02 - MAIN COURSE PART 1

MAIN COURSE

INTRODUCTORY PAPER - MODULE 1 PART 1
KEY CONCEPTS

by Edward C D Ingram
Last edited on 28th February 2017

More knowledge, and better understanding, gives people more power to manage their lives.

This course is expected to give significantly better insights to attendees and policy makers than has been possible hitherto
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NOTE: Page number refer to the word version

Contents












This introductory paper is quite a handful.
It is an overview of the entire course.

Readers  are not expected to cope with all of it at this stage.
It is split into sections / parts which will be discussed during the course.

There is a limited glossary of the key terms used herein. Some of these are essential to the course but they cannot be found in any dictionary.

Without those new terms the subject cannot be fully understood and the comprehensive mathematics of lending cannot be formulated.

 




KEYNES' PROPOSITION


As J M Keynes pointed out in the first paragraph, Chapter 1, of his 'A Tract on Monetary Reform', 1923, Macmillan:

""If, by a change in the established standard of value [of money], a man received and owned twice as much money as he did before in payment for all rights and for all efforts, and if he also paid out twice as much money for all acquisitions and for all satisfactions, he would be wholly unaffected [by the falling value of money]"

I call this Keynes' Proposition because he never followed through with it. He did not seek to find ways in which this outcome might be achieved.

That is a pity because the failure to seek that outcome lies at the heart of the unwanted wealth re-distribution, financial instability, confusion, and destruction, which permeates the world's economies today.

Keynes' proposition needs to be slightly amended because it does not make any provision for other things which can, and do, alter prices in the meantime. It takes time for money to halve in value.

It would be more realistic to have written that If money did not fall in value all prices would only adjust to everything else, including supply and demand, fashion, innovations etc.

KEYNES' AMENDED PROPOSITION

A more accurate proposition would say, "If all prices also adjusted for the falling value of money then all prices would be that much higher than they  would otherwise have been."

Given that both kinds of pricing adjustments were taking place, people would be spending their earnings on the same new goods and services, savings and loans, imports and investments, as if money had never changed in value.

Then they would be wholly unaffected by the falling value of money.

LIMITATIONS

This idea lies at the heart of everything contained in this course.
However, although we can get much closer to this ideal than we are today, it must be understood that the world is not perfect and that perfection cannot be achieved. One reason is that prices do not adjust every minute of every day and some prices adjust long before others. In the mean time this affects what people spend on and what some things cost. Another reason is that some prices are said to be inelastic, meaning that the quantity of a good or service being demanded or supplied  is not much affected when the price of that good or service changes, or doesn't change when, in theory, it should change.

If we succeed in getting even a little closer to fulfilling the amended proposition then almost everyone will feel safer with their savings, loans, business plans, and life plans, than they have ever been before in the whole history of mankind.

This looks like something which is worthy of our attention.
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THE KEY TO COMPLIANCE

Today, when you mention the word 'compliance' whole portions of the financial population think you are talking of complying with financial rules and regulations which have already been imposed on their sector of the economy. For example, compliance with BASEL III in banking and other financial services. In this course, the meaning is different. It means following the principles of design and management which need to be complied with if the economy of any nation is to be relatively safe and well organised. It means compliance with Keynes' Proposition as amended.


Lerner’s Law - the principle that, in economics, one should never compromise principles, no matter how much trouble other people have in understanding them - [or implementing them].

For a very long time now Edward Ingram, the founder of this school of economics, has settled upon a key principle with which to address this problem. It is based upon David Hume's and then Adam Smith's point, well made, that free markets and free market pricing is good for the economy in a number of specific ways. In particular:

1.    If all prices and earnings are permitted to adjust as in the amended Keynesian Proposition explained above, and

2.     If there are market forces which can be released or which are already free to ensure that all prices do adjust to the falling value of money as well as to everything else, then that amended Keynesian proposition would be fulfilled / complied with. Lerner's law would be obeyed.

COURSE CONTENT
This course will be dealing with those issues. We need to know which prices are mis-behaving and why; and we need to think about what we can do to change them.

THE TARGET
If we can deal with these issues so that almost all prices  can and do adjust properly, then can we have designed an economy which can comply with the major part of Keynes' amended proposition so that people are largely unaffected by the falling value of money. If we can do this by allowing market forces to adjust all prices, whether they be prices, costs, earnings, or values, so as to balance supply with demand, then we will have optimized the use of every resource linked to every price. And if we have done that then we will have adjusted the price of every unit of the economy so that they can all work together in harmony.

A KEY QUESTION
Here's the first question:

What market forces would there be which would adjust all prices so as to offset the falling value of money? Or do we have to somehow force this to happen?

Before answering that, let's consider a list of prices which would have to respond to all market forces if Keynes' amended proposition were to be completely fulfilled. If all of the prices would have to adjust, what would all prices be?

WHAT IS A PRICE?

Some prices are normally called costs and others are normally called values. but there is a reason to think of all costs and all values as being prices. Prices are things that adjust, or should adjust to balance the supply of things with the demand for them. And that includes the hiring or people so it includes earned incomes of every kind. With that in mind it is perhaps sensible to give a definition of what a price is in this context:

A price is something which has to be paid for if a person or entity is to benefit from the good, the facility, the asset, or the service in question.

Someone has to pay: 


  • Wages
  • Rentals and dividends, and
  • There is a price for the purchase of any asset
  • There is a price for imports and for export currencies
  • There is a prices (the rate of interest or the 'real' part of it) for credit

There are two parts to a rate of interest. There is the part which adjusts to the rate at which money is falling in value. The other part is a cost to the borrower or a benefit to the lender.

Economists normally thing of the other part as being the real rate of interest in which:

The nominal rate of interest r% is the sum of the rate of inflation and the real rate of interest.

THE REAL RATE OF INFLATION
In this course we will look more closely at what is meant by the rate of inflation and what is meant by the real rate of interest. The rate of inflation is intended to mean the rate at which the generality of all prices are rising. That includes asset values, all costs, all other values, all earnings, and all benefits however derived.

The inverse of this is the rate at which money is falling in value. Thus if prices double then the value of money halves. The 50% loss of value of money is the inverse of the 100% general price rise.

Based upon the above, here is the main list which needs to concern us:

LIST OF PRICES

In the amended Keynesian proposition sense, prices include:


  1. Asset prices, including the nominal price of bonds, equities, savings and loan accounts
  2. Incomes and all other earnings
  3. The cost of regular payments including the monthly repayments for loans and the monthly payments into savings and pension funds or any donations, and
  4. The real rate of interest - the real cost of credit being the nominal rate of interest minus the real rate of inflation.
  5. The cost of foreign currency
  6. The cost of all goods and services
All of these get paid for by some persons and / or some entities.

An entity is some person or some organisation such as a business or a government.

Of the items given in the above list the main ones which seem to stand a reasonable chance of fully adjusting to the falling value of money are:

  • Incomes / wages, 
  • Earnings like rental income, and maybe dividends, and
  • Most goods and services. 

Even those prices can be affected by untoward (distorted or inappropriate) behaviour of other prices because those other prices such as the cost of mortgage repayments and the price of the currency can affect end user prices. And since prices can be affected by a change in the level of demand, and because people's spending budgets include the cost of all regular payments, a leap up in the cost of housing finance can deprive some spenders of money which they were otherwise going to spend on many non-essentials. This can also affect many other prices. There are plenty of complications and knock-on effects when prices do not adjust properly.

So now we have a list of prices to look at. Any of these which are not adjusting properly is something we need to explain and to consider if a structural change to the market in question is needed. And that is exactly what we are going to do.

THE COMPLEX SYSTEMS THEOREM

As in any complex system if anything goes wrong then that one thing affects other things each of which then affects more things, and so forth. The number of effects can be like a pyramid, starting at the top with the distorted price of any one thing tumbling down to an ever-widening set of other levels of demand which affect other prices. Since we now know from the above that there are many such wrongly behaved prices, that is exactly what makes understanding what will happen next in an economy such a complex exercise. Even with the best computers and models of the economy, because people's behaviour is also affected and how they respond is often unpredictable, the forecasts still get it wrong.

It is well known by doctors, engineers, and social workers that if any one thing in a complex system is not behaving as it should, then unwanted behaviour, or symptoms appear all over the system. If that starting point can be identified and the problem can be removed, then all of those dozens of other problems disappear to the astonishment of the observers. It is as though those problems had never been there. It appears to be magic.

The good news is that whenever we can prevent pricing mis-behaviour in the Keynes' Amended Proposition sense, when that price begins to behave in a useful way which re-balances supply with demand and so optimizes the use of the particular resource involved, and keeps spending demand unchanged, then dozens of unwanted price changes everywhere else do not happen. Then the need for new or old regulations and various kinds of tweaking of the system, called 'interventions', including tax subsidies and man-made interest rate changes, (managed rates of interest), become unnecessary. By putting right any one pricing problem, models of the economy which might be used to forecast the future, will become both simpler and our mor reliable. The same applies to all financial planning. Simpler is less costly, promotes investment, and boosts demand and economic output.

A PROPOSITION TO BE TESTED

That is the theory and that is a proposition which can easily be tested.

The highly professional review committee which Edward assembled in 2003/4 and which went over his new lending model in meticulous detail (Module 2 of this course), were thoroughly bemused by the number of other issues which in theory would disappear as a result of a new lending model.

The reason as only later found to be that the proposed new Ingram Lending and Savings (ILS) models were complying, or attempting to comply, with this pricing principle. Members of the committee had a professional reputation to protect, like the head of economics at the university, another who was the best known economist in the country, the head of the building societies association, the spokesperson for a central bank, and some actuaries. They  were all reluctant to say publicly that the ideas were right. 

That only changed when Edward asked if any of them could find fault with anything. There was complete silence...no faults had been found. Then he told them that they all agreed with the findings and no objections were raised. And so participants in this course can rest assured that they are learning something of value.
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All that is an interesting observation and it is wonderful news, but it is not the main point to be made.

What we need to ask now is how market forces can and do force prices to make all of the necessary adjustments.

FIRST HOMEWORK

But first, here is your first homework before the first webinar is delivered:
If you have any questions please email them to
...@...
This email address is not yet running.

Do you have Skype? That helps if you want one on one tutorial as an alternative to emailing your questions.

Download it here: www.shype4free.com

When you are ready submit a written paper using Word or equivalent in answer to the following questions:

Q1: What are the key concepts / principles of macro-economic design
Q2: What does the complex systems theorem state?
Q2a: Give some examples of knock-on effects in the economy when any selected price (choose one price) does not adjust properly or cannot adjust properly to the falling value of money. These knock-on effects can be an effect on other prices, a social price, and a likely intervention response. Give some further (second generation) knock-on effects following on from the list of knock-on effects which you have provided. Normally there are several generations.
Q3. Do you have any questions to raise at the next webinar - teach in online? There are no wrong answers to this question. The idea is to make sure that every student gets a pass mark out of this course and a certificate to say so.

You have to submit answers to questions five days before each webinar is scheduled.

If you miss a webinar there will be a recording of it on YouTube. You will be given a pin number with which to unlock it.

It would be helpful for the tutors who may be tutoring you to have a small amount of information from you such as:

Your name and location
Your occupation
Your age
Your sex
Your motivation
Your level of education
Your career ambitions
Your contact details

The information is voluntary and will be protected

Please send this to eingram@ingramsure.com
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You may watch the first test webinar done for testing a webinar system here without any pin being necessary - just click here.


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