The theory of periodic economic development

As, in my previous scripts, I have already referred to it, the conception of progress theory created by me is based on two simple, axiom-like parameters. One of them is the development of production opportunities, the other is the conditioning of needs.

Discussing the potentials of the production is originally based on dividing a certain quantity of means between the times when two different products are made. But to be able to examine the opportunity of progressof production potentials we need the volume of aggregated production possibility, in theory, at least. We we have at least 20 thousand years of experience in this (Although the first flints were made approximately two and a half million years ago).

And according to this experience the value of the products and service that is created on the basis of using the production potentials that is the means at our disposal (possible production value) is growing exponentially but in any way it is in a progressive function connection with the time elapsed .[1]  

Fig.No. 1.: Development of the production opportunities

 

The evolution of needs in the history of menkind is a complex question. It is, first of all, because need is not an objective category.  Its most simple and, at the same time, most general definition of it may be the following: 

A need is a demand for all the goods and services for which a distinguished person in the economy – the consumer – is willing to make sacrifices. 

This notion, however, has a wide meaning. It obviously includes possessions and services that are absolutely necessary to simply live a human life but at the same time it is not possible to exclude demands and wishes that are very far either from everyday practice, or, sometimes, from an average person’s imagination.In addition to all of the above, this definition puts products and services on the demands list, which are specifically harmful to their consumer, and can be hazardous to their health and bodily soundness (eg. drugs, but also some services such as certain events which often provideunduerisk for those who use them)And there is a place on the list for the demand of fans of unreasonable, sickly violence (animal fight, all-in wrestling or cage-fight for example)

This short exposition shows that the science of economy – as far as I know it –owes us the elaboration of the category of needs according to its significance.[2]

To be able to examine the rate of extension of needs, we need two things. One is that we have to make a difference between rational and irrational needs, the other is that we should be able to fix, but at least presume the aggregated value of rational needs. I don’t know any objective method to define rational needs, in my opinion, it is still yet to come. I believe, however, that we can reach a proper approximation if we take a close look at the frequency of a certain need, or more exactly the value of expenditure According to this, however, rational is when an expenditure assigned to a certain need, when put in an increasing order, it is ahead of the first 25 per cent.

This is, however, not more than a theory for the researchers of the future. At the present we have to start with an abstraction similar to this. 

The extension of rational needs is objectively restricted. These are partly quantity restrictions of the consumptionk: e.g. biological intake of food, but much more the well-known consequence of decreasing limit profit. Taking these principles into considerationwe can lay down that the expansion of the rational aggregate demandis in degressive function relation with the time elapsed in historic prospects.  (fig no. 2.)

Fig. No. 2.: Expansion of rational needs

 

The potential of production is determined and the need – that is the basis of consumption -  is also determined. It is obvious, that there is a huge difference between production potential and production. The purpose of production – at least in theory – should be the satisfaction of needs.[3] 

The question presents itself:  knowing the producton potential and the rational needs what consequences can we make concerning production, distribution, barter and consumption, in short  the cycle of economy. It is clear that – irrespectively of the production potential  – there is no point in producing more of any kind of products than needed. 

That is to say, the economic rationality and the aggregate need defined on the level of the certain era sets another limit to the production irrespective of techical-technological possibilities.(Fig No. 3.)

Fig. No. 3: Production limit set by the full satisfaction of needs 

 

The figure shows that at the indicated point (F-full) production potential is far beyond the numerical value of the aggregate need, but in lack of consumption ability, there is no point, whatsoever, to increase the production.[4] 

In fact, it is not the need that puts a market limit to production it is rather the sound demand.Nevertheless, to be able to compare we need to make the aggregate value of sound demand, too. As follows:

1./ it is always below the the value of the aggregate need because satisfying the needs make new needs, so they can not be totally fulfilled;

2./ it is in very strong connection with the characteristics of the society structure, property and distribution conditions, employment indexes, the measure and proportions of income outflow. 

So, the plotting of the limits of production is completed with a third gram, which, on the level of development and structure of the certain society, shows the sound demand. (Fig No. 4.) 

Fig No. 4.:  Limit of production caused by the fullfilment of needs 

 

In the graph you can see that the aggregate effective demand in the era indicated with „t₁” is far behind the value of rational needs (v_m>>v₁) Let’s see what consequences can be drawn on the basis of the graph: 

The aggregate sound demand in a certain country is far behind the value of needs at all-national level. This has proposedly one reason: vast majority of the population does not have significant income, or, just the opposite: income is accummulated in the hands of a the members of a very small group.

Knowing the proportions of the distribution of income, however, we can find relations with property conditions. Since there is a rough disproportion in the distribution of income, there probably is a similar situation in the differences of property ownership, which draws the direct consequence of social differences, as well. Looking through modern eyes, this is a rather rudimentary, immature social formation, in which all power belongs to a small dominating group (knowing the value of  v1 – which is a parameter without value here – we could also see that the formation indicated is the slave-holder society, because I picked the proportions that way for the benefit of the example)

The example above clearly shows that there is a tight correlation between the measure of economic opportunities and the structure and the development of the society! But let’s see what else can be found out here!

Let’s take a look at the relationship of production opportunities, the economic limitations of production and economic performance. Let’s lay down the fact, that the economic performance can not, in any case, go beyond tha value of PPv function in the origo and t₁ domain, and going beyond the value of t₁ it can not exceed ED_A function, because PP_V means the upper limit of production, while ED_Ais the economic limit of the same thing. 

The closest possible approximation between production and production opportunities and the limits of sound demand is ensured by the economic rationality. If the upper limit of production opportunities is lower than the sound demand, producers obviously aim to extend the opportunities, growth and economy can develop without any obstacle. If this is not so, economic performance will be far behind the limits of production possibilites, and in this case we have to blame the operation system of the economy, economic policy.(Fig No. 5. P₁ point) 

Fig. No. 5.: Relationship of economic performance and economic limits 

 

There is no obstacle in the way of economic growth – if it is not objected by the disfunction of the government – as long as it reaches the point of intersection of the functions of sound demand and possible production [5] In point P₂ , however, both growth and economic development become impossible. . Why? Because beyond this point production opportunities will exceed the value of sound demand. Production can be increased (what is more, economic performance probably goes into a higher domain than t_2,  in such way that participant of the economy will take notice of it only later, with a certain delay), but the aftermath of this is unsalable stock, which, - going beyond a certain quantity – ends up in overproduction crisis. 

What happened to the slave-holder society – according to our graph?

The slave-holder society was succeeded by feudalism, starting from 476, the fall of the Roman Empire. This date, however, is symbolic, because the transition was continuous, the lenghtiest of all social changes. It is well-known, that it was a generally approved, legitim part of the social structure on the American continent even in the 19th century.

On the other hand, if we take the aspects of economic history into consideration, it is not the length of the process, that is important, but the neccessity of the transition and the way of the procedure. . 

We are in the era in the 5th century indicated with t₂on Fig. No. 5. 

The slave is not a participant of the economy, he functions as means of production. He does not have his own property, does not produce for himself, he is the property of his owner, the expenditures of his maintainance falls into the category of maintaining and amortization of means of production. 

The development of the economy, the economic growth can be measured in aggregation, which has serious limitations and difficulties. Vast majority of production is provided for by the agriculture, so it is perishable, not suitable for storage and piling.

There is money, operates on the basis of precious metals, which is only in limited quantities, this is also an obstacle to piling and getting rich. Production opportunities expand slowly but continuously. The growth of demand is mainly objected by the few participants, whose rational needs are more and more fulfilled. Another important holdback is the limited quantity of means of change, i.e. pileable lasting products. 

The role of producer is acted by the owners of the slaves, the aim of their activity is the profit but it is gradually reduced with the fulfillment of needs and around the 5th century the opportunity of getting rich is no longer an option.(Remember, we are not talking about single participants of the economy but aggregate data! )

Production, whose result is mainly perishable, exceeds the possibilities of purchase, and this leads to a typical overproduction crisis.Production has to be held in, fewer slaves are needed, owners spend less on their maintainence. It is not very difficult to picture the consequences! And it would be a mistake to think that it does not affect very seriously the slave-owners Not being able to grow any richer will be their smallest problem, the decomposition of social stability is much more important, the rich can get richer only at the expense of one another, the quantity of dispensable goods is not even constant but decreasing! Total decline! It is not an accident – the fall of the Roman Empire! 

The graph clearly shows this. The development of the economy was continuous as long as the function of the production possibilites was under that of the sound demand. 

The size of sound demand, however, is determined by the structure of society, relations of property ownership, the ratio of employment and last but not least the income-outflow. So, as a consequence, the structure of the slave-holding society of the 5th century is no longer capable to provide for the conditions of economic development. 

To be able to kick off economic growth again, the society structure needs to change. And it needs to change in a way which goes together with the increase of the sound demand, i.e. a new consumers’ group has to be included in the economic cycle. Slaves have to be prepared to be able to have their own consumption and to produce the cost of it plus, of course, they have to cover the cost of the consumption - and that of financial growth – of the ruling class. This implied the liberation of slaves, the distribution of socages. A new kind of social structure was established in which sound demand was integrated at a much higher lever, opening a new opportunity for the economy to develop.(Fig. No.6.)

Fig. No. 6.: Effect of the social change on the sound demand

 

Economy and society are in a very close interrelationship:the possibility to develop the economy, the conditions of economic growth are provided for by the structure of society, while stability of the society, its all-time status is defined by the operation of the economy. 

In the t₁ – t₂ interval economic growth and development, again, are not objected. 

The villein basically still depends on his master, but he owns him as a productive unit, together with his own natural property (soil) and his means of production (see „bondage to the sod”).

This new social structure was able to ensure the conditions of economic growth, the opportunity of economic development until the end of the 18th century. At that point, however, a similar situation to the fall of the slave-holding society emerged: economic performance again exceeded the sound demand, at least, within the distribution relations of the outstanding society, so the opportunity to grow any richer was closed again. Once again the change of the social structure was necessary to provide for the opportunity for economic development. 

Capitalism evolved, we have ample resource about how and under what circumstances it happened.We, have to underline, however, that personal freedom of the worker is significantly bigger, than that of the villein, his relationship with property is more complete, he has no principled, legal limits, so he is much more motivated to consume and to produce the cost of consumption, as well.[6] 

Examining the development of the economy (and the society) from this aspect, we can surely state, that to this day this model has passed the test of history and accounts for the reasons and consequences of the significant social-economic changes.

It is not necessary to compare the model with each period of history. It is enough to pay attention to the fact, that the model divides the development of the economy into periods, just like history does the same to the development of menkind. This may be worth identifying:  let us name it „periodic development model”. 

I consider important, though, to highlight the verge of two periods - one is the great depression in 1929-33, the other one has been happening since 2008 to these days.I want to show that this model accounts for the reasons and consequences of the great depression of 1929 and explains the evolution of the 2008 recession and knows more than that: comes up with a solution.

Fig. No. 7 The periodic development model and the problem of our era

 

The graph shows clearly, that the production possibilities in 1929 reached and exceeded the rate of sound demand given by the society structure according to that era.  Thus the upper limit of economic development has been replaced with the limit of technical-technological possibilities by the social limits.

A typical overproduction crisis emerged which ruined the economy.

To overcome the crisis – on the basis of all this – a reformation of the society structure was or was going to be needed. Apparently it never happened. On the other hand, the structure of consumption  changed significantly: the state – as the largest orderer – entered the traditional market, a new notion – communal consumption - was born and a dual role of employment evolved. I think this can fairly be considered the change of society structure, that is what I wrote about it earlier:

„Economic increase recoiled at the end of the twenties of the 20th century, expanded reproduction made an unsaleable glut, which made expanded reproduction impossible, and so did economic growth.

The only possible way to wind up the crisis was the expansion of sound demand. This aim was to be reached by developing the armaments industry in Germany, and by introducing the New Deal ,(a new economic policy by Roosevelt) in the United States of America.

It is very interesting, that the economists of the era did not recognize the principles behind this process, what is more, following the great depression (1929-33) the real reasons have still not been determined.

Let’s see what really happened.

The economic policy of both Germany and the United States led to a huge extension of the employment by producing goods and services for which – to say the least – consumers’ demand is quite modest, the consumer is not really willing to pay for. But! Both expand the sound demand by increasing the employment. The dual role of employment evolved then: on one hand for the necessary workforce to be able to produce goods and provide services, on the other hand for maintaining the sound demand to provide for the expanded reproduction, thus maintaining the economic growth.

It is – consequently - not true, that continuous economic growth is the guarantee for the functioning of the economy.

Let’s take a look at what the crisis management strategies of Germany and the United States had in common and what was the difference between them.Both countries introduced the employment that extended the sound demand by producing unmarketable goods. Both countries generated demand through state orders to the production capacity locked up and both countries significantly increased the government’s intervention in the economic processes.

The difference was a new notion in the economy introduced by Franklin D. Roosevelt : the public consumption. As a result of the employment to increase demand, in the United States, useful products were made for the society: roads, railways, public buildings etc. which met real public demand but the participants of the market were certainly not willing to pay for them. These products of the economy were started to be used right away and – since this quantity of products is involved in the production- distribution – barter – consumption cycle – this economic process can be maintained,public consumption - under proper government control - becomes a part of the economic system.

In Germany, on the other hand, employment for extending sound demand was created via developing war industry. But product surplus realized this way accumulates, because neither the market, nor the state is capable of involving these produts in the consumption, the economic cycle. The result is well-known to everybody!

What consequences did the windup of the great depression have?

It created the employment to make sound demand, introduced the notion of public consumption, increased the role of the state in operating, controlling the economic processions, the participation of the state in the economic processes at all. It became obvious that economic growth can be maintained only if the adherent sound demand is justas well provided for, and because of that the control of the employee’s salaries, the quantity of redundants, the number and proportion the unemployed is really necessary.

But why do we need to maintain economic increase?

This has two basic reasons. One of them is that the quantity of resources at our disposal is terminate, so we can use less and less as time goes by. To maintain the same standard of living with a constantly decreasing quantity of resources requires continuous development. The condition of continuous development is economic growth. The other one is that a man’s quality of life is relative, everyone compares his to the other’s, he wants to reach, to overcome that of the other.This generates such development which requires extended reproduction.” (quoting myself: The criticism of the Communist Manifesto II.)

Periodic development model can explain the evolution and management of the recession in 1929-33.

But what about this lengthy recession of the present days, still standing without remedy?

According to the development model, we once again came to a pointat the turn of the Millennium, when the function of production possibilites and the function of sound demand provided by the society structure (or consumption structure) in the given era have an intersection. (Fig No.7.: ED_A4 and PPV) This, just like earlier, means that the upper limit of possible development is rather defined by social (market) limits than technical-technological limits.A further increase of the production volume is possible, but that of sales is not.However, development of production possibilities do not stop, because the owners of capital goods see an opportunity to increase profit in reducing costs.The easiest way to reduce costs is technical, technological development.This, however, goes together with the fact, that saleable products can be made by fewer employees, this was income-outflow decreases and so does sound demand. Unfortunately, in one of the latest reports of the European Commission the reasons for the fallback are explained by the decrease of productivity - thus by the decline of production opportunities.(July, 2013.). This presumption, however, is not properly supported and does not give acceptable explanation for the crisis and it is unable to come up with a guideline towards the solution of the problem. As opposed to this,the periodic development model can explain the evolution of the crisis and reveals that the condition of recovery is the changing of the structure of society but at least that of the consumption. Discernment, however, is getting very complicated here, because the function of production possibilities had an intersection with the function of the sound demand connected to the given structure of consumption much earlier, at the end of the seventies, beginning of eighties, so this recession would have occured much earlier.And it would have occurred, if it had not been delayed artificially. The economy of developed countries was trying to find an answer to the decreasing demand - or more exactly to the slowing pace of the increase of demand - in the reformation of the credit policy. Its main point - beyond increasing credit outsourcing - was the reformation of credit structure, significant enlargement of the proportion of consumers credits at the expense of investment credits. And as a consequence, the quantity of current money - compared to the value of the quantity of goods on the market - grew significantly, approximately hundredfold.(Source: Péter Farkas, 2013.) It can happen only one way, if money itself becomes a product, which has the direct consequence of the vast majority of financial processes becoming autotelic. But this artificial delay of the crisis led to much more serious problems: a general crisis of values was added to the classis (overproduction) crisis, money is less and less capable of fulfilling its role in the economy, its basic functions

The periodic development model, thus, indicates the way to solve the classic crisis, but to reach it, a basic change of the approach, a paradigm shift would be necessary. At the same time it does not give a guideline to manage the general crisis of values, the reconstruction of financial processes.It is obvious, though, that the original functions of money have to be restored, a difference between the two functions of money – good and means of exchange – has to be made and the market balance of money – functioning as means of exchange – has to be taken care of, because the traditional market mechanism is no longer capable of doing that. 

[1] I recently heard a lecture about the quantity of mineral resources on earth. A theory came up which says that the finite quantity of mineral resources has an effect on the production possibilities, meaning that we are on the peak of possibilites in these days and a steep decline is coming in the near future.I don’t believe in this: more than half of the production of gold comes from recycling. The theory, nevertheless, has to be examined thoroughly.

[2] I might be uninformed, but concerning the topic of needs within the frames of economic sqcience, I met only quite poor, and rather general descriptions.The most promising work, that I know of, is a creation of Maslov, about the structure of needs, which was made primarily for sociologists and psychologists. I must admit, I found it useles from the aspect of economy, and so it holds no value for me. On the other hand I figure that the economic role of needs has great significance. It is a well-known fact, that GDP and the index of economic growth is unable to rate or compare the economic performance of a country. Economy experts have an old joke of the Bős-Nagymaros dam, namely that it increased the GDP twice, first when it was built, second when it was pulled down. It is even more suggestive, if we take the example of KSH, whose data are considered official and authentical by every government, according to which they take 1960 as a basis and thus the economic performance was 200 % in 1974 and 400 % 2007. But it is clear to everyone who experienced it, that economy did much better in 1974 than in 2007. I think the economic performance of the country has to be compared to the needs and the elaboration of such system is yet to come.

[3] The development of the economy, however, brought a revaluation of this on. As a consequence of technical, technological development, fewer employees can attend for the needs of more and more consumers, so fewer and fewer people can produce the total quantity of products and services to fulfill rational needs. The pinch of employment, however, would go together with the significant decrease of income outflow, which would reduce sound demand, and set a limit to the quantity of saleable goods.A significant part of workers nowadays are not employed because their jobs are absolutely necessary to produce basic goods and services but to assure the necessary purchasing power that makes the economy operate by fixing the level of income outflow. All this, of course, within the frames of a distribution system based on work, through goods and services, that are – in a certain quantity, at least – not really necessary for the society, thus the consumers. To prove this we can mention the several hundred broadcasters, which present themselves on television nowadays, or the quantity of waste that grew several hundred times as much as it was fifty years ago and the problem of its  elimination. 

[4] Many more consequences can be drawn but let’s not forestall things. 

[5] If we say it more exactly, holding back the growth of economy is not necesserily a mistake,it may be the consequence of a wise economic policy. If the government takes measures which is intended to delay to reach the intersection of the two merging functions it would be possible to maintain economic growth even when - under similar circumstances – other partners and competitors can not develop any further. This, however, requires further discussion.

[6] One of Marx’s most frequently quoted thesis, the antagonistic conflict between classes is, in my opinion a wrong consequence concluded on the basis of some wrong observaton. Because it is clear that the social distance between a villein and his master is much less than that between the slave and his master. As workers’ class evolved this distance between the „exploiting”  and the „suppressed” became even shorter, and by now border between the workers and the capital owners has been completely washed away, transition is possible into both directions.For his excuse: this was impossible to recognize at the beginnning of the 19th century.