A Few Principles of Economics

The economy is always a competition.  That is, businesses are competing with each other for customers, resources, etc.  If one has an advantage, e.g. lower costs or better products, it wins by attracting customers from others.

For practical purposes, local competition is zero sum.  That is to say, if you do better, someone else has to do worse.  If one town lowers its tax rates, for example, businesses move from other towns,but little new business is created.

The global economy can grow, but only at a relatively slow rate.  Big changes are so disruptive that there are a lot of losers.  If one area (region, type of business, income group, etc.) sees a big improvement, there is another area seeing a big decline. 

The value of things is determined by perceived supply and demand.  If there appears to be more demand for a thing than its supply, its value increases, and vice versa.

The accuracy with which perceptions of demand and supply match reality is called efficiency.  Economic efficiency is thus a measure of information flow.

Only goods and services have value.  The value of a thing is determined by how hard it was to make or obtain (a service) relative to how many people want it.  Information is such a service.

It's thus possible to profit from the difference between perception and reality.  This gives an incentive for fraud.  Fraud will be discovered eventually and priced into the market, but it's possible for it to last long enough to cause a lot of harm.

Liquidity is a measure of how easy it is to trade in the market.  There are a lot of factors affecting this.  Among them are portability and granularity.  If I have something traded in bulk but easily divided, such as grain, it's easy for me to break it up into convenient-sized groups.  If I have something larger--a cow, or a house--it's harder.

Currency is a tool for increasing liquidity.  Anything can be a currency, and actual grain crops were among the first.  It's helpful that it be portable, granular, widely accepted and difficult to forge.  Gold works well, because it's difficult to forge and easy to check whether it's real or not.  Today, most currency is binary data in computer networks.

Currency has NO intrinsic value.  Its value is derived purely from the service it provides--that is, the goods and services it can be traded for.  Thus:

The value of all the currency in circulation is the perceived value of all the goods and services in the economy.  Money that's not in circulation (such as in a coin collection or savings account) counts much less (not quite zero: it could come out of storage and impact the economy, but as long as perceptions are that it won't, it's effectively not in circulation.).  Thus:

The production and protection of currency, in whatever form, is a service provided by government.  This is an extremely valuable service as it increases the liquidity of the economy enormously.  It's one of the many services we pay taxes for.

We pay government to keep all these things working properly: to police fraud, to print currency, to regulate things like market manipulation and inequity.

Taxes are not a load on the economy, provided they are equitable.  If everybody pays the same taxes, everybody has exactly the same buying power, other things being equal. Remember: the market is a competition.  Taxes are thus functionally like a small amount of deflation.  There are a few ways this can go wrong.  Most obviously, if they are inequitable, such as being lower for one type of work than another.  Also, because government is making the spending decisions, they could potentially distort the market.

The market is everybody.  This is important. We can refer to "a" market (for some particular product, or some particular region), but for purposes of discussing the economy overall, we must make sure we're counting everybody.

There's an optimal level of inequity.  Too much, and the vast majority can't afford to buy stuff. Too little and there's no incentive or opportunity.  High levels of inequity inhibit economic growth, because the vast majority have no opportunity or incentive.   Rich people can only buy so much, which strongly limits "trickle down".   If you really want to grow the economy, you need to grow it for everybody.  A million people, each growing 1/10th of a percent, grow the economy ten times as much as a thousand people each growing 10 percent.   It is the role of government to enforce this level.    Thus:

When inequity is high, tax breaks for rich people hurts the economy.   Tax inequity should be used to reduce inequity.  Not to zero, which is probably impossible and would be harmful, but enough to make the middle economically strong. 

The free market very powerful and works well in most cases, but there are some where it doesn't.  An oversimplistic generalization is that these are cases where there are huge, inherent advantages to monopoly that distort the market. The phone company of old was an example.  The phone works best if everybody is on the same network.  It's beginning to look like this may also be true for internet service and health insurance, although it may be possible to restore the free market through (draconian) regulation.  Many markets, such as finance, energy, and health insurance, could potentially be healthy and free, but they are clearly not at the moment, being dominated by a handful of giants who have bought not just the regulators, but the government itself.

Because of things like fraud and rent seeking, only regulated markets are free.  Most people are honest, but as long as there are some that are not, we must enforce against it.  Rent seeking is the tendency for those who have captured some advantage to extort extra for the privilege of doing business with them.   (Rent seeking is really a symptom of some other failure, but is a fairly reliable indicator).

Many market failures take the form of a race to the bottom.  Competing for lowest price is an example.  It's especially dangerous in things like transport, where price cutting may be served by cutting maintenance, and customers may not realize they've made a bad choice until it's too late. Markets are working best where some vendors are going for low price, and others are going for high quality, and both are succeeding.

Saving money or other resources can be good for the individual, but it takes those resources out of the economy, and anybody depending upon them necessarily suffers.  In a healthy economy, it's easy to find a replacement, but if many are saving at once, it creates a shortfall of demand, also known as a recession.  When a recession is caused by a demand shortage, there is low inflation, and sometimes even deflation, as unemployed workers drive wages down and unsold goods drive prices down.

Some recessions are caused by shortfalls of supply, such as food or petroleum shortages.  These recessions always have high inflation, centered around the missing goods or services.

Recessions can only be fixed by restoring or replacing the missing thing.  If it's some commodity or group of commodities, getting it is what needs to be done.  If it's demand (typically, rich companies are hoarding cash while others don't have enough to do ordinary business), then someone (typically government, but JP Morgan pulled it off in 1907) has to put more cash into the hands of the people who need it, not the people who are hoarding.  The most effective ways anybody has thought of is infrastructure spending (hiring unemployed people to build stuff) and unemployment subsidies.  This has to go on for long enough that the hoarders get over whatever is scaring them and start putting their money back into the economy.  Because interest rates are necessarily extremely low at this time of zero or negative inflation, government can safely borrow to do this.
 
Most politicians and pundits don't understand any of this, including some who purport to have some expertise--especially people who went to business school.  You will frequently hear them talking about the intrinsic value of gold or some other currency, how tax breaks can boost the economy, especially how tax breaks for some favored group, such as "job creators", can stimulate.  Business school teaches people how to compete in business, and getting people to believe some sales pitch is a fairly effective strategy.  The better ones actually do teach the overall picture, but a lot of the students didn't really care about that.

US Energy Flow

Two charts, produced by Lawrence Livermore Labs: https://flowcharts.llnl.gov/.
This is an attempt to characterize all the energy consumed by the United States.  I find this a very helpful way to look at energy use and production, and endlessly fascinating.

Some definitions and observations:

A "Quad" is a Quadrillion BTU.  1 Quad is about 293 Trillion KiloWatt/Hours.

"Rejected Energy" is that lost to inefficiency, including heat and entropy.

Total energy demand has shrunk by more than 4% in those 4 years.   For the preceding decades it had only risen, flattening in the mid 2000s.
 
Solar and wind have substantially more than doubled in 4 years.  Those numbers are on track to double again by 2016, but 2012 is the most recent year for which LLL has produced these charts.

Coal as an energy source has gone down by about 5 Quads, over 22%.  Natural Gas has only increased by 2.2 Quads.  Almost all of this is in the generation of electricity. 

Electric transportation is only .02 Quad, rising slowly.  I'm guessing the largest share of this in these reports is stuff like subways and trolleys.  We have seen a big increase in electric cars since 2012...I suspect this will see a more visible increase in the 2013 report once it's available.

I'm surprised at how much Biomass is used in industry.  I suspect it's substantially burning of agricultural waste.  The use of ethanol in transportation is visible.

I'm not sure why Rejected Energy has increased while total demand has dropped. The largest piece of this (over half) is electrical transmission losses and generation efficiency, but that's improved.  Most of the gain "Industrial".