Wednesday, June 03, 2015

Thought experiment on employment

One of my favorite things in science is the use of a thought experiment, which has a cool German name of gedanken experiment. And I have some theories on unemployment, on which I'd like to try such an exercise.

On one of my other blogs I came to the conclusion that unemployment results from blocks in monetary flows, where I have posted thoughts on those.

That's a simple, and short conclusion where I think I can do a thought experiment, so imagine a hypothetical small village, where money flows have been perfect, no new money is created on a given year which we will study, and all people who can work and wish to work are employed.

Now a problem emerges at the general store, where the owner begins to notice a short-fall in revenues! This owner now has to cut back on purchases, from within the community as let's imagine it's completely closed, as is a fantasy scenario, so we can make up a lot of rules impossible in the real world. As the shop owner cuts back on purchases, other businesses begin to cut back as well as the shop buys a lot usually but now? Not so much, and soon some people are told there is not enough work for them as businesses where they work watch items they make pile up in their warehouses.

What happened? Closer scrutiny as we can probe anywhere as it's our made up world, reveals that some people in the community are stockpiling cash in their houses. And that is all that is required. As they pull cash out of the system, it become increasingly scarce, and the monetary system begins to break down.

What if they had the money instead in a bank? No problem then. The bank in our perfect hypothetical small village loans the money out, so it still flows.

The idea that monetary flows are key to employment may seem a strange one, but now let's move from our thought experiment to high unemployment in the European Union. Why? Because it's a great current real world arena and why not?

I can speculate, as it's not really a good enough framework to call it a scientific theory that high unemployment, for instance in Greece and Spain, is driven by some people taking money out of the system, possibly by not putting it into banks. Maybe they don't trust banks in their own country? How well does money flow in the Eurozone? I'm not sure. I could check but will check later after I post these thoughts!

So a solution would be to let Greeks or Spanish easily deposit their money anywhere in the Eurozone with guarantees, freeing them from trusting banks in their own countries, if this speculated problem is the issue. Then unemployment would diminish rapidly.

And that is a bit of brainstorming the problem with a gedanken experiment, which leads to a policy suggestion which may be naive as I need to read up on banking in the Eurozone now.

Which is how I do many things. So now on my agenda: read up on banking in Eurozone countries, as to how easily people can have deposits in other countries if they are scared of putting money in banks in their own country.

Maybe I should put a brainstorming label on these type posts, as I try not to edit them as much. Done.

James Harris
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