Prices

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The Laffer curve - tax and income

Supply-side economics basic idea is to reduce barriers for people to produce goods and services, such as lowering income taxes and taxes on capital and allow more flexibility with less regulation. According to supply economy, consumers will benefit from greater choice of goods and services at lower prices. Typical policy recommendations from the supply-side economists are lower marginal tax rates and less regulation. Laffer curve is the basic tenet of supply-side economics, government tax revenue is equal to 100% rate at 0% tax rate. Tax rate that provides the highest state income lies somewhere in between. Any further theoretical derivation - in addition Lafferkurvan - are conspicuous by their absence. Lower taxes can have a major effect on start-up small businesses but for large and well-established companies it is difficult to see any profit for the state with lower taxes. Furthermore we can even dare to say that lower taxes for low income earners and pensioners small pension has a strong effect on demand, while high income earners are unlikely to increase their consumption because they pay less tax. The effect becomes a lower unemployment rate with a concomitant increase in inflation. A healthy economy can withstand inflation up to four percent. An inflation rate below 2 percent will create an unemployment rate of 8-10 percent!

If you pay 0% or 100% in tax the state will earn nothing. So true, so true - but how does it look somewhere in between? On the small picture below you can see how one usually imagine that tax revenues will vary with rate. But the curve in the small picture - and that is also used in wikipedia, and of economists - has actually nothing to do with reality. There is no function or specific data that shows this kind of Laffer curve. It is only a poor and insipid pedagogic attempt to describe the taxes and revenue. It seems to agree with common sense, but that is far from being scientific.

The large graph below shows how the curve behave through different forces (acceleration) and changes in economic motion. Tax revenues have more resemblance to this life-like curve than the old Laffer-curve. If the tax increases and opposition to tax increase is constant, the curve with higher gravitational force will decline more rapidly, but the two curves reach the same height at constant acceleration, but a higher rate reaches maximum point faster (initial income velocity is the same).

If no other forces affect revenue, then the movement uniformly continue in a straight line (as in the rays from the origin), but with different impact of forces will change the revenue curve to a parabola, where acceleration is facing downward. For really high incomes - in the case of multi-million - will be wage earners quickly comparatively few in number, which also means that the curve more or less flattens out on a low level. The largest tax revenue is in this example, between three and six hundred thousand SEK.

The concept phase and economic theory

"Phase space is a mathematical space that describes a system's configuration and motion" (Wikipedia). Phase space in mathematics and physics represents a space where all possible states of a system is represented and in which all possible states of a system corresponds to a point in phase space (U.S. wikipedia). The system parameters form the coordinates (dimensions)of the system. Change in dynamic systems in continuous time is often written as follows: = x-cos x, where x refers to the point of differentiation with respect to t (time).

The closest you get the concept phase of the economy, the terms "pro-cyclical" and "counter-cyclical", which refers to macroeconomic variables that are thought to move in the same or opposite direction as the GDP. Here it may be in place to contemplate a differential equation and its corresponding phase space. The equation Θ'= f(Θ) corresponds to a vector field on the circle. Θ represents a point on the circle and Θ'its velocity vector at the point. The motion of the point on the circle in one direction means that eventually it will return to the starting point. Vector fields on the circle gives the most basic model of the system are periodic (oscillating). A point on the circle can be described as an angle or a phase. The simplest system is when the angle of rotation is constant = w.
When Θ(t) = wt + Θ the solution is periodic because Θ(t) is changed by 2π and will return to the starting point after time T = 2π. T is the period of oscillation (and therefore rotational speed is equal to T^-1). Many biological systems, including the human circadian rhythm, is usually non-uniform oscillators, so the equation becomes Θ'= w - a sin Θ. If a = 0 equation is reduced to a uniform oscillation.^*

When using the term "phase" to describe something it relates to an event or condition relative to a norm. In economic theory data is usually presented as aggregated data for calculations, and they are treated as if they constituted a single homogeneous mass in the equations. But in doing so they have not taken into account that say different income groups are in different phases. If different wage groups, for example, examined during a bargaining as it appears quite evident that the groups are divided into different phases. If one then brings together groups of statistical aggregates one has put together data with non homogeneous characteristics. Although data are in the same layer and have the same physical state they are in different phases. Even more significantly if you compare different industries. If, for example, you compare the construction industry with the manufacturing industry. The housing sector is of course in principle in opposite phase with the industry, because housing investment is often greater during economic downturns.

Periodic systems are characterized by rotational movement, and frequency and oscillation is associated with wave motion and wave velocity. Over one period wavelength is usually represented by the greek letter λ. Velocity v of a wave is λ / τ, where τ represents the time difference. The difference in position between two points divided by time difference of a wave is called phase velocity. With examples from the table below, we can calculate the correlation between wave frequencies w and wavenumber with the formula w² = g * k²* p, where g = gravitational constant, k = wavenumber, p = income/hour (price of labour). The first line gives k = 0.001514, which gives the phase velocity w / k α 8,72, while the last line gives the phase velocity 19,33.

Price and money sypply/demand

The current euro crisis is probably the beginning of the end for the neo-liberal economic philosophy: to reduce government spending and regulation and by short leash keep money supply at an appropriate level of production in the short term and the price level over long periods. with all due respect to Milton Friedman, but the euro crisis points to some fundamental errors in the theory of money.

It may not be easy to be a professor of economics and to explain the quantity theory. Monetary theory is usually written MV = PT or MV = Σ P _iQ_i , where the left leg (LL) stands for the product of money and a velocity while right leg (HL) describes the sum of the prices p and quantities q transactions. where left leg (LL) represent amounts of money for a certain period (eg year), while V assumed to denote the transaction rate (wikipedia: the average rate for all transactions as a unit of money used) and in the right leg (HL) describes the sum of the prices P and quantity Q of transactions (sometimes said to be the Q index for real value)! There is nothing in the equation that is logically sustainable: mixing volume, velocity and frequency, index and whisk it together into a terrible moldy sourdough. Even the dimensions appear not to be logical.

If we return to the formula in the left leg (LL) MV to express the product of an quantity M and a speed V . This means simply that an object/quatity is in motion (in a fixed frame of reference) with a certain speed, which we for simplicity denote p / t. If you multiply the speed but then a certain quantity you simply get M * V = P . But now it is no longer a question of static money supply but rather the monetary momentum. In a closed system a conserved quantity can not be changed: that is, money must be influenced by an external force to get to a higher or lower level and thus change the direction. In such situations, it is the central bank or government actions that can change the money supply, ie change its motion. A lower interest rate lowers the financial costs while savings decreases. But a reduction from 3.5 to 2.5 percent means that the financial period increased by 11.5 hours, which means that wage income decreases correspondingly. But the central aspect in terms of interest rates is that the central bank would also extend the time horizon. Instead of the normal period of 24 hours period increased to 28.5 and then - at 2.5 percent case - 40 hours! Per unit of time, it means that money will lose momentum, that is, money supply is shrinking in the 24-hour period horizon! It does not matter much if the central bank in this situation lowers the interest rate below one percent. Growth will continue to fall as long as the money supply per unit time does not increase. The only way remaining to increase the money supply is the demand for labor increases, ie, wage income must be increasing, which requires that government takes job creation initiative if the market fails to do so. And that is the key to solve the problem: it can only be done through public investment. Funding by increasing taxes on the idle capital, ie by taxing individuals with great wealth and high wage and income! Large companies having huge profits and high liquidity, which in a crisis situation remains largely idle capital that do not increase the money supply movements beeing idle why companies also can be taxed more heavily. It is by increasing the money supply per unit time, which will generate growth in the economy. It is particularly important to a social insurance system works in an economic recession. Security systems help to increase the money supply in the movement which creates the necessary increase in demand.

But it remains a difficult problem situation: if the state has sold out much of the infrastructure that is not a lot for the state to invest in: it can be a lack of government investment! What remains of the joint ownership? Roads, railways, schools and medical facilities? What about the ownership of hydroelectric power and energy that it generates, for example? The recent demands for liquidation sale, or privatization of public enterprises have created a lack of governmental job creating investments. In countries with poorly managed economies are now great demands on the sale of state enterprises and activities; something that can only be temporary solutions, but in the long term limit the governments space for maneuver and reduces welfare.

Formal notes

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Prize force component is always directed towards the equilibrium position, where the price velocity reaches its maximum value and its potential energy = 0. The total energy is constant, and by price (transaction) is fed energy into the economic system as shown in the figure to the left. In the figure shown to the right shows the division of Economic amount of energy E = E _k (= 0.02345) + E _p(= 0.02345), which also shows the motion in an economic system can be described as a wave motion and thus as a motion with the wave properties. The price of a financial transaction relates a certain time period (here 24 h) and gradually returns to the starting value, when the whole period is traversed. By tricks with basic movement equations is obtained other and different connections, providing knowledge which intuitively is not obvious:

It should also be noted that if the price represents an economic force (F_p) during the same period of time and multiplying the price by the economic mass, we get the economic momentum. If we instead multiply the price by the time we get the economic "pulse", which occurs every day and for labor is labor income and which really constitutes the money supplied during the period in question.

Examples from the table: P = 0.2571, a = wa/2 = 0.0214, P/a = 12 and thus 12 × 0.02143 = 0.2574. The same situation also applies to the cost of labor in the table of revenue: the last line gives 12 × 2,5985 = 31.18. You can check the calculation. There are many more correlations in Tables for those who want to discover the connection. For example, compare the ratio of the squares of radius r and income or price per hour, and inspect the square root!

The corresponding concept in economic theory is difficult to find and the ingenious will surely be able to invent suitable concepts. Mass in mechanics or physics is a measure of the body´s matter. The mass is a measure of the resistance, which the body does to motion changes, ie a measure of the body's inertia. Mass creates gravity, thereby affecting other masses in the surrounding area. In economy mass can thus be said to be a measure of its economic or monetary content. To investigate the weight Q, we can in the equation m = P / a put the mass Q and the weight factor g, what is the acceleration of gravity, Q gives the product's economic content per unit price (an arbitrary utility) obtained m = Q / g and for consumer products you get consistently low values. For now we conclude that the economic mass times acceleration is equal to the priceforce F_p = P / h.

quantity of payment

Definition: price is the quantity of payment given from one agent to another in return for goods or services. If we consider the classical case of agents exchanging goods: 5 apples for 2 loaves of bread. In economic theory one would say that the price of apples was 2/5 = 0.4 loaves of bread. Likewise, the price of bread would be 5/2 = 2.5 apples. Currency is simply another type of good and subjected to the same treatment as apples or bread. It may be acceptable in everyday speech but is far from scientifically acceptable.

In mainstream economic theory price involves opposing forces: demand and supply. Demand based on marginal utility, while on the other side supply based on marginal cost. To pu it simple: an equilibrium price exist when marginal utility exuals marginal cost.

Forces

IS curve (the Keynesian cross model) shows the rate required at any particular GDP for the commodity market to equilibrate. A change in government spending (G or T) shifts the IS curve. What is meant by "government spending shifts the IS curve"? Theoretically, the IS curve only move the periphery of the circle if radius r changes, and the radius changes if interest P (= pricepower), through the damping coefficient, changes. The force P controlled by the central bank and government expenditure and revenue. The same applies to the LM-curve.

It is a generally known principle (d'Alembert's principle) that the points in a system in motion there is in every moment a balance between on the system acting external forces and inertial forces (external and internal forces and in opposite direction inertial force - ma). If we compare two prices from our table below, it is easy to determine the difference in radius. Take the first and the last example: the diference of the radius is 3,0883 - 1,0685 = 2,0198 and the difference in the accceleration quota is 0,0429 / 0,0148 = 2,89 and the quota between prices is 0,5147 / 0.1781 = 2,89 (the more decimal points, the better compliance), which immediately gives us a confirmation that the forces is related to each other as their accelerations (which they can impact each). Again you can check this calculation from the table below. It is interesting to note that the natural mass ratio (in a system with a period of 24 hours) increases when period becomes longer and lower interest rate. Inertia - ie resistance to motion changes - becomes larger. If interest rate changes from 4 to 2 percent the 24 hour mass will double. Central bank and government affects the economic leadtime, but they can not change the physical time - the year is still 365 days and every day is still divided in 24 hours regardless of what the central bank or government invents.

Lorenz curve

Max O. Lorenz developed this curve to describe the income inequalities. The Gini coefficient is based on the Lorenz curve and shows how income distribution looks in a particular population. The Gini coefficient, in brief, is the ratio of the surface area under the red curve and the area under the green curve, and as shown in the graph below shows a ratio between 0 and 1. When the surfaces are equal there is full equality. On the right is a sine curve (amplitude is damped) along the line y = x (based on data from the price / revenue table).

In the diagram is shown ratios between x and y coordinates respectively, and the ratio between curves angles in brackets. Looking at the latter case there is complete equality, when the ratio is 1 and when the ratio is less than one increase inequality. If you have only a few points, it is easier to use and calculate the angle measurement. If you make a simple analysis of the equality curve y = x can be seen that the vector field (black arrows in the diagram) shows that the intersection between the curves represents a stable position. If we are close enough to the intersection the deviation will decay towards the stable equilibrium position. This is an important observation since the direction towards the equilibrium position, so to speak constitutes a natural motion. In the labor market, it would thus be a matter for the parties to recognize the importance of not letting the wages and bonuses to soar in the opposite direction, that is, instead of following the curve y = x let wages follow the Lorenz curve, wherein the vector field is pointing in the opposite riktnimg. (In physics the use of Lorentz curve or Lorentzian profile, named after the dutch physicist Hendrik Antoon Lorentz. Nobel Prize in Physics in 1902 with Pieter Zeeman. Note the difference in spelling between the disparate curves.)

Pareto's principle (80-20 rule) is often used as a simple rule of thumb to describe the inequality. Pareto found that about 80% of Italy´s total wealth belonged to 20% of the population and similar conditions were found to exist in other countries. The 80-20 rule is often used in different contexts to describe similar conditions. But the principle is often misused.

Labour economics

The mainstream economic theory: "people are assumed to be rational and seeking to maximize their utility function. In this labour market model, their utility function is determined by the choice between income and leisure. However, they are constrained by the waking hours available to them". Every individual in the labour market is assumed to maximize utility in the choice between labour and leisure during waking hours. This common-sense economic argument is shown in a graph that illustrates the trade-off between allocating your time between leisure activities and income generating activities:

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The effects of a wage increase is supposed to shift (in the left diagram) from point A to point B. To understand this better, the theory tells us, we must consider the income effect and substitution effect (shown i diagram to the right). And in this case - the income effect - the shift is from A to C, if we. But when wage rate rises, the worker will work more hours simply because the higher wage rate, and now we have a movement from C to B. The worker will move away from leisure since leisure has higher oppotunity cost. When the worker choose more leisure his marginal utility of leisure outweighs his marginal utility of income. And the economic theory concludes : "there is no point in earning more money if you don't have the time to spend it". My immediate question is: what about the income of millionaires? If the theory exclude some individuals (in the labour force) then the theory obviously refutes itself!

Before going any further, I must note the following stunning fact: In the diagram above, the income and leisure represent time spent every 24 hours: Income can of course be measured per 8 hours but leisure eight hours per 24 hours? What is the measurement ofleisure time and how derive the time? If leisure is just a number it is of course difficult to derive, but economists always complicate the simple things of implicit functions (for each value of x only one value of y so that F(x,y) = 0). The whole argument about prices, labor, supply and demand is somehow so obvious and commonsense. But economic theory must probably abandon common sense to raise themselves to science. Events in our world seems to be controlled by principles, which are alien to our intuitive notion. In economic theory appears intuitive notions of common sense as linear or rather linear relationships and functions. The mathematician Herman Weyl said that it gives clumsy and primitive equations. It is also difficult to make measurements and check the results. The marginal cost is equal to marginal revenue at the optimal allocation of resources (balance): the total supply of labor is then equal to the total demand. But the thesis is actually not true, as there are still workers who are unemployed. Unemployment can not be zero, there is only a zero vision (the natural rate of unemployment is equal to the structural, skills and education for example, and friction-induced unemployment, which refers to the time required to seek new employment). But the natural rate of unemployment refers to one or two percent, while an unemployment rate of 6-10 percent is a quite different matter.

Finally, a closing argument: the productivity of the workforce is decreasing, ie, as more and more workers employed, their contribution to production will be reduced. If labor productivity multiplied by the value of physical output it produces, we get the value of the extra physical product of labor: MP _L * P_Q = MR_Q, P_Q = product price. If we could measure the quantities we would be able to express productivity:

Production theory

Each one quickly realizes that we encounter problems measuring productivity and the additional value in the production of the last produced units. Whether it is intuitively correct in its reasoning, it becomes difficult to verify or test the theory. And as we have seen many times the result can have dangerous consequences. It is therefore impossible to test theories, and in terms of economic policy, it will be as usual that it is only when we have the benefit of hindsight we see that the theories do not measure up; theories are allowed to falsify themselves. An extremely dangerous way to experiment with people's welfare.

Looking at a production curve in the economy as it turns into the shape of a quadratic curve, but the curve which often appears together with other curves in production theory, as if it were only pictures of the assumed connection. The chart below shows a hypothetical production curve, which based on table data from the table above. It shows a quadratic curve for various alternative rates 3 percent and 1 percent.

The graph above shows a simple attempt to interpret the traditional economic production theory, using only data from a table of production values (instead of revenue is the price of inputs, which gives a corresponding output value in the company). The curve for the total production is formally identical with the curve of projectile motion, parabolic trajectory. The maximum height path is determined by initial velocity squared divided by twice the gravitational constant (v ²/2g, the length is v²its 2α / g). Similar curves can also be displayed to other prospective context of economic theory. If you turn the red curves upside down, you have a picture of cost curves. In the chart below, the interest rate set at 4 percent, and then one can easily conclude that the lower curve (MPP) is inside the maximal production. Similarly to the case of the 1 percent the MPP curve cut the x-axis far beyond the maximal production.

There are a number of production functions in economic theory: for example Cobb-Douglas function, Q = AL^αC^β, or Leontief Q = Min (aX₁bX₂ .. X_n). The Cobb-Douglas function is α and β ratios between the percentages of production factors (in this case, labor and capital). A typical production function is a quadratic function as in the diagram above. If we agree with the mathematical definition so any given output value is determined by the expression V₀ = √2gP (V₀= initial velocity, g = gravity, P = production), and time to achieve a certain level of output is equal to V₀/ g; Contradictions and paradoxes in economic theory don´t give way for new theoretical approaches to be examined, rather than trying to adapt the old theories to new statistical data. In scientific contexts are normally unsustainable theories rejected, but in economic research they instead try to align a theory by introducing new constants that give a better match with new statistics. Ratios between the percentages of Cobb-Douglas function is a prime example of this approach.

UNEMPLOYMENT

Phillips curve

In economic theory the relationship between inflation and unemployment is exemplified by the so-called Phillips curve. In its classic form the curve shows a negative relationship between inflation and unemployment: low unemployment accompanied by high inflation and vice versa. In the economic theory the recurring image of economic activity is shown below (see diagram of the workforce). The curve is named after William Phillips (1958) and was formulated in 1960 by Paul Samuelson and Robert Solow.

In the late 1960s appeared a new phenomenon that did not correspond with the Phillips curve, the economy showed both high unemployment high inflation, so-called stagflation. In the 70´s attempts to explain this new phenomenon with such a vague concept as "rational expectations", which was adopted to explain that the curve changes shape depending on future expectations of inflation. Millton Friedman argued that the Phillips curve describes a short-term perspective, while in the long-run expectations of future inflation would be incorporated in wages. (NAIRU: non-accelerating inflation rate of Unemployment). Criticism of the NAIRU in the recent past have focused primarily on the absence of a unique equilibrium state (which is contradicted by d'Alembert's principle). But this is now being introduced by concepts such as "sticky prices", which again allows for a variety of explanations or reasons for the phenomenon of "sticky" prices.

Beveridge curve

The swedish Konjukturinstitutets macroeconomic model provides two explanations for why equilibrium unemployment arises. On the one hand, imperfect competition in labor and product markets. On the other hand, the social search process as a further reason to unemployment. According to this model the long-run equilibrium unemployment rate is determined 'by a range of factors affecting prices, wages, corporate recruitment behavior and search behavior of unemployed'.

The Beveridge curve often illustrates the relationship between vacancies, job vacancies, and unemployment. Note the obvious: "The more jobs there are, the greater the probability of a person finding a job, ie. the lower the unemployment rate." Unbelievable! And here obvious remarks are stacked: 'For example, falling demand in the economy leads to reduced vacancies and unemployment is rising ... When the economy recovers, the rise in the number of vacancies leads to reduced unemployment'.

When business costs are too high in the recruitment process, matching costs, we encounter falling demand for labor! Companies who still have to employ is forced to pay higher wages. Employment rates are lower when the matching costs is introduced in the model - again, we end up in intuitive commonsense-reasoning, that does not explain anything.

The swedish central bank's (Riksbanken) Monetary Policy Report 2007/2 shows a Beveridge curve for 1980-2006 (vacancies and unemployed as a percentage of the workforce, picture below to the left ). The Riksbank's comment: "The relationship was relatively stable throughout the 1980s. But in the early 1990s the development was dramatic, since the proportion of unemployed people increased rapidly, while vacancy rates were largely unchanged. Since the mid-1990s, the curve shifted outwards, suggesting that the matching functioned not as well as in the 1980s. "

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What is th relation between matches and increase in unemployment? In plain language - not much. If the job is stable over time, it's a reasonable assumption that the labor force increases as more people enter the labor market, which is also broadly in line with the unemployment figures for the period. if you rotate the image to the left 180 degrees and plot the statistical figures, it is quite clear that the measuring points are concentrated in ellips curves^[1](this is actually only part of a ellipskurva) as shown the image to the right. The interest rate has changed significantly over the same period. The discount rate in the 80's fell from 10 percent to 8 percent -88, 89-93 commuted Discount Rate between 9 and 12 percent, and from 1995 the rate fell from 8.5 percent to 0.75 percent in 2010 (recently increased to 1 percent). The ellips curves shows an almost complete compliance with interest rate movements. The two outer curves are almost circular and has a eccentrisity which is almost zero, while the inner brown curve has a eccentrisity which gives a much more flattened shape (with one focal point near or on the horizontal line) and is greater than zero. (A line has a eccentrisity which is = 1). The sharp drop of the interest rate illustrates the contraction of number of jobs and increase unemployment. Talk of matching problems in the labor market has, therefore, as I understand it, is more like "Financial astrology" - attempts to interpret the constellations in the statistics. Seriously, it is sad that "economic pros" in Parliament and the government do something bordering on quackery and rogue statistics games and thereby risk the welfare of the people.