilitating that makes Jim Lehrer look like a Fox News anchor in her impartiality and sheer desire to just get all opinions heard, for me the show was one of those shows where I wish I had that special gun that allows you to shoot people on tv.
Specifically, the case of a girl who had to drive 700km-800km per week to attend university. This was put forward as why we 'need' a solution to the petrol crises as she had no viable alternative, she had to drive to her train station and then ride the train for 2 hours each way to get to uni, and she pointed out that this particular semester she had classes from 8 in the morning to 7 at night. She was currently working two jobs to pay for her petrol and that petrol cost her $120-$140 a week to fill up a tank.
Now if you are nodding your head going mmm-hm yes there really is no solution for that, then consider this - if she lived in Ballarat and made this exact claim we would think her an idiot, a simple alternative that is not public transport and not cheaper fuel is to simply move closer to her University. If you are paying $120 per week for petrol then your car is certainly costing you more than that in both depreciation and insurance, registration etc. Maybe even $250 per week. I know there's a rental crises but I'm sure you can still get a room for under $250 per week somewhere much closer to University than that, and probably closer to better job opportunities as well.
Furthermore if you actually sympathise with people who believe their car is a necessity then you perhaps will find my course in the Australian Economy quite interesting.
Let's start with how the Australian Economy works, this is the Australian economy.

Fig 1.0 the Australian Economy

This is the model we have used basically since white settlement turned up, legally defined Aboriginals as Animals and then claimed all the resources here for use in its economic output. But its not that simple, you see because Australia is part of a broader international community, and despite different economies having different structures we all need a bench mark. This benchmark is called Gross National Product or Gross Domestic Product. It is basically a $ value of how productive your economy is. How does this relate to Australian economy - well have a look:

Fig 1.2 The GNP and the Australian Economy

Okay are you following? Well in fig 1.2 we see our 'hole lot of resources' that is the Australian Economy, any given year we dig up/chop down/extract/mine/blow up/burn off/eat so much of our resources and then we sell them to someone for some money. This then shows up as our GNP. For purposes of simplicity I have created two hypothetical years of using our 'hole lot of resources' to generate GNP $'s. In year x we dug up a band of resources and sold them off to countries that needed them, maybe some of them we sold domestically that were then used to produce goods and services or manufactured into export goods. For simplicities sake, generally Australia just digs it up and sells it to whatever bubble economy is in vogue at the time (1980's Japan, 2000's China) until the 'unpredictable' economic bursting of that bubble.
So in year x you might say our economy produced $4 billion worth of goods, the next year year y we produced $6 billion worth of goods. Because year y follows year x and year y is greater than year x this represents economic growth. In this bumper year we achieved infact 50% GNP growth which would have every country in the world jumping up and down demanding to know why their government didn't deliver the same returns.
So now you are basically up to speed with what our governments across the world try to do to show that they are doing a good job, this economic model fits basically all our mining industries particularly relevant for the boom in WA and even represents the Balifornian gold rush in the Victorian Central Highlands, which similar to the WA boom I expect few people will actually 'strike it rich' in the view of history.
So now you understand the Australian economy, how it relates to Coal, Forrestry, Oil, Minerals, etc. So lets step it up and get a little more complicated, lets now observe the role government plays in the economy - 'the government is your friend'.
Basically lumping everything into the same 'hole lot of resources' is good for an overview but doesn't help us understand the complexities of industry.
Lets move to a favorite illustrative tool by economics teachers the two by two matrices.
First our two resources - Brown Coal and Asbestos.
Fig 2.1 two resources

Now each 'hole lot of asbestos' and 'hole lot of brown coal' has a set value on it, that is there is a market price going for every bit of coal or asbestos in that hole. It takes time to dig it out, so each industry is susceptible to market fluctuations over time. Inflation general tells us that prices go up, like petrol. So the oil we dig up today will possibly be worth more if we wait and idg it up tomorrow - this helps explain why OPEC doesn't really give a shit when the leaders of the world demand they increase production.
But do prices always go up? well this is an interesting case study in Fig 2.1, you see back in the 50's or some shit, asbestos was 'white gold' a wonder product, it was fire retardant, an insulator, practically industructable, light wait and a handy sbstitute for bi-carb soda. We couldn't get enough of it. Then one day, people started dying. Not unusual for any given day, except that a bunch of people died of commn symptoms, which was respiratory problems and these people had something else in common - they had all worked with asbestos. Asbestos though useful, seemed to have this nasty property of killing just about anyone who inhaled the stuff.
To oversimplify a bunch of people sat down to figure out whether the cost of making asbestos safe was greater than or equal to the value of selling it. And it wasn't so the value of asbestos as a viable industry fell. Many governments regulated against using it in buildings and many old buildings took on the additional financial burden of having to be stripped of it to be made safe for its employees again.
As such if you had a 'hole lot of asbestos' it basically became a 'hole lot of shit'.
Similarly, Coal is a 'wonder product' that can also be dug out of the ground, it burns fairly hot which is good for boiling water, boiling water is fucking great at generating steam, and steam can be put to work to turn turbines that spin a magnet through a coil and generate electrical current. And electricity is the thing with a million uses. Coal has other qualities as well, like if a ship laden with coal sinks, the coal generally just sinks to the bottom of the ocean and becomes 'wet coal' rather than spreading out on top of the ocean strangling wildlife, spreading toxins and potentially catching on fire and stinking up the atmosphere (although oil is generally intended to catch on fire somewhere, just not usually in the middle of the ocean). So coal can be very valuable.
Until someone points out that when coal is burnt all 'that black shit' that we had been diverting out of the buildings and into the sky, tends to be denser than air, and heats up and retains heat better than regular old air. And when some 'mr.scientist' points out that if continued this will kill not the earth but human civilization if continued, one would resonably forecast that human civilization will want to stop using it.
So one assumes that it is inevitable that like asbestos, coal similarly transforms into a 'hole lot a shit'. But does it? Consider two different countries:
Fig 2.2 Australia and Canada "America's Hat"
I hope my illustration is helpful for those of you who don't know where Canada is, hopefully we all know where the USA is, even if we laugh and scoff at Australians so ignorant they can't point to California 'the worlds 5th largest economy' on a map yet would be ignorantly arrogant enough to laugh at US citizens who can't point to Australia 'the worlds 18th largest economy' on a map.
Basically remember how I said a bunch of maths guys figured out whether the cost of making asbestos safe was outweighed by the revenue from selling it? Well that happened in a bunch of different places, it happened in Australia whom evidently found that the costs of making the industry safe were not worth the returns from our piddling little 'hole lot of asbestos' which I guess in this case could be described as a 'hole little of asbestos' whereas Canadia math guys sat down and were like, 'boy we sure do have a hole LOT of asbestos, it really is a shame we can't sell it' they figured out that the 'cost' of making it 'safe' was worth it just to continue to sell the 'hole FUCKLOADS of asbestos' they had over there. So unlike most of the developed world, the Canadian government invested in making Asbestos safe and tried to keep on selling it to other countries stupid enough to keep on buying (like Japan) where the cost of litigation is virtually non-existent.
So as you can see, changes in value effect different economies differently, one economy that had been relying on digging up and selling more asbestos each year for economic growth was all like 'ouch that hurts, stop it! stop it! stop saying that your ruining everything! I know your lying, I'm not listening...lah lah lah lah lah' and another economy that didn't really rely on digging up more asbestos than another economy was like all 'well that's a shame but really we have to bite the bullet and shut down that industry or we'll go broke just paying compensation.'
So we could hypothesise on this point as to how different countries will react to this thing called 'climate change' as it relates to the value of our 'hole lot of brown coal'.
Australia and Canada both have lots of Uranium, so on the won hand climate change is kind of good for them because Uranium doesn't produce CO2 gasses that cause climate change, so one might expect both countries to jump on the issue.
But Australia does have a 'hole FUCKLOAD of brown coal' and big companies that already make money out of digging it up, and other companies that make money out of burning it. And a consumer market that is all like 'this is cheap' when they get their electricity bill.
Now these companies will be pissed off if their primary assett - the coal they haven't dug up yet - becomes worthless because human civilization selfishly desires not to die but wants to go on living into the future without any consideration for the future sustainability of the coal industry. The government was enjoying the praise it got internationally for its economic growth caused by selling more brown coal to China who don't give a shit about the environment ("hey lady China looks out for nobody but China").
So we might expect to find noise in Australia about 'making coal safe' that is simply not heard in other countries. Australian math dudes may calculate that there is a benifit in a hugely costly endeavor to invest in unproven technology over other viable alternatives in order to keep an industry going, that say Canadia might criticise or other countries for that matter, simply because they don't "depend" on a 'hole FUCKLOAD of noxious poisinous shit' and maybe if we point out that they keep an industry of killer asbestos propped up, they should back off and let us prop up our industry of planet killing coal.
But Canadia has a luxury in asbestos that Australia doesn't have with coal. You see asbestos has a tendancy to kill only people stupid enough to try and make money digging it up, and people stupid enough to buy it for buildings they need fireproofed or insulated. (and fireproofing a building with a substance that is going to kill everyone in the building for a prolonged time is pretty stupid).
But CO2 goes up into the atmosphere and kills EVERYONE EVERYWHERE. It will probably kill those pansy species butterflies first, then start drowning brown people on Pacific Islands second (but lets face it who ever cared about them) and then some south americans who rely on glaciers to get drinkable water but we barely care about them either and then EVERYONE EVERYWHERE.
You see two stupid people - people stupid enough to keep digging it up, and people stupid enough to buy it to burn for electricity, is enough in the case of Brown coal to kill everybody.
Or is it?

Time for lesson three, is there room for doubt about climate change.
Here is a basic drawing of what is called the 'earths atmosphere'
Fig 3.1 the earths atmosphere sort of

It's a big roundish cloud of air that has a certain quantity of air in it.
Then within the earths atmosphere is something pretty unique in our neck of the woods, it has a small arear called the biosphere.
Fig 3.2 atmosphere and biosphere sort of

Now looking at the biosphere its worth mentioning a small part of that biosphere can comprehend its own mortality, represented by the round smiling part in the diagram, the rest of it lives but isn't really conscious of the fact. It sort of relies on the round thing to keep it alive.
Now where do all the resources from lessons 1 + 2 fit in? well they are represented by most of the earth being minerals and material that isn't alive, solid matter and some liquids that we often draw upon for industry.
Fig 3.3 the atmosphere, the biosphere and pretty much all solid matter or "natural resources"
Now to oversimplify, we can use natural resources for industry, the drawback is by porducts and waste. This is the not-useful stuff and out-right dangerous stuff that gets produced when we produce non-dangerous-useful stuff. Now previously we pretty much thought that most of these by products go somewhere benign, out into space and we stop worrying about them, as represented in this diagram:
Fig 3.4 the skeptics view of how CO2 and the atmosphere interact

This view can be described as 'skeptic classic' or simply 'ignorance' as if you think about it we actually release these noxious gases not out of the atmosphere but inside the atmosphere, so what has actually been happening, and what these trouble making bulk of the scientific community keeps suggesting is that the world and industry actually work something more like this:
Fig 3.5 the byproduct goes into the atmosphere which the biosphere needs to keep on living

Now sceptics may argue that my diagram is not proportionally correct, that the number of particulates in the atmosphere is nowhere near as drastic a quantity as in my diagram which indeed would kill the biosphere in a matter of minutes rather than decades as a proper diagram would illustrate. But the principle is the same, you can't keep pumping CO2 into an enclosed space (the atmosphere) and expect the biosphere to keep on living. Yes eventually the gas will clear and the atmosphere will become habitable again, maybe from the slow buildup of bacterium that grows on the rotting corpse of the old biosphere, which in short means that there is hope for life on earth. The problem really is for that round bit of the biosphere up the top which can contemplate its own death, and we assume wants to keep on living, its limbs aswell will probably die too, but unfortunately while they die in a manner that is 'business as usual' for them blissfully unaware that death is a permanent state, conversely the round bit is the one that the scientific community thinks will be most dissapointed when it realises it inadvertantly killed itself, and also consciously failed to save itself.
So if you are still skeptical about climate change, I suggest recreating on a micro scale the basic science of it, by pumping your cars exhaust directly into the chasis of your car, after trapping yourself in there (because let's face it fleeing out into space isn't really a solution for us) if you don't have a car, buy a fish tank. Stick your head in it and burn some paper with the lid on to get a forecast of what happens when we continue to pump carbon into the atmosphere.
But what does this have to do with $2 a litre?

The government and you. Suppose you were playing a game, called 'king of the castle' where you accrued certain priveledges and benefits from holding a certain place in the mini 'society' by being on top of say a big rock. The big rock represents 'society' all you have to do to be 'king' as is the object of the game is push people off the rock and retain your position on it.
I can't be bothered drawing a diagram for something so simple, but basically this is a version of the game known as 'king of the castle classic' nothing has really changed in terms of the object of the game, which is to retain power, and the fact that that power accrues benefits usually means you get a king strong in some criterion or other at the top.
At some point someone figured out though that while 'king classic' was enjoyable for the person on the top, everyone enjoyed it more if instead of simply holding the position of king by force, you were elected by the players in the game to be king, and accountable to them. So being king was marginably more enjoyable and it was pretty pleasent for other people too.
Basically the king becomes 'the government' so you could call the new modern version of the game 'the government of the castle' incidently this was a long hard development that came out of some pretty vicious infighting between kings and colonies and western civilization vs eastern world empires and schools of philosophy and lots of work.
It works basically by you the player, having a concept of what is good for you. aka what is in your best interests. And here is the whole flaw of the system - what is in your best interests?
Furthermore another flaw is that the king today is making decisions that will effect what is best for people that play the game tomorrow. So there is to flaws: here they are.
Flaw 1. You have to be not stupid enough to realise what actually ARE your best interests.
Flaw 2. Retention of power only relies on the votes of people playing the game right now, not the beneficieries (or victims) of the decisions the king is making RIGHT NOW. (The future doesn't get to vote)
$2 petrol has a little to do with both these flaws.
Flaw 1 - To understand why the government shouldn't and won't reduce the price of petrol you need to understand these basic concepts of economics that aren't actually complulsory for you to learn in school, the first thing is 'Supply and Demand' and nominally how they relate to price.
Fig 4.1 Supply and Demand curve

Now thankfully our government made mathematics compulsory up until 16, so most of you should be able to understand a basic graph. What it says, and economics basically believes is that at a certain price there will be a corresponding amount of demand. so at $1 people will demand $1 banana to be supplied. At the same price there will be a corresponding desire to supply, so at $1 a supplier will want to supply $1 banana.
This works as a model very well for a banana. Now suppose there is a high price on the market, then think about it, people will demand less banana's and seek other fruits and alternative snacks to spend their money on. Banana suppliers will want to sell as many of their bananas as they can while the price is so high, they will be literally going bananas.
If conversely the price is low then demand will be high, in this case people will be going bananas for bananas. But suppliers don't want to sell bananas at a low price, they have to work harder to supply these bananas that people want and end up earning less money.
The idea is that eventually the market has a bunch of exchanges where the suppliers hold back their bananas if the price is too low and the consumers stop buying bananas when the price goes too high until somewhere demand crosses supply and you achieve market equilibrium.
This works well with our goods we call commodities.
But what of other goods like coal, petrol, and asbestos.
Well asbestos we have established that in australia since we don't have much to sell, asbestos is bad and that governments that sell it are evil, like evil canadians who are hellbent on killing their own stupid customers.
What of the other two then? Well remember Australia's economy? the 'hole lot of resources'
Fig 1.0 revisited

Now what is this 'sustainability' that is cropping up everywhere? well you'll notice a new economic property unique to Australia's general stupidity - 'the bottom' you see if we dig up x amount this year and y amount next year such that y is greater than x, and z the following year is next year that even while GNP proudly proclaims to our governments patting on the back that our economy is growing, we are infact accellerating towards 'the bottom of our hole lotta resources' some people are studying this remarkably obvious fact in things called 'peak oil' one of the voices of reason represented on insight.
So you run out of coal, but since 'the king of the castle' retains power by people thinking that they are doing a good job looking after their best interests you can understand why the general education of the public has a tendancy to obscure these facts, particularly since the general form of education most often consumed by the public once they leave school comes from 'today tonight' and 'a current affair'.
I'm not here to explore the vested interests between media and government that might make their job easier by having a stupid public, but basically the new supply demand curve starts looking like this for coal and oil:
Fig 4.2 the suppy and demand curve for oil and coal

This one may be really complicated and is what people seem to have trouble understanding the most. So I will use CONDSCENDING capital letters. Okay in this case oil and coal are a finite amount we can dig out of a hole. Because the hole has a BOTTOM. This is what finite means, it is the difference between going to Subway and ordering a large drink with FREE REFILLS and ordering a medium drink which you can ONLY FILL UP ONCE.
This means suppliers can supply a maximum amount, or less. Demand though, people are free to demand as much as they please. This means you can go to Subway order a medium drink, drink it AND STILL FEEL THIRSTY EVEN THOUGH THERES NO MORE DRINK.
Now suppliers they own the oil, and they want to sell it, they really do, if demand is low few of them will want to sell it because the price is high. Demand may increase though because a bunch of people want the convenience of cars, and the price reaches equilibrium, this means People want $1 per litre worth of petrol and the suppliers want to sell it for $1 per litre. This is good for the suppliers because they are supplying exactly as much as they can produce. In effect there is EXACTLY ENOUGH OIL to meet the DEMANDS OF ALL CONSUMERS.
But suppose demand increases again? This would normally happen because the price had decreased, and consumers wanted to snap up a bargain. But in the case of oil, it is probably because people want more cars which NEED petrol which is a product from oil. But now the suppliers can't actually supply anymore because they are already supplying what they can, even though the price is increasing, they can only sell the same quantity "x" on the graph as before. Demand theoretically decreases because they can't afford petrol.
Yeah, right. This is what would happen in AFRICA and possibly CHINA and INDIA countries where the majority of the population has had to get by without cars for most of last century, they don't see cars as a necessity, they infact are demanding them chiefly as symbols of status and wealth that they have long associated with the WEST. To see that this is the case go to Bejing or Mumbai where cars are simply not practical at all thanks to shitty infrastructure.
The supply demand curve for Australian oil consumption looks remarkably similar to the supply demand curve for Heroin addict consumption. For simplicities sake I can also remove supply as it is largely irrelevant:
Fig 4.3: Addictive Demand behaviour

This is why I suspect those cursed OPEC nations are laughing at the plight of the Aussie battler, because to them we are SAD JUNKIES going 'man o man you gotta give me the goods man, I got bugs crawling under my skin' All credit to the OPEC nations, they seem to understand that we will buy at WHATEVER PRICE they set and will buy WHATEVER AMOUNT they choose to produce. They seem to comprehend that there 'hole lotta oil' is going to runnout someeday and they need to charge as MUCH AS POSSIBLE to be REPONSIBLE to their people as they invest that money in new economic engines such tourism and sustainable industries such as IT, Education and so fourth.
And here is where Australians should be reassured. Because we have a 'hoel FUCKLOAD of coal' and despite the climate change fiasco, we have the US on side (who also are the only military power that from time time force the OPEC nations to behave (that is behave to the US's benifit, this usually means that instead of OPEC trying to exploit the desperation of oil junkies, the US assumes the reins of exploiting the oil junkies)) and a willing customer in China who's 'king of the castle' is currently promising its population FABULOUS FANTASTICAL RICHES in order to hope that they don't wake up and notice how shit their 'king of the castle' is, realise they are responsible for most of their miserable life, realise that the 'king of the castle' is a minority within its own kingdom of China and do horrible things in retribution. So far this seems to be working, and as we know Coal is fixed in supply, we should be able to exploit China in order to grow up other industries to provide economic income for future australian's right? Wrong.
Our government is a democracy, that pats itself on the back whenever it gets a growth in GNP. Our aim is not to try and make as much money as possible, but to dig up and sell of as much of our natural resources as possible. We take the BULK BUY approach to Coal. That is the more China demands of our fixed asset, the cheaper we are willing to sell it.
If you are too stupid to realise then, that our best interest is to break our dependance on cars and oil and coal, then you would possibly vote for a government that was doing these stupid things, and making stupid promises.
So if by now, you don't understand that when you lobby to have the excise on petrol cut, because of the fixed supply of petrol and our addiction to it, that benifit will dissappear overnight, and the opportunity of the government to invest that in better transport alternatives, which stupid people are currently voting against. You may also think that all the profit from selling coal should be going to building alternative sources of energy, and alternative sources of revenue for the Australian economy so it can move from the 'hole lot of resources economy' to say a technological innovator like Japan was, and certain Scandinavian nations with the best living standards and happiest people in the world are.
But if you are too stupid to realise that, then what? then You think that what is in your best interests is a government that 'creates jobs' by investing in low tech, hole digging industries. You think that a government that 'protects jobs and industries' by subsidising uncompetitive indutries. You are porbably stupid enought o think that if the government stops taxing petrol, then petrol companies will pass the savings onto you the consumer. Maybe some, but they too know you're a junkie and probably wont. Price will continue to rise but at least there may be some benefit from consumer groups stopping bitching and whining about the petrol excise and start to address the problem - first call of action 'introduce a petrol excise to finance alternative transport and energy initiatives'
And what of Flaw 2. the future doesn't get a vote? here is probably a good place to lead in to this flaw neatly from flaw 1. You see we actually have TWO SETS of best interests, our short term interests, and our long term interests. A simple analaogy is sitting on a couch, in our long term interest it is better if at some point we get up and go for a jog, to make sure we are healthy and robust at some point in the future. In our short term interest it is much easier to continue sitting on the couch right now. Of course if we constantly use the short term thinking then at some point in the future, we will be UNABLE TO JOG JUST TO SAVE OURSELVES and die a fat lardass.
So now let's look at Economics, democracy favors short term thinking, if any given government with a 3 year window of opportunity wants to put into effect a plan that pays dividends in 15 years time, they have one may notice very little incentive to do that, because 1) it is rare for a government in Australia to be in power still in 15 years time and 2) they may get voted out in max 3 years time.
So better to see what voters care about right now and address those. Aka short term thinking, people have a tendancy to care about prices of goods, employment, housing, interest rates etc. some of these you can fix with long term plans, but if they fix these things really well in 15 years (through tax reforms, investment in sustainable industry, investment in education) then god forbid, the opposition may be in power then. So better off just to blow money on a bunch of publicity and feel good policy, support the crappy industries you already have rather than pissing off voters by getting rid of them and so fourth.
What's the deal? Well one, is that generally good changes take time, only bad change usually happens quickly. That is that your children may live in best case a world that is exactly the same as we live in now, or one much worse.
I would put my money on much worse though, because we have this nasty addiction on the one hand that are usually progressive in nature, and on the other hand we have an economic model based on accellerating towards the 'bottom of the hole lot a resources'.
Hmm the bottom, rock bottom...
What does that look like, when you run out of the stuff in the hole you depended on selling and can't afford what you need to keep going? Hey! remember brown people?
Fig 5.1 Famine "classic"

Upsetting? yes, well this is the fundamentally most stupid thing about Australians, Australian's do not seem to be that part of the biosphere that can comprehend its own death. This famine thing is what happens to people who are unable to pay or produce things that are valued by people with money. When Australia has no more coal, no more forest, no more rain on farmlands, no more minerals this 'famine' thing is one likely outcome for us. No doubt some of us will be smart enough to get jobs in other countries that value educated people instead of protecting industries that employ people who they don't train to have alternative means of generating income.
Some people already are going right now. You see, famine doesn't just happen to Brown people, it also can happen to white people. And as the Irish prove, white people don't necessarily look after their own.
So think about all this. Role it around in your head as many times as you need to.
Economics and government go hand in hand, and its a big game that if you make the wrong decisions at the wrong time, you can lose and lose bad.
Generally the wrong decision is looking after yourself to the exclusion of all others. We are in this together now. I am lucky, I am educated and ride a bicycle, I have done most of the hard work to survive in a world without petrol or low-skill jobs already, for me I have the luxurious position of being able to point and laugh at your stupidity right up until your stupidity kills us both.
If necessary, and I'm serious I WILL KILL YOU before your stupidity kills US BOTH. Fortunately I'm just waiting for you to come on board for the solutions that allow us BOTH TO SURVIVE.
Most probably, Neitherlands, Denmark, Germany and whatever other countries have started to take this climate change seriously form an aliance and proceed to kill you for being stupid and me for associating with you before your stupidity kills you, me and them.

In summary, learn what you are talking about before you start bitching and moaning about solutions.
Because the funny thing about all games is that reality has a tendancy to win in the end. If you don't believe me, try and keep sneaking free refills at Subway when you haven't paid for it.

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