Price-list invariant in credit and finance system
Представляем перепечатку статьи из №906 газеты "New Europe" за октябрь 2010 года.
Introducing reprint articles from №906 newspaper "New Europe" in October 2010.
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EU, Russia secure future for Europe
“A Common Energy Platform — Basis of a Secure Future for Europe: Agenda for Russia and the European Union” was the title of a two-day international conference held at the European Parliament in Brussels on 13-14 September. The event was an initiative of Russian and European non-governmental organizations realized under the aegis of “The Greens/European Free Alliance” group of MEPs. Many participants were representing the government and the Federal Assembly of the Russian Federation, while top Russian and other experts participated in it, along with academics, businessmen and journalists from many other European countries. The forum had the support of the Russian Energy Ministry and the Permanent Mission of Russia to the European Union. The main issue that prevailed in the two days discussions was the political background of the energy relations between Russia and the European countries.
As it was stressed by a number of participants, many Russian proposals in the energy field were meet with sharp criticism that is not always motivated by economic factors. Other speakers observed that on many occasions “common European interests become hostages to historical stereotypes and the selfish aspirations of individual states.”
Thus, the main target of the conference was to provide a forum for dialogue and exchange of opinions on interaction in the energy sphere, as well as to present the Russian approach to the current problems and set the perspectives of the Russian-European energy cooperation. The Russian side stressed that the European Union must “foster a favorable attitude to the Russian international energy policy and to provide information support for the overseas projects of the Russian fuel and energy sector.”
On this occasion, Professor Vladimir Zaznobin of St-Petersburg University wrote a very interesting article, proposing a new international financial system based on energy transactions.
Price-list invariant in credit and finance system
Not only does the public economic science lack managerially significant notions to do with the real production and consumption (i.e. demographically defined and degradation-parasite spectrum), but it also lacks a number of managerially significant notions that describe the credit-and-finance system itself and its links with the exchange of commodities as such. Actually, that is just what makes the economic theories inconsistent and, therefore, inapplicable to solving the macro-level economic problems to receive the predetermined, ‘pre-ordered,’ promised and guaranteed results.
The basic notion that makes the economic theories for masters to be consistent in metrological terms is the ‘price-list invariant’. The ‘price-list invariant’ has always been defined in such a way, that in a barter trade system, where the goods are exchanged using a two-stage scheme «G1MG2», there is such a commodity belonging to the money commodity group that possesses the following features:
* firstly, it is a sovereign participant of the natural exchange of goods in the barter trade process because it has some additional valuable features apart from the fact that it constantly acts as commodity money in two-stage schemes «G1MG2»;
* secondly, the market prices of other goods for every single commodity-exchange deal are given in an equivalent amount of that commodity by common consent (as a result, the price of a standard unit of the invariant commodity calculated in the invariant amount is always equal to 1, which is behind the term ‘price-list invariant’. In other words, we always exchange an invariant to an invariant pro ratia 1/1.)
* In the days of ancient barter trade, according to the laws enacted by Hammurapi, the King of Babylon, the society considered the payments in grain and gold to be equal, there fore, they established them as the two equal price-list invariants. Later, in the crowd-and-‘elite’ society, the ruling elite on the basis of its degradation-parasite needs deprived grain from the right to function as a price-list invariant, and the civilization used the gold invariant for a long time.
* In economic studies and calculations we can use any commodity type as the price-list invariant, including the commodities that do not belong to the established money group.
Economics does not need the notion ‘price-list invariant’ only in case if researchers do not know how to select it in a way that will let them use the invariant for solving the macro-level management problems. They do not now about it because they serve the ‘elite’ wants and needs, which belong to the degradation-parasite spectrum.
Gold as an invariant was used as the stuff for means of payment production – coins and standard bullion. Due to that fact, the whole epoque of circulation of gold and other precious monetary metals as means of payment (up to the beginning of the XXth century) represented the epoque of natural barter using the scheme «G1MG2».
The only difference between that epoque and the epoque of traditional barter trade was the fact that ‘packing’ of the invariant into a shape of standard coin was transferred from the marketplace stalls to the Board of Treasury. However, that difference is not bigger than the one between buying tomatoes by weight from the stall at the market or buying nicely pre-packed tomatoes from the supermarket.
The difference between means of payment and the price-list invariant is that whereas the mean of payment, being the measure of prices for all commodities (like the price-list invariant), can possess no other commonly recognizable values except playing the intermediate part of commodity money in a two-step scheme of exchange «G1MG2», or be used in a single-stage scheme «GM», when it plays a role of means of accumulation of nominal paying capacity.
Any means of payment that does not have any value outside the sphere of money circulation, accompanying and supporting the exchange of commodities for production and consumer purposes and accepted in certain transactions, may be rejected in other transactions. However, despite the means of payment may have no other value except being the means of payment or means of accumulation of nominal paying capacity, it can still be recognized having such qualities by the majority of population for a long time.
Economic theories thoughtlessly inherited the notional system from the epoque of circulation of ‘precious-metal’ coins and the gold standard. The functions of price-list invariant and those of means of payment are considered as if they were just different functions of the same money.
Being the measure of prices of other goods, the price-list invariant, however, in a general case does not act as a price level basis for the rest of the prices, including rates of exchange (the relative prices of foreign money). That is why all the suggestions aimed at the revival of the gold standard come from the grave misapprehension of the fact that the possibilities of distribution are stipulated by its production.
‘An attempt to ‘galvanize’ the dead body of gold standard or even restore the circulation of gold are useless in the epoque of economic well-being. That historic fact shows how the price of the gold invariant dropped in comparison with the other implicit invariant (grain), which the society did not recognize in that role; however, grain still defined the price levels and all the other relative prices. That takes us to the notion of the ‘price-list foundation.
The price-list foundation is a small group of goods, each of which has the following feature: a short-term perceivable price growth for such goods cause a perceivable growth in production cost figures of the most of other goods. The reasons of the production cost increase of other goods is the direct or indirect consumption of the products from that small group for production of other goods (all or most of them).
Of course, the production cost growth is accompanied by the market price growth. Herein, the price relations between various pairs of goods and the cost-effectiveness of particular sectors undergo changes, because the prices are not only determined by production costs, but also by distribution of always limited effectual demand all over the goods and services supply spectrum.
From what we said above follows that to make economic calculations, long-term economic analysis and forecasts and long-term plans of social and economic development comparable, we have to select a price-list invariant which belongs to its base for the time span in question.
Ordinary people, politicians and economists should remember a well-known definition from the school course of physics:
“Useful work performed by a system” = “efficiency coefficient” x “power consumption of the system”
However, we may be interested in ‘useful work’ performed by a system, which is not seen in a sense of ‘mechanical work’ (which is a physical term). In that case, ‘useful work’ and ‘useful effect’ satisfy the same equation, but their dimensions will be different from physical dimensions of mechanical work and energy in physics. In that case the efficiency quotient will not be dimensionless.
[efficiency] = [the unit of measurement of a useful effect] / [the name of the unit of measurement of incoming energy].
Like anything else, the production system of a society obeys the general physical law of energy conservation, a partial form of which is the efficiency coefficient equation.
The useful effect of the production system of a society is represented in a natural form as an end-consumption product manufacturing spectrum. Abstracting from the span of time needed for the growth of production capacities in each sector, and taking into consideration the whole lot of consumption of intermediate products for manufacturing purposes (because it is impossible to do without them when producing end products with the use of modern technologies), we will see that the industrial output level for each item throughout the production spectrum is limited by efficiency coefficient of technological processes in the corresponding sector and by the amount of incoming energy.
Correspondingly, the production spectrum as a whole has an upper limit. It is limited by:
* the values of sector efficiencies of technologies (the dimension of technological efficiency is [unit of measurement of the output mount] / [kW/hr];
* the amount of incoming energy for the whole system;
* energy distribution by sectors.
The above means that when we move from physical indicators of a production-and-consumption system to their monetary expression, we can see that the primary base of the price-list is its energy base. In other words, energy prices determine all the other price levels, when the established needs of the society undergo slow changes in comparison to the production dynamics.
The words in italics mean that human needs are primary to pricing, whereas the labor theory of pricing (value) in its historically established form is metrologically inconsistent.
The energy base of the price-list has permanently been present all through the span of the history of civilization; however it consists of a changeable composition of power sources, whose component weights are also prone to changes. All the history of the modern global civilization can be separated into two epoques:
* till the middle of XIXth century; it was the period when production was mainly based on the prevailing biogenetic power, which source is photosynthesis in plants (which means that the natural flora and crop production efficiency are the roots of well-being).
* since the beginning of XX century – the epoque of production based on the prevalence of technogenic power.
There was a transitional period that lasted for several decades, during which a transition from biogenic to technogenic power sources was made, when we could witness a superposition of both.
Modern professional economic science and ordinary people make a grave mistake having chosen an American dollar – a currency of one of many countries — as a pseudo-invariant, despite the fact that none of the modern monetary units belong to primary (energy-based) price-list foundation; what is more, it is not a sovereign participant of production-and-consumption exchange of commodities, but only follows and supports it.
Since the second half of the XXth century, the best choice for the price-list invariant of technologically developed countries has been kWh of energy consumption, because:
* the overwhelming majority of businesses are electric power consumers;
* electric power tariffs are a part of energy base of a price-list.
Herein, financial and economic analysis and the forecasts gains the metrological consistency and comparability for long-lasting time intervals in case all the calculated and real prices, costs and other financial indicators are measured in kWh.
But even if we have accepted the electric power invariant, we should remember that in other sectors beyond agriculture the number of workers is limited by the ability of agricultural infrastructure to feed its personnel (otherwise the coverage of the deficiency of own products has to be guaranteed by means of imports). Therefore, the dynamics of the ration of the number of people dealing in agriculture to the number of people dealing in other industries ought to be targeted at the efficiency growth in agriculture, first and foremost at crop production and natural flora (photosynthesis is the core of everything). Nowadays and for the foreseen future, the best choice for the invariant seems to be kWh, but not ‘a ton of fuel equivalent’, for ‘a ton of fuel equivalent’ represents an abstract notion created as a result of vain attempts to find the proper foundation for comparability of economic reports and business analysis without rejecting the hangover of public economic science.
‘A ton of fuel equivalent’ may have a limited right-to-life when used in analysis of the energy complex sector; however it is not applicable for long-term economic analysis, forecasting or planning, because the way it is linked with real energy carriers transforms together with the changes in technological foundation of production, predominantly in energy industries. Unlike that unit, kWh of consumption remains the same and does not depend on the particulars of primary energy source spectrum lying in the foundation, or how the spectrum responds to the consequences of technological progress. Having selected an unchangeable kWh of power consumption as a price-list invariant, belonging to its energy base, we can deal with long-term planning of production in accord with the demographically dependent needs spectrum by means of simulation and optimization of distribution options in the continuity of production cycles of energy consumption among the specialized sectors, which produce goods and services.
Vladimir Zaznobin is a Professor at St Petersburg State University of Russia