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Principles of Ecology: Business cycles and money. Lecture III November 18, 2010 Karl Seeley, PhD Hartwick College, Oneonta NY. Data from Penn World Tables, 2007. Data from Penn World Tables, 2007. Czech Republic. Data from Penn World Tables, 2007. Data from Penn World Tables, 2007.

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principles of ecology business cycles and money

Principles of Ecology:Business cycles and money

Lecture III

November 18, 2010

Karl Seeley, PhD

Hartwick College, Oneonta NY

outline november 18
Outline, November 18
  • Resource supply curves
  • Circular flow
  • Sustainable growth
  • Money
  • Unsustainable growth
  • Investment (physical process, financial process)
exhaustibles over time
Exhaustibles over time

PE

New discoveries

Construction of capacity for extraction

New extraction technologies

New technology and discovery not keeping up with depletion of the stock

(There’s still some cheap oil)

E

Emax

Emax

Emax

Emax

fossil fuel supply curves
Fossil fuel supply curves
  • Easy to move rightward
    • Concentration and density
  • Can keep moving rightward as you:
    • Find new reserves
    • Invest in extraction capacity
    • Develop new fields
  • Move leftward as you extract fuel
renewables over time
Renewables over time

Discovery/conquest of new land

Clearing of forest for agriculture

Fishing boats that go further from shore

Soil exhaustion

Depletion of fish stocks

Cutting of most/all available trees

PB

More powerful timber harvesting equipment

Bmax

Bmax

Bmax

B

renewables supply curves
Renewables supply curves
  • Move rightward with:
    • Better harvest techniques
    • Conquest of new land
    • Investment in harvest tools
  • If harvest is only natural growth, then nothing pushes curve leftward
  • If harvest is high, or other activity damages, then curve moves leftward
solar constraint
Solar constraint
  • Renewable curves are subject to the “solar constraint”
    • Ultimately limited by the flow of current sunlight, and the ability to capture, convert, and concentrate it
  • In one place, you can’t expand very far before overharvest
  • Because it’s diffuse, it tends to be more expensive than fossil fuel
fossil renewable interaction
Fossil-renewable interaction
  • Fossil fuel frees up renewables
    • By replacing biomass as an energy source
  • Brings within reach formerly inaccessible stocks of renewables
  • For a while, can compensate for declining health of renewables
    • Increased chance of overharvest
  • Fossil fuel: Both a new resource, and a means of increasing supply of old resources
2 field agriculture
2-field agriculture

Field operations

22

20

5

11

Soil improvement

15

25,000

200

Fallow

5

7

11

24,805

Animals

180

17

2

23

Sun

30

11

3

45

25,000

400

People

Crop

24,628

325

28

Some energy is growing the crops

Some energy is driving ecosystem services (e.g., restoring fertility)

generalized pre industrial human ecology
Generalized pre-industrial human ecology

Humans

Food

Ag

Industry

Ecosystem services

Sun

Eco-systems

Raw materials, motive power

Agriculture is solar-based, also relies on ecosystem services

Industry uses energy from animals, wind, water, animals, and humans

Materials are derived from plants and animals (and minerals)

early industrial human ecology
Early-industrial human ecology

Humans

Food

Ag

Industry

Ecosystem services

Sun

Eco-systems

Coal

Population, agriculture, and industry all expand

Increased competitive exclusion of other ecosystems

Coal introduced as additional source of industrial energy (and raw materials)

advanced industrial human ecology
Advanced industrial human ecology

Oil, etc.

Food

Ag

Humans

Sun

Industry

Ecosystem services

Eco-systems

Coal, oil, nuke, etc.

Further expansion of population, industry, agriculture

Increased use of fossil fuel in industry

(Near) elimination of human motive power

Introduction of fossil fuel to agriculture

Further shrinking of ecosystems

production output
Production (output)
  • Y = F(K, N, A, R)

Production (output) is a function of

      • Capital (K)
      • Labor (N)
      • Technology (A)
      • Resources (R)
  • Standard approach omits resources

Y = F(K,N,A)

long run vs short run
Long run vs. short run
  • The long-run trend since the Industrial Revolution has been growth
    • Sometimes faster, sometimes slower around that trend
slide19

GDP

Trend

Actual

Time

long run vs short run1
Long run vs. short run
  • The long-run trend since the Industrial Revolution has been growth
    • Sometimes faster, sometimes slower around that trend
  • Increasing capital, improved technology, increased resource use
    • Increasing output per worker
    • No growth means falling employment
recession
Recession
  • Falling GDP
    • Or growth too much slower than trend
  • Higher unemployment
  • Capital idle
  • Resource use declines
uses of output
Uses of output
  • Y = C + I + G + EX – IM
      • Consumption
      • Investment
      • Government expenditure
      • Exports
      • Imports
    • National Income Accounting Identity
    • This is about technical possibility
      • How much can you produce and how will it be used?
    • But why produce?
circular flow diagram
Circular flow diagram

Wages, capital rent

($)

II. Including investment

Labor, capital

Export

expenditure

(Ex)

Firms

Households (HH)

Goods, services

($)

Import

expenditure

(Im)

Consumption expenditure

Financial markets

I

S

T

G

Government

aggregate demand
Aggregate demand
  • The sum of all final expenditure in the economy

Consumption

Investment

Government expenditure

Imports minus exports

AD = C + I + G + Ex – Im

  • The same stuff as GDP
  • The motivation for production
supply vs demand
Supply vs. demand
  • Supply-driven model
    • The economy is going to produce what it’s going to produce (Y)
    • Divided in different ways (among C, I, G, Ex, Im)
    • More for one of those means less of the others
  • Demand-driven model
    • Economy responds to more demand by producing more
    • More of one (C, I, G, Ex) results in more of others
circular flow diagram1
Circular flow diagram

W

II. Including investment

Firms

Households (HH)

Export

expenditure

Import

expenditure

C

Financial markets

I

S

T

G

Government

circular flow diagram2
Circular flow diagram

W

II. Including investment

Firms

Households (HH)

Ex

Im

C

Financial markets

I

S

T

G

Government

composition of gdp
Composition of GDP
  • Consumption is usually about 60% - 70% of the total
  • Government ~20%
  • Investment fluctuates a lot, 10% - 20%
standard b cycle explanation
Standard B-cycle explanation
  • “Exogenous” drop in demand
    • Exports, or weakened consumer confidence
    • Or reduced investment expenditure
  • Circular flow amplifies this “shock”
  • Output goes down, and employment
  • Renewed demand puts unused resources to work

… eventually

  • Government policy can create demand, shorten the process
reconciliation
Reconciliation
  • Ecological model accounts for long-run growth
  • Ecosystems have fluctuations in “output”
    • Volcanic eruptions, droughts, sun-spot cycles …
  • In agricultural economy, similar drivers for “business cycle”
  • In industrial economy, only contributory
    • In recessions, we “underutilize” everything, including ecosystems
  • The driver is finance
    • Controls rate of economic activity

 Controls rate of use of ecosystems and resources

sustainable growth
“Sustainable” growth
  • In economics, nothing to do with whether resources are being used “sustainably”
    • That’s very hard to define, anyway
  • Growth in purchasing power matches growth in productive potential
    • As workers get better at doing stuff, demand for what they make rises in sync, so that they keep being employed
creating purchasing power
Creating purchasing power
  • By making stuff
  • Out of thin air
production based buying power
Production-based buying power
  • Purchasing power can be created through production of things other people want
    • I make something, you buy it from me, I can buy something else
  • But this process generally supports current level of output
    • If demand is based on what’s currently being made, there can’t be demand for more than what’s currently being made
money for growth
Money for growth
  • To cause firms to provide ever more output, there must be ever more demand
  • Easy way to do this is to create money out of thin air

?????

essence of money
Essence of money?
  • Anything generally accepted directly as claims on current stuff
    • Cash
    • Checking account balances
    • Savings account balances (if there’s ATM access)
      • Instantly and at fixed rate converted to cash
    • Credit-card line
money and time
Money and time
  • You can exercise your claims on stuff immediately
  • You can wait till next week, next year, next decade
    • Though a credit-card company could revoke your credit line
assets
Assets
  • Anything of value
    • House, cash, bank accounts, stocks, bonds, a factory, jewels, artwork
  • They are indirectly claims on current stuff
    • Though cash and bank balances are directly claims on current stuff
    • Other assets have to be turned into money before they’re effective as claims on stuff
  • Money values of assets can fluctuate wildly
what is credit
What is credit?
  • Giving someone money now, in exchange for money later
    • Giving someone claims on current stuff in exchange for claims on stuff in the future
      • Credit card
      • Business loan
      • Mortgage
earning future claims
Earning future claims
  • In the future, how will you get claims on stuff, to pay off credit?
    • Get a job
    • Produce a good that you can swap for other people’s claims
    • Provide a service that you can swap for other people’s claims
      • Which is what getting a job amounts to
assets and time
Assets and time
  • I hand Chris claims on stuff now, to buy a house
  • I balance that act with the right to a stream of claims on future stuff
  • The right to that stream of claims on future stuff (i.e., the mortgage) has value
  • I can sell the mortgage (e.g., to Alex)
    • Alex hands me claims on stuff now
    • He receives the right to a stream of claims on future stuff
  • By creating the mortgage, I’ve created an asset
money for start up
Money for start-up
  • I need claims on stuff for my new company
  • Sell shares in the new company
    • e.g., 1,000 shares, each one owns 0.1% of company
  • Shares are rights to future claims on stuff
    • Future profits (resulting from production in the future) belong to share-holders
  • The right to future profits is worth something now
    • Though value depends on guesses about size and timing of future profit
  • Shares are an asset
changes in asset values
Changes in asset values
  • My company could invent something BIG
    • Guesses about future profits jump
    • Value of right to those profits (stock shares) will jump
  • Chris could lose his job, stop making mortgage payments
    • The right to those payments loses value
    • Likewise, my company could go bankrupt rather than prosper …
      • … destroying the value of the right to future profits
bank made money
Bank-made money
  • A loan: the creation of claims on current stuff in an account for you
  • Your suppliers will accept your checks
    • Claims on stuff are backed by your bank
    • Maybe pay off their own loan
    • Or put them in checking, buy something else in turn
  • Eventually, claims return to your bank for settlement
    • In the meantime, they’ve been acting as money
  • Meanwhile, other banks also creating loans
    • And some of those claims are making their way to your bank
the dirty little secret
The dirty little secret
  • In a legitimate loan or mortgage, the creation of claims on current stuff is balanced by rights to claims on future stuff

BUT…

  • You can create a loan, even when the stream of claims on future stuff is implausible
    • The claims on current stuff are just as real, but no claims on future stuff will ever flow back
money review
Money review
  • Money:
    • Any convenient thing generally accepted as claims on stuff
  • Assets:
    • Things of value
    • Indirectly claims on stuff
    • Financial assets
    • Physical assets
      • Productive: means of future production
      • Consumptive: means of future consumption
money review cont
Money review, cont.
  • Credit:
    • Provision of claims on stuff now
      • Or claims on value in the present
    • Balanced by claims on stuff in the future
      • Or claims on value in the future
    • Always results in creation of a financial asset
    • May result in creation of a physical asset
      • If it’s not just used up in current consumption
unsustainable growth
“Unsustainable” growth
  • Government can spend too much through borrowing
    • Trigger excessive creation of purchasing power
      • 1960s, Vietnam War + Great Society
  • Govt. can encourage too much lending
    • Creation of purchasing power
      • Late 1990’s, this decade
  • Private sector can go crazy
      • This decade, housing bubble
physical investment
Physical investment
  • Allocation of available inputs to creation of capital
    • Physical usefulness is given by capital’s ability to actually do something
    • Value depends on the value we put on that physical result
  • Investment can fail due to
    • Technical or resource problems
    • Output becomes obsolete or out of fashion
investment as a financial process
Investment as a financial process
  • Establishing claims on value to be produced in the future by relinquishing claims on valued stuff available now
  • You can buy or pay for the creation of a piece of physical capital
    • You will own the value created by that factory or warehouse or … in the future
    • A physical asset that is part of how the economy produces goods and services in the future
pure financial investment
Pure financial investment
  • You can also create a financial asset
      • Instead of a physical one
    • Lend out money
        • Create purchasing power
    • Create an asset
    • Sell the asset for claims on stuff available now
    • Use those claims for stuff, or acquire a different asset
      • Maybe even a physical one, like a factory or warehouse
joys of financial investment
Joys of financial investment
  • As long as you can find
    • People willing to borrow, thus creating an asset
    • Other people willing to buy the resulting asset

… you can establish claims on value to be created in the future …

… without creating a single piece of physical capital

    • e.g., without contributing in any way to future ability to create value
double role of physical investment
Double role of physical investment
  • Investment is the key human factor in long-run growth
    • Along with resource availability
  • Investment is also the most variable part of aggregate demand
    • A key driver of the (short-run) business cycle
  • Availability of investment to spur short-term growth depends on the prospects for (investment-driven) long-run growth
business cycle and growth
Business cycle and growth
  • Creation of money creates demand
  • Demand results in increased production
  • With prospect of growth, incentive to create capital
    • So there is growth
  • The assets that backed the creation of money can be honored
business cycles and energy
Business cycles and energy
  • Increasing demand causes increased efforts to produce
  • Increased productive effort tends to lead to increased energy use
  • Temporary difficulty obtaining energy:
    • Makes it harder to produce stuff
      • Harder to produce purchasing power
    • Diverts existing purchasing power toward energy
      • Away from any other activity in the economy
for seminar iii 19 11 30 11
For seminar III (19.11, 30.11)
  • Find a definition of “sustainability”
  • Bring it to seminar, along with the source
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