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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


    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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