Economics of Mars

louis · 2019-12-23 06:38:27

I’ve just been reading a book on economic theory called 30-second economics (it’s actually a more in-depth study then that title might suggest). I thought it might be interesting to work through the theories and ask how they relate to a future human society on Mars since I don't think anyone here or elsewhere has ever attempted to do that...

Classical economic theory This theory has evolved out of Adam Smith’s original writings which indicated that the rapidly adjusting market ensures equilibrium, stability and prosperity.

My comment: The free market will be largely absent from Mars for at least a couple of decades following the arrival of humans in my view. This partly reflects technology (the need to ensure that life support technology is in place) and partly the way missions will be structured (under the control of a centralised planning team). There will be a market between Mars and Earth e.g. over science experiments, where I anticipate demand will exceed supply.

Marxism Marx predicted the inevitable evolution of a classless society based on the principle of "from each according to their ability and to each according to the need".

My comment: In a sense the early missions to Mars will probably reflect these principles. All the participants will be highly dedicated to giving their all to the project and financial motivation will not be required. Equally, they will be happy to help a fellow pioneer who may be in need - e.g. in need of medical treatment. But Marxism is not an organising principle that works well with larger and more sophisticated societies.

Keynesian economics. Keynes argued that the business cycle was driven by aggregate demand and suggested that government could intervene to smooth out the ups and downs of the business cycle by manipulating aggregate demand for goods and services.

My comment: The business cycle is a reality in all markets but it is worth pointing out that we have, on Earth, had steady growth in world GDP year by year virtually every year since World War II. This is due to technological innovation, improved transport and communications and a growing population.

The Mars economy will be growing from a tiny colony into an economy based on substantial human populations possibly millions within 100 years. So I think we will not see major business cycle dips. There is perhaps a risk of investment "bubbles" going forward which may cause economic dislocation.

To be continued...

Last edited by louis (2019-12-23 09:46:57)

tahanson43206 · 2019-12-23 07:16:31

For Louis re this new topic .... Bravo!

Looking forward to your next installment.

May I repost this to luf.org in their (curated) blog? I am fairly confident it will measure up to their expectations for content and quality.

(th)

louis · 2019-12-23 14:32:34

Thanks TA - feel free to pass it on.

tahanson43206 wrote:

For Louis re this new topic .... Bravo!
Looking forward to your next installment.
May I repost this to luf.org in their (curated) blog? I am fairly confident it will measure up to their expectations for content and quality.
(th)

louis · 2019-12-23 16:41:05

Neoclassical synthesis The neoclassical synthesis suggests that Keynes was right in the short term but in the longer term the classicals have the correct approach. There is general agreement however that "perfect" markets (the markets that classical economics assume as part of their theory) do not exist in reality.

My comments: In relation to Mars, the likelihood is that it will be dominated in its early stages by one or at most a few players (e.g. Space X, perhaps a Mars Corporation and one or two major universities). Market entry will be very difficult for competitors (space agencies are the most likely "competitors" but they will probably create their own isolated settlements if they do reach Mars - at the very least Space X will probably be 15 years ahead of other potential players). So it is clear the "market" on Mars will be very imperfect with strong monopolistic tendencies.

The need for a Keynesian approach to boost aggregate demand and smooth out the business cycle will not be pressing because the Mars settlement will be growing exponentially.

Austrian School Hayek is one of the best known members of this school. Essentially the School holds that economies are extremely complex phenomena. The amount of information that needs to be co-ordinated is huge and price information (responding to supply and demand, in turn reflecting the wishes of individual consumers and firms) is in practice the only way to organise it efficiently. The state cannot acquire all the information it needs to set prices itself rationally.

My comments: Clearly in relation to Mars there will be a huge difference between the initial stage - a small settlement - and a larger, more Earth-like, settlement, involving hundreds of thousands or even millions of people.

Pricing of goods and services on the Moon was not an issue for the lunar landings in the Apollo programme and pricing is unlikely to become an issue on Mars until we reach a certain critical mass of people. Initially nothing will be priced. Everything will be provided free to the pioneers (who will be receiving salaries paid into their bank accounts back on Earth). But a few years in, we will probably see something like this shop at the McMurdo Antarctic base:

https://www.youtube.com/watch?v=n-ohSqiFvoM

Pricing will not be related to profit-making so much as limiting demand for "luxury" items imported from Earth.

As the economy increases in complexity, we should begin to see more genuine markets developing on Mars - with individual service providers and retail outlets setting prices in relation to supply and demand.

One caveat: The Austrian School came to prominence before the IT explosion and rise of computers' ability to handle mind-boggling amounts of data. We know that organisations like Walmart and Amazon can cope with vast amounts of data about products, services and prices. It's not impossible, I would say, for a whole economy to be organised on an Amazon-style basis. But of course that does reduce individual choice and consumer sovereignty...would we want that? Probably not.

Free Market Capitalism Milton Friedman argued for a minimal state to allow free markets to work properly and maximise prosperity.
This also implied a commitment to global free trade.

My comments: In reality there is nowhere on Earth where the state withdraws from all but an extremely minimal role. Subsidies, grants, government planning, differential taxes and so on are found in all countries, even the USA and these interfere with the operation of "free markets".

On Mars, there will be limitations as to how freely market actors can operate. Firstly, Mars is a dangerous place, with people living in pressurised environments dependent on life support technology. For instance, the authorities will not simply allow anyone to operate a taxi service, if a defective or badly driven taxi might ram into a hab, break the pressure seal and kill everyone inside. Many activities will have to be subjected to many restrictions because of these safety considerations. Secondly, the Outer Space Treaty (OST) places limits on the creation of property rights in relation to land. Land is one of the key factors in production. It may be subject to some form of licensing but it cannot really be freely transferrable, at least not until a self-governing entity is created on Mars, which will not be a party to the OST.

Global free trade on Mars is likely to be the norm especially if Space X is able quickly to create a sizeable settlement that comes to dominate the whole planet.

Market Socialism This approach combines state ownership of the means of production and control of prices with individual firms being run by their managers.

My comments: We will see something like this in the early stages of Mars economic development. There will be little differentiation between the private companies controlling the settlement and "the state". Space X or a Mars Corporation will own the energy generation facilities, the 3D printers, methane-oxygen production and so on.

Whether individual firms will operate at an early stage remains to be seen. I don't see any great incentive for Space X or a Mars Corporation to allow the creation of firms in the early settlements as they will add a lot of administrative complexity. We will probably see an incremental progression towards the creation of individual firms. We might for instance see individual companies being licensed to operate hotels at popular tourist locations like Olympus Mons or operate long range bus routes.

(...continued)

Last edited by louis (2019-12-23 17:49:31)

louis · 2019-12-23 17:45:13

Central Planning Under central planning the State controls all the machines and factories and makes all investment decisions. There is no role for market forces.

My comments: There will be a large role for centralised planning on Mars. The early Missions will be planned down to the minute and the planning will be under the control of Space X, the de facto state on Mars.

This will begin to shift somewhat as other actors come into play. Universities and space agencies may undoubtedly want to engage in scientific research on Mars. They will have to liaise with Space X (or a Mars Corporation that Space X may set up) but they will have their own discrete area of control over planning how that research is delivered.

Gradually as other actors become involved in activities on Mars - manufacturing and service companies, artists, film makers, hotels, leisure industries, tour operators and others - the role of central planning will become less important. However, because human settlements are being built from scratch and because life support is a huge challenge on Mars, the likelihood is that central planning will continue to be a defining aspect of Mars society, much more so than say in the USA. This pattern will likely be taken up by an independent Mars Republic once that is established.

Mercantilism This approach is an alternative to global free trade. Essentially it means building up your industries behind tariff barriers (protectionism), using subsidies to help develop your domestic and export industries, preventing transfers of money from your country to other countries and trying to run trade surpluses. Many countries (US, Japan and S Korea for instance) have developed their economies in this way and built up their export industries before adopting free trade policies.

My comments: This has some relevance to Mars. Mars could easily develop a kind of "tourism" economy, simply servicing visitors, but being dependent on imports from Earth for its food, consumer goods and so on.

But many proponents of Mars colonisation explicitly have as their aim to create an autonomous human civilisation which could itself withstand the entire destruction of human civilisation on Earth. In order for that aim to be achieved, Mars has in effect to replicate all or most of the achievements of Earth-based humanity in terms of understanding and application of science, technological mastery, manufacturing and agriculture. In order to do that it has to develop its own economy and cannot remain dependent on Earth.

From that perspective (and given that Space X's founder Elon Musk is a firm advocate of creating a self-sufficient human civilisation on Mars) there is likely to be a lot of pressure to adopt mercantilist-type policies, so that after a few years there could well be limits placed on the amounts and range of imports in order to encourage the growth of Mars ISRU industry and agriculture. This might form part of a centralised development plan. At the same time, in order to help fund its development, Mars will be attempting to find all sorts of ways to run a trade surplus with Earth.

At some point, Mars may find there is resistance to being able to pick and choose its trade policy. Earth states may well want to have opportunities to export, to invest and to repatriate profits back to Earth.

Shock therapy When countries with centralised or government-dominated economies hit the buffers (they are no longer able to borrow on the market and inflation takes control of their economies), "shock therapy" is often recommended, involving a quick withdrawal of subsidies, reduction in government expenditure and a swift switch to market-orientated policies.

My comments: This seems unlikely to be of much relevance to Mars, unless a Mars Corporation possibly relies on loans to fund development. At some stage that might prove problematic if the economy is unable to support the repayment of the loans.

The Washington Consensus This neoliberal approach argues that if you remove state controls over the economy and keep government small, the economy will grow successfully.

My comments: Unlikely to be relevant to Mars. It will be difficult for a Mars government to remove state controls. It will need to plan for development. It will need to ensure life support systems operate effectively. It will need to control interplanetary transport and so on. My sense is that Mars government will stay big for a long time.

Monetarism This economic theory suggests that control of the money supply by government is a vital tool of economic policy, key to controlling inflation (low inflation in turn being a key factor in maintaining economic stability).

My comments: This of course begs the question firstly of what policy in relation to money should be adopted on Mars.

There are various options for a Mars Monetary Sytem. A Mars government (or dominant company) could decide to:-

1. Allow all and any currencies to be used, leaving it to the market to decide which one(s) are best to use. All else being equal, users of money on Mars would tend to choose the most stable currencies. Of course these currencies could be cryptocurrencies like Bitcoin.

2. The Mars governing agency could declare only one Earth-based currency as legal tender on Mars. An obvious choice would be the US Dollar, already the pre-eminent trading currency on Earth. This would be highly convenient from many aspects.

3. The Mars governing agency might create its own currency. This has the advantage over Option 2 that Mars will itself have full control over the money supply and could manipulate the currency to facilitate increased exports to Earth.

The likelihood is that any Mars monetary unit would be purely digital in form, to avoid the expense of printing notes and minting coins. (However a limited number of coins might be produced for sale back on Earth).

Having control over its own currency will provide the Mars governing agency with an important economic tool that can be used to facilitate inward investment and exports to Earth. However, there would be nothing to stop Mars using both a local currency and the US dollar if that proved convenient and conducive to economic development.

Last edited by louis (2019-12-23 19:02:06)

louis · 2019-12-23 18:52:13

The Phillips Curve The Phillips Curve suggests there is a correlation between (a) high inflation and low unemployment and (b) low inflation and high unemployment. In other words, if you want to squeeze inflation out of your economy, you have to accept higher unemployment. Critics of the theory note that in the 1970s across most of "the West" we experienced "stagflation" - high inflation and high unemployment.

My comments: This seems like a rather simplistic theory, as the counter-example from the 70s shows.

In general terms I think there will be less pressure on the Mars economy to maintain low inflation. We may well see quite high inflation (as production struggles to keep up with the inward flow of investment) but unemployment will be virtually unknown on Mars. I expect one of the key differences between Mars and Earth is that unemployment will be abolished by statute and that everyone will have the right to work. There will be a chronic labour shortage on Mars that will probably go on for at least 100 years and probably centuries.

Permanent Income Hypothesis This theory suggests that people spend according to their estimate of what they are going to earn over a lifetime (not just on their immediate earnings). This is why people feel confident taking out mortgages on properties.

My comments: On Mars there will be a high level of confidence about future earnings. Most people will be on contracts that guarantee their earnings and allow them to save back on Earth (through income going into their bank accounts). This will certainly help stimulate the economy on Mars since people will have a low propensity to save. Even as people come to live on Mars permanently they will have a high level of confidence about future earnings, as this will be one of the ways Mars attracts settlers, by guaranteeing their financial future.

Last edited by louis (2019-12-23 18:57:12)

louis · 2019-12-24 08:41:22

Rational expectations This theory makes the fairly commonsense observation that we make predictions about the future on the basis of available information. Even if it turns out to be wrong, it is a rational, the most rational, approach.

My comments: The creation of an off-Earth human civilisation is a project of startling novelty. I think in order for the project to proceed with stability, people need to know there is a clear, public plan in place about how this is to be achieved. This will encourage confidence among investors and pioneers if they can see there is a clear route map. This will aid overall economic development.

There should be full and open discussion on the plan, ideally. Going forward, the Mars community should vote on the plan periodically.

Time consistency This theory holds that governmental policy consistency over time is important, otherwise economic actors come to distrust policy initiatives and statements.

My comments: This reinforces the point under Rational Expectations, that there needs to be a clear and consistent plan for development of human society on Mars that people can trust in. At present we don't have that. While Elon Musk is undoubtedly committed to Mars colonisation he has so far announced only very ambitious goals. The route map does not yet exist.

Financial accelerator: The credit crunch of 2008 shows how a weak financial system can accelerate negative outcomes, with a situation arising in the end where banks refuse to lend to each other. It is likened to a rolling snowball, gathering volume as it goes...

My comments: Any financial system on Mars will need to be robust. But that raises the interesting question of what sort of financial system should there be on Mars. One approach might be to separate out private banking (for individuals) from investment banking. For the former, we might have licensed financial co-operatives (similar to building societies in the UK). For the latter, we might have licensed investment corporations which will loan money to businesses and possibly to the Mars government to pay for infrastructure projects.

It is unlikely that banks will be required on Mars for some time. Initially people will use bank accounts based on Earth for their private needs. There will probably be ATMs on Mars connected to Earth. Space X and a Mars Corporation will, for several decades, and possibly beyond, be able to fund investment themselves on the model of Amazon, which essentially funds investment through company growth.
Space X and/or a Mars Corporation may issue bonds to fund infrastructure development. But eventually it seems likely that banks will be required to fund business growth as the Mars economy becomes highly complex.

Mars may create a more restrictive environment for financial institutions than in market economies on Earth. One might expect low upper limits on loan rates for individuals, within a legal framework. Mars is unlikely to be the sort of place that will encourage a "credit culture". The emphasis will be much more on saving and long term investment.

Calliban · 2019-12-24 09:27:30

Louis, bravo for starting an interesting new thread.

I would begin by saying that conventional economics has led many seemingly clever people down a blind alley. It encourages people to think of the economy as a metaphysical thing, which can be manipulated by interest rates, money supply, etc. in a way that makes it appear to be disconnected from any real physical inputs. This has led to the absurd idea that wealth can grow perpetually using fixed or even declining inputs of materials and energy. Many otherwise clever people seriously believe that this system will allow us to cheat the laws of physics, essentially getting something for nothing.

That’s kind of like saying that in the future, I should be able to make endlessly increasing amounts of hot coffee without using any more hot water. Ultimately, new technology should allow me to produce infinite amounts of hot coffee using no water at all! In the short term, it may be possible to improve the efficiency of some production processes using new technology to remove waste. But there are clearly unbreakable physical limits to how far that can be taken. A device or system allowing ever increasing production of any good or service, decoupled from rising inputs of energy and materials, would ultimately need to become a perpetual motion machine.

The article below sums up the awful state of affairs that metaphysical economists have brought the world economy to. This is what happens when those in charge forget what the economy actually is and attempt to mitigate a problem that is rooted in resource depletion, using esoteric monetary policy.
https://www.zerohedge.com/markets/world … al-economy

One might imagine that it may one day be possible to plug human beings into a Matrix-like simulation, in which imaginary goods really can be disconnected from the need for any real physical inputs, besides the baseline amounts needed to run the simulation and repair the machine. But even in that scenario, growing virtual wealth would ultimately lead to an increase in the complexity of the simulation, requiring more physical memory space and more real resources from the real world.

So I will start by stating what I believe the economy to be:

<i> The economy is a systematic organisation of human beings, machines and other infrastructure, that use harvested energy under the direction of human intelligence, to reorganise matter into products that human beings use or value. <i>

This essentially defines the economy as a machine that makes all stuff we need or want. Money is simply a claim on the physical output of that machine and changing interest rates and money supply will change how the output gets divvied up.

When we talk about economic models, we are talking about ways of organising and controlling this physical machine and ways of dividing up what it produces. But the economic model and any decisions over monetary systems make absolutely no difference to what the economy is. It remains a machine for organising matter in ways that benefit human beings in some way; and it remains governed by the laws of physics and thermodynamics.

That being said, I do believe that conditions on Mars will tend to favour certain economic arrangements over others. Simply growing food and accessing water will require an expenditure of energy and materials substantially greater than would be required here on Earth. I second Louis's proposal that this would suggest a very collectivist outlook, as large upfront investments are needed simply to establish the basic necessities of life: Food, water, warmth and living space. Growth will be a function of energy supply, just as it is here on Earth. But on Mars, a lot more energy will be needed to produce any realistic good, so the cost of energy will be an urgent political and economic priority. Again, that drives us towards economy of scale, which applies a high level of collectivism. As living space will be at a premium, people will live in close proximity to one another. Again, that encourages a collectivist outlook.

On Earth, the most successful economies are 'mixed', implying a mixture of privately owned and publicly owned services. I would anticipate a similar arrangement on Mars. Important services that tend towards monopoly, such as air, water and energy, are likely to be owned by the state and developed on a large scale. Small scale manufacturing and service industries will either be privately owned or developed as public-private partnerships. As the scale of habitation increases and the wealth of the colony grows, the role of the state can be expected to shrink. With a hundred million people on Mars, even essential industries will enjoy enough economy of scale to function in a competitive market.

Last edited by Calliban (2019-12-24 09:42:44)

tahanson43206 · 2019-12-24 09:51:43

For Calliban re #8

Thank you for your interesting contribution to Louis' new topic!

For Louis re topic ... The entire original series has been posted as a set of links at luf.org.

You *** should *** get a comment from Lizard King at a minimum. I'm definitely interested in seeing cross-forum exchange.

(th)

Calliban · 2019-12-24 10:01:19

louis wrote:

The Phillips Curve The Phillips Curve suggests there is a correlation between (a) high inflation and low unemployment and (b) low inflation and high unemployment. In other words, if you want to squeeze inflation out of your economy, you have to accept higher unemployment. Critics of the theory note that in the 1970s across most of "the West" we experienced "stagflation" - high inflation and high unemployment.
My comments: This seems like a rather simplistic theory, as the counter-example from the 70s shows.

It's a simple idea that stems from the reality that money is a paper claim on real goods that are produced by the real economic machine. Inflation is simply rising prices of real goods, which consumers experience as loss of value in the currency. Given that the machine can only respond slowly to changes in demand for real physical goods (often by building more infrastructure and the energy supply needed to run it), a sudden increase in either money supply or velocity of money, will push up prices. Given that the real products of the economy are fixed in the short term, more money simply means higher bids for the same stuff. High unemployment naturally reduces the spending power of the great unwashed public, so it reduces inflation and under severe conditions, can even lead to deflation. The Phillips Curve ignores any input from changes in wages. A reduction in wages would theoretically have the same effect as a reduction in employment.

The Phillips Curve is a bit like an observed correlation, developed by an economist that noticed a relationship without really understanding what caused it. Exactly what you would expect from someone without any real physics or engineering knowledge, i.e. an economist.

In recent years something interesting has been happening. Official unemployment rate is low and inflation is also low. What is more, this has been going on at a time during which central banks around the world have been printing money like crazy and lowering interest rates to almost zero. This would appear to contradict the Philips Curve. Anyone care to take a guess as to what is really going on?

Last edited by Calliban (2019-12-24 10:13:30)

louis · 2019-12-24 11:48:38

I am old enough to remember when monetarism was in the ascendant in the UK, and the reality was that however much they tweaked money supply or re-defined what it was (there were several measures) the economy seemed always to elude governmental control via monetary restraint.

This is probably because there are many more ways to create "money" or - if you prefer - a potential claim on current production. Credit is the most obvious one and at the time all sorts of new areas of credit were being opened up. There were other innovations that created potential claims with no government approval e.g. "Air Miles". I am probably missing some of the big factors but essentially in a free economy it's quite difficult for a government to get total control over the whole of the money supply (understood as the whole of the potential claims on current production).

Are you a fan of social credit theory, Calliban? That was developed by an engineer!

Calliban wrote:

louis wrote:
The Phillips Curve The Phillips Curve suggests there is a correlation between (a) high inflation and low unemployment and (b) low inflation and high unemployment. In other words, if you want to squeeze inflation out of your economy, you have to accept higher unemployment. Critics of the theory note that in the 1970s across most of "the West" we experienced "stagflation" - high inflation and high unemployment.
My comments: This seems like a rather simplistic theory, as the counter-example from the 70s shows.
It's a simple idea that stems from the reality that money is a paper claim on real goods that are produced by the real economic machine. Inflation is simply rising prices of real goods, which consumers experience as loss of value in the currency. Given that the machine can only respond slowly to changes in demand for real physical goods (often by building more infrastructure and the energy supply needed to run it), a sudden increase in either money supply or velocity of money, will push up prices. Given that the real products of the economy are fixed in the short term, more money simply means higher bids for the same stuff. High unemployment naturally reduces the spending power of the great unwashed public, so it reduces inflation and under severe conditions, can even lead to deflation. The Phillips Curve ignores any input from changes in wages. A reduction in wages would theoretically have the same effect as a reduction in employment.
The Phillips Curve is a bit like an observed correlation, developed by an economist that noticed a relationship without really understanding what caused it. Exactly what you would expect from someone without any real physics or engineering knowledge, i.e. an economist.
In recent years something interesting has been happening. Official unemployment rate is low and inflation is also low. What is more, this has been going on at a time during which central banks around the world have been printing money like crazy and lowering interest rates to almost zero. This would appear to contradict the Philips Curve. Anyone care to take a guess as to what is really going on?

louis · 2019-12-24 12:07:53

I think you make lots of good points but I would say there are other ways of looking at this.

You would get very different outcomes if you took economy X - your "machine" - and applied (a) sensible policies as recommended by most economists (b) idiotic policies not recommended by most economists. The thermodynamics would be no different but going forward in one case the economy would prosper or at least not collapse and in the other case it would collapse, Zimbabwe-style. In the case of Zimbabwe the thermodynamics didn't really change at all - the farmland was there, the machines were there, the labour force was there. But economic mismanagement created an economic disaster zone.

You can look I think at economies also as a kind of game that people play according to certain sets of rules (e.g. money is counted in units; banks are not supposed to deny you deposited money with them when you did; you can't own slaves and so on). The rules change over time but one of the important points is that you can count a lot of elements of the game e.g. money itself, hours of time, distance travelled, units of production and so on. This means that if you have influence over those countable units (as a government does with money and the amount of time people are allowed to work), you can strongly influence the course of the game, even if you aren't actually making a single widget yourself. So I don't agree that economics is metaphysics!

In terms of the energy in the system we have seen huge increases in energy efficiency over the last few decades and also huge increases in recycling. This means you can produce more stuff with the same amount of energy and materials.

Calliban wrote:

Louis, bravo for starting an interesting new thread.
I would begin by saying that conventional economics has led many seemingly clever people down a blind alley. It encourages people to think of the economy as a metaphysical thing, which can be manipulated by interest rates, money supply, etc. in a way that makes it appear to be disconnected from any real physical inputs. This has led to the absurd idea that wealth can grow perpetually using fixed or even declining inputs of materials and energy. Many otherwise clever people seriously believe that this system will allow us to cheat the laws of physics, essentially getting something for nothing.
That’s kind of like saying that in the future, I should be able to make endlessly increasing amounts of hot coffee without using any more hot water. Ultimately, new technology should allow me to produce infinite amounts of hot coffee using no water at all! In the short term, it may be possible to improve the efficiency of some production processes using new technology to remove waste. But there are clearly unbreakable physical limits to how far that can be taken. A device or system allowing ever increasing production of any good or service, decoupled from rising inputs of energy and materials, would ultimately need to become a perpetual motion machine.
The article below sums up the awful state of affairs that metaphysical economists have brought the world economy to. This is what happens when those in charge forget what the economy actually is and attempt to mitigate a problem that is rooted in resource depletion, using esoteric monetary policy.
https://www.zerohedge.com/markets/world … al-economy
One might imagine that it may one day be possible to plug human beings into a Matrix-like simulation, in which imaginary goods really can be disconnected from the need for any real physical inputs, besides the baseline amounts needed to run the simulation and repair the machine. But even in that scenario, growing virtual wealth would ultimately lead to an increase in the complexity of the simulation, requiring more physical memory space and more real resources from the real world.
So I will start by stating what I believe the economy to be:
<i> The economy is a systematic organisation of human beings, machines and other infrastructure, that use harvested energy under the direction of human intelligence, to reorganise matter into products that human beings use or value. <i>
This essentially defines the economy as a machine that makes all stuff we need or want. Money is simply a claim on the physical output of that machine and changing interest rates and money supply will change how the output gets divvied up.
When we talk about economic models, we are talking about ways of organising and controlling this physical machine and ways of dividing up what it produces. But the economic model and any decisions over monetary systems make absolutely no difference to what the economy is. It remains a machine for organising matter in ways that benefit human beings in some way; and it remains governed by the laws of physics and thermodynamics.
That being said, I do believe that conditions on Mars will tend to favour certain economic arrangements over others. Simply growing food and accessing water will require an expenditure of energy and materials substantially greater than would be required here on Earth. I second Louis's proposal that this would suggest a very collectivist outlook, as large upfront investments are needed simply to establish the basic necessities of life: Food, water, warmth and living space. Growth will be a function of energy supply, just as it is here on Earth. But on Mars, a lot more energy will be needed to produce any realistic good, so the cost of energy will be an urgent political and economic priority. Again, that drives us towards economy of scale, which applies a high level of collectivism. As living space will be at a premium, people will live in close proximity to one another. Again, that encourages a collectivist outlook.
On Earth, the most successful economies are 'mixed', implying a mixture of privately owned and publicly owned services. I would anticipate a similar arrangement on Mars. Important services that tend towards monopoly, such as air, water and energy, are likely to be owned by the state and developed on a large scale. Small scale manufacturing and service industries will either be privately owned or developed as public-private partnerships. As the scale of habitation increases and the wealth of the colony grows, the role of the state can be expected to shrink. With a hundred million people on Mars, even essential industries will enjoy enough economy of scale to function in a competitive market.

Last edited by louis (2019-12-24 14:26:49)

kbd512 · 2019-12-24 12:38:21

Calliban,

Actually, I think Mark Blyth (a Scottish economist who immigrated to America, not a physicist) accurately noted what happened to the global economy in the 1970's. Capital went on strike because there was no way for capital to continue making more money off of its investments into production without a corresponding increase in productivity and sales of goods or services to customers with a surplus of income they were willing to devote to those goods or services. We were so productive that we completely saturated the market with goods and services that people actually wanted to pay for. No increase in productivity could fix that problem. Labor's share of the market was at an all-time high, but everyone who had money to invest was investing in debt, instead of investing in creating more goods and services, because the interest rate off the debt was so much better than the gains from creating new businesses. As a result, no "real" (goods and services) economic growth occurred.

Despite the fact that I agree with your understanding of what an economy ultimately requires in order to continue pumping out goods and services, there's no demonstrated shortage of energy or resources in the world. None whatsoever. This notion of scarcity flies in the face of what we see in terms of global economic output. Nobody can look at the trend line for the world's total economic output over the entirety of the 20th and 21st centuries and not see what's happened. Despite the numerous hiccups, that line only runs in one direction. Reduced population growth will ultimately curtail future economic growth long before energy supply ever could. Apart from routine infusions of human capital from the developing world, there is no net population growth in the industrialized countries.

SpaceNut · 2019-12-24 13:51:23

The cog of wages, energy costs are the interuptors locally plus globally for a production with taxations in all forms of income and tarrif.

louis · 2019-12-24 18:24:56

UK, USA, Australia, Canada, Germany and France are all growing in population. Japan is the real exception.

The 1970s downturn was a direct result of the oil price shock. That was a very artificial sort of negative stimulus...a bit like increasing income taxes by 20% all round.

The economic problems from 2000 onwards have been a result of US and EU deciding to allow China to trade with the rest of the world while it has a huge reservoir of cheap labour and while it shows no inclination to follow fair play rules in any area. The consequences were blindingly obvious - China is just going to start replacing US and European industries. The naive idea they would stop at producing cheap consumer goods rather than high tech products has been disproven.

kbd512 wrote:

Calliban,
Actually, I think Mark Blyth (a Scottish economist who immigrated to America, not a physicist) accurately noted what happened to the global economy in the 1970's. Capital went on strike because there was no way for capital to continue making more money off of its investments into production without a corresponding increase in productivity and sales of goods or services to customers with a surplus of income they were willing to devote to those goods or services. We were so productive that we completely saturated the market with goods and services that people actually wanted to pay for. No increase in productivity could fix that problem. Labor's share of the market was at an all-time high, but everyone who had money to invest was investing in debt, instead of investing in creating more goods and services, because the interest rate off the debt was so much better than the gains from creating new businesses. As a result, no "real" (goods and services) economic growth occurred.
Despite the fact that I agree with your understanding of what an economy ultimately requires in order to continue pumping out goods and services, there's no demonstrated shortage of energy or resources in the world. None whatsoever. This notion of scarcity flies in the face of what we see in terms of global economic output. Nobody can look at the trend line for the world's total economic output over the entirety of the 20th and 21st centuries and not see what's happened. Despite the numerous hiccups, that line only runs in one direction. Reduced population growth will ultimately curtail future economic growth long before energy supply ever could. Apart from routine infusions of human capital from the developing world, there is no net population growth in the industrialized countries.

louis · 2019-12-24 19:07:55

...to continue...

Financial Instability Hypothesis Essentially the argument is that economic stability leads people to take greater risks with their investments and spending until defaults create an economic crisis. Capitalism is inherently prone to periodic crises.

My comments: History does show that the increase in GDP does periodically slow down and even, very occasionally, go into reverse. Certainly, free markets are subject to the business cycle.

Major economic downturns and crises are unlikely to play much part in Mars's economic history for the first 100 years. There will simply be too much potential for growth for that to happen, in the absence let us say of some awful calamity like a large meteorite strike.

Mars's development is likely to be guided by a detailed plan which will provide a good deal of certainty and stability. There will be only a few major economic players on Mars in the early stages and they will be signed up to the plan.

Lender of Last Resort The role of "a lender of last resort" is usually a national central bank, which acts in the national interest to stop banks going under. It does this by lending money to banks and other institutions. In extremis it can also create money e.g. through Quantative Easing, so that the central bank buys securities, such as government bonds, from banks, with electronic cash created by fiat. This helps increase bank reserves and so stabilise the economy in a crisis.

My comments: There won't be a central bank on Mars to begin with and probably not for several years, maybe decades.

Development will likely be under the control of Space X and a Mars Corporation in which Space X will be a major shareholder.

If Musk's plans work it seems unlikely that these companies will need to depend on loan finance. Space X is a developing the Starship for a number of roles and so only part of the development costs need to be covered by a Mars Mission. The scope for generating huge income from a Mars landing is immense: including commercial sponsorship, TV and film rights, spin off books, charging for undertaking science experiments, establishing a university presence on Mars, paid-for placements and so on. I would expect Mars development to be based much more on the Amazon model where increased revenue gets directed primarily into increased investment in the company's expanding activities, rather than into rewarding shareholders with dividends. This is how Amazon grew from a small online bookstore in 1994 to the commercial leviathan it is now.

https://fourweekmba.com/amazon-business-model/

From this optimistic appraisal it seems to me that the services of a central bank will not be required urgently as a "lender of last resort".
A central bank is probably more important for developing monetary and trade policy - for trying to create the most favourable terms of trade with Earth.

louis · 2019-12-24 19:42:16

Neoclassical Growth This model seeks to predict a nation's long term economic development, through focussing on three factors: technology, capital and labour. The theory explains, through the rule of diminishing returns, how the growth rates of advanced countries eventually slow down as a steady state is reached where only technological innovation can bring further advances in productivity and thus a higher rate of growth.

My comments: This theory is certainly relevant to Mars. We will see very advanced technology being applied from the start and that is likely to remain the pattern on Mars. A shortage of capital for investment is unlikely to be a restraint on development in the first few decades. Space X will very likely have billions available for investment in Mars colonisation. The key restraint on growth will be the labour force. Getting the right people to Mars and then ensuring they can be as productive as possible is no easy task. The likelihood is that there will be a chronic labour shortage on Mars until mass colonisation becomes feasible.

As a consequence, the Mars economy is likely to be highly automated and robotised. Don't expect people to serve you your meals in a restaurant! Don't expect taxis to be driven by taxi drivers. Mars will be built from ground up to be robot-friendly. Floor and wall surfaces for instance will allow robots to provide cleaning services.

High levels of automation and robotisation will allow Mars to escape to a large degree the constraints of the chronic labour shortage.

New or "endogenous" growth This theory stresses the importance ultimately of techological innovation as the chief determinant of economic growth - ie new growth. An economy that can provide a platform for technological innovation will do well. Both private companies and government can play a role in ensuring that innovation happens and that it is harnessed to the benefit of the economy e.g. through seed capital.

My comments: I think initially Mars will be very advanced technologically but it will be importing its innovation from Earth. It won't have the population and labour force to be able to provide the full platform for innovation. Of course a lot of scientific research will take place on Mars but it is unlikely to lead directly to innovations that enhance economic performance; for those Mars will be dependent on Earth.

Of course, over time this could change. There are some good reasons to think that Mars might itself become a centre of innovation. The Mars pioneers and the first permanent residents will be highly educated people with a strong base of scientific and technical skills. Mars will in that sense represent something like an American campus, an MIT transplanted to this new planet for humans.
There may be economic advantages in engineering and software design taking place on Mars in the absence of rents and taxes. There is certainly scope for Mars to become a centre of excellence in innovation once universities from Earth establish themselves there.

Creative Destruction This is one of the key features of freewheeling capitalism. Companies are constantly going bankrupt or being eaten up by competitors. This sort of creative destruction allows for rapid business innovation - different ways of doing things - and thus is very responsive to consumers, thus promoting economic growth.

My comments: The primary task on Mars is somewhat different from the primary task on Earth. On Mars the main aim is likely to be the creation of a largely self-sufficient civilisation in the shortest time possible. That doesn't really require creative destruction of companies. Rather it requires an intelligent "pick and mix" attitude to what is available on Earth and seeing whether it needs to be applied on Mars. The classic example I would always point to is paper.

On Earth paper still has a key role to play in all sorts of activities: newspaper reading, magazines, advertising, marketing, packaging and so on. But is it really necessary on Mars? On balance I would say no. You can have an advanced civilisation on Mars without the need for paper.

To create a paper industry on Mars with different companies competing with each other to produce the best paper products at the cheapest price would be a serious diversion in terms of meeting the over-arching aim of creating a new self-sufficient human civilisation.

So I do not see "creative destruction" having a significant role to play on Mars until a large human settlement has been created.

Last edited by louis (2019-12-24 20:35:44)

kbd512 · 2019-12-24 22:00:41

Louis,

Old people living longer doesn't count as a population increase. The fact that we can keep someone alive today into their 80's or 90's doesn't mean the number of young people at the bottom of the population pyramid is increasing.

When the birth rate dips below 2, population will inevitably decline. It's only a matter of time. The US birth is 1.8 children per woman. The replacement rate required to deal with mortality is at least 2.1. In fact, the fertility rate has been below replacement rate since 1971. Anyone who knows how to count should be able to figure out how this works.

Here in America we boost our population numbers through immigration, but that doesn't mean the country that those people left get an automatic population increase as well. In fact, it seems that the exact opposite occurs more often than not. Population growth has been falling every year since 1950 and shows no signs of reversal. Our replacement rate numbers include all the immigrants, legal or otherwise. The entire world is rapidly become an old folks home.

Until the machines take over in a major way, all those welfare programs that our socialists are so fond of will require more people who are producing and consuming goods and services to maintain- or, more succinctly, just provide care for the elderly.

tahanson43206 · 2019-12-25 05:39:16

For Louis re #17

I like your series over all, and have posted links to it on luf.org.

However, I disagree with your cavalier disrespect for the importance of paper, and invite you to re-examine that small part of #17.

In my vision for Sagan City (2018) I anticipate a need for paper, and indeed, anticipate Terraformer's idea of growing bamboo to make paper to become a vital part of the economy.

In examining my use of paper, I concede that it is steadily decreasing, so I grant you that hardened paper for writing or printing will become less important.

However, I am confident that any person living and working on Mars is going to want hardcopy manuals and similar collections of data to be available as backups for the inevitable failure of the digital systems.

I have recently made the transition from paper newsprint to all-digital newspaper delivery, and find the experience to be acceptable overall. In addition, I have transitioned from using post-it notes for short reminders to playing card sized plastic pads for use with erasable ink pens, so I can easily imagine Mars residents doing something similar when digital devices are inappropriate.

Google was flummoxed by the inquiry: do astronauts still use paper on the ISS

However, I did get back a few indirect hints that paper is still in use in the world's most advanced technological outpost

(th)

louis · 2019-12-25 11:10:32

Hi TA - Have you ever been to a paper mill? They are huge places and use vast amounts of resources, not least water, to manufacture paper efficiently. It seems an unlikely activity for Mars where useable water will be such a scarce resource.

There might be some residual use for paper on Mars, but nothing necessary to modern human civilisation as far as I can see. Would probably make sense to import a little paper as necessary.

tahanson43206 wrote:

For Louis re #17
I like your series over all, and have posted links to it on luf.org.
However, I disagree with your cavalier disrespect for the importance of paper, and invite you to re-examine that small part of #17.
In my vision for Sagan City (2018) I anticipate a need for paper, and indeed, anticipate Terraformer's idea of growing bamboo to make paper to become a vital part of the economy.
In examining my use of paper, I concede that it is steadily decreasing, so I grant you that hardened paper for writing or printing will become less important.
However, I am confident that any person living and working on Mars is going to want hardcopy manuals and similar collections of data to be available as backups for the inevitable failure of the digital systems.
I have recently made the transition from paper newsprint to all-digital newspaper delivery, and find the experience to be acceptable overall. In addition, I have transitioned from using post-it notes for short reminders to playing card sized plastic pads for use with erasable ink pens, so I can easily imagine Mars residents doing something similar when digital devices are inappropriate.
Google was flummoxed by the inquiry: do astronauts still use paper on the ISS
However, I did get back a few indirect hints that paper is still in use in the world's most advanced technological outpost
(th)

tahanson43206 · 2019-12-25 11:52:01

For Louis re #20

To your question .... not to a paper mill, but I HAVE toured a steel mill in operation, back a few years when the United States still had the real thing.

I can visualize what a modern industrial size paper mill might look like.

I'm going to try again ... I'm not getting through to you.

Please imagine how paper products might be used in a medical facility.

Please imagine how YOU would be cared for, in the absence of paper products in a medical facility.

Paper manufacture did NOT start out as an industrial sized operation such as you are visualizing.

Paper manufacture started out on a very small scale indeed.

I am quite confident that a market for selected paper products will exist in the Mars population from day one of their arrival on the planet, and each and every day thereafter, for the fullness of time.

(th)

SpaceNut · 2019-12-25 12:36:01

The paper is processed by drying and the water is reclaimed.

post #1

Mars economy is going to happen whether the people on mars that stay want it to or not as the funds to send goods to mars and back will need to be equalized soon after the science exploration permanent settlement is established.

People on mars will want to pay off there debt so that they can earn the big money that was invested for there going. They themselves will want to be able to keep earning at a rate greater than it costs to be able to stay there on mars.

Once man is not working for survival and is working for a mars earnings then they will be able to start a business for the eventual growth of mars economy.

The most likely business venture would be to be able to manufacture rockets as sending goods back to earth will be expensive if we are using what we came in to make that return of goods.

The business cycle will start as soon as it does not cost an individual or group funds to send goods to earth markets and that they are free of the earthly debt so that they can make money on the sales of them.

post #4

Hopefully low cost earth competition to send goods and men will continue for a long time but if no others step up to doing so we might not be more than a flash and gone again for a long period of time as we have been with the moon.

The initial mars business that will be made will be for the very things that we take for granted here on earth that mars is a cold climate absent of free flowing Water, Oxygen plus buffer gasses, food, power, heating and shelter....Mars people may not charge each other much but these are the most important for each to be able to survive once earth cuts off its funding and shipping of any of these.

Post #5

I can see the first renergades rebeling in time to an earth bound to mars details of what they want done in time as more of those that stay can afford to not do work at all for the corporates that funded there going. That these first mars business men will take hold of what goes on seperate from the earth dictates. These firsts will turn around and dictate to earth what they will be willing to do for a fee.

Its the independence of mars from earth that will lead the way for mars ecomonic future and for a second earth in our solar system. But why stop there when the asteriod fields are a natural resource to draw from as we go outward into space.

I guess for mars will it still hold the values of currency, exchange of precious metals and gems as well as the plastics we all enjoy called credit cards as how else can we trade goods from mars once we are not doing so on earths dime..

louis · 2019-12-25 15:47:43

Fair to raise the medical uses of paper. There may be a limited requirement...probably far less than in Earth-based medical facilities.

It's true we could produce paper on Mars on a small scale and perhaps that's what we will do, but I think it makes a lot of sense to reduce paper usage to an absolute minimum.

tahanson43206 wrote:

For Louis re #20
To your question .... not to a paper mill, but I HAVE toured a steel mill in operation, back a few years when the United States still had the real thing.
I can visualize what a modern industrial size paper mill might look like.
I'm going to try again ... I'm not getting through to you.
Please imagine how paper products might be used in a medical facility.
Please imagine how YOU would be cared for, in the absence of paper products in a medical facility.
Paper manufacture did NOT start out as an industrial sized operation such as you are visualizing.
Paper manufacture started out on a very small scale indeed.
I am quite confident that a market for selected paper products will exist in the Mars population from day one of their arrival on the planet, and each and every day thereafter, for the fullness of time.
(th)

louis · 2019-12-25 16:06:33

Not sure it's quite as easy as you imply re water usage in paper mills....

https://www.waterworld.com/environmenta … onsumption

I just think paper production is such a huge resource drain. Growing big trees on Mars won't be that easy. The whole process will drain labour away from other vital tasks. For what? Paper can be replaced in nearly all uses.

Post #1 - Yes there will be two ways to go for business: export or Mars-based services, agriculture and manufacturing.

Post #4 - Yes, there will be a lot of focus on the life support infrastructure.

Post #5 - I am a strong supporter of early Mars independence as the best motor for economic development.

SpaceNut wrote:

The paper is processed by drying and the water is reclaimed.
post #1
Mars economy is going to happen whether the people on mars that stay want it to or not as the funds to send goods to mars and back will need to be equalized soon after the science exploration permanent settlement is established.
People on mars will want to pay off there debt so that they can earn the big money that was invested for there going. They themselves will want to be able to keep earning at a rate greater than it costs to be able to stay there on mars.
Once man is not working for survival and is working for a mars earnings then they will be able to start a business for the eventual growth of mars economy.
The most likely business venture would be to be able to manufacture rockets as sending goods back to earth will be expensive if we are using what we came in to make that return of goods.
The business cycle will start as soon as it does not cost an individual or group funds to send goods to earth markets and that they are free of the earthly debt so that they can make money on the sales of them.
post #4
Hopefully low cost earth competition to send goods and men will continue for a long time but if no others step up to doing so we might not be more than a flash and gone again for a long period of time as we have been with the moon.
The initial mars business that will be made will be for the very things that we take for granted here on earth that mars is a cold climate absent of free flowing Water, Oxygen plus buffer gasses, food, power, heating and shelter....Mars people may not charge each other much but these are the most important for each to be able to survive once earth cuts off its funding and shipping of any of these.
Post #5
I can see the first renergades rebeling in time to an earth bound to mars details of what they want done in time as more of those that stay can afford to not do work at all for the corporates that funded there going. That these first mars business men will take hold of what goes on seperate from the earth dictates. These firsts will turn around and dictate to earth what they will be willing to do for a fee.
Its the independence of mars from earth that will lead the way for mars ecomonic future and for a second earth in our solar system. But why stop there when the asteriod fields are a natural resource to draw from as we go outward into space.
I guess for mars will it still hold the values of currency, exchange of precious metals and gems as well as the plastics we all enjoy called credit cards as how else can we trade goods from mars once we are not doing so on earths dime..

louis · 2019-12-25 17:18:24

Human capital Economic development is dependent not just on investment in physical infrastructure and factories but also in human beings, particularly in terms of education and training. More advanced economies require high levels of training and education.

My comments: The settlement of Mars will begin with very high investment in human capital. All pioneers will be educated to post-grad level and with several skill sets. Going forward Mars pioneers are likely all to be highly educated personnel. There will be no call for low or no skilled labour. Eventually some differentiation will occur. People with creative as well as technical and scientific skills will be needed. Likewise, experts in sports and leisure will be required. A lot of agricultural work may not require post-grad qualifications.

That said, it seems likely that in comparison with Earth the labour force on Mars will remain highly educated, and trained to a very high standard. Mars will no doubt follow this pattern going forward as it becomes more self-sufficient. This will allow Mars to support an advanced economy with extremely high levels of automation and robotics.

The Rule of Law The rule of law - specifically the creation of property rights with legal backing - is vital to the successful operation of modern capitalism.

My comments: The situation on Mars will be somewhat peculiar. By international law, no sovereign nation can lay claim to Mars. One presumes that - to the extent that the pioneers' operations are identified with one nation state, most likely the USA - they will be subject to the law of that state in a way analogous to the crews of ships registered with states. However, this is a very murky area. The Outer Space Treaty creates a rather vague framework for activities on Mars. It seems clear that no country can treat any part of Mars as its own land.

But of course the practicalities are that the pioneers will in effect be laying claim to land by building habitation, factories and farms on it, while also mining, laying roadways and creating spaceports.

It is to be expected that as soon as humans arrive on Mars the UN will expand its interest in this area and try in some way to extend its tenuous jurisdiction to Mars. There may be calls for revision of the OST treaty. The USA is likely to be quite aggressive in extending the reach of its federal laws to Mars as it tends to do to other countries on Earth.

Nevertheless the reality will probably be that Space X and some partners will operate the settlement more or less like a company town.

In the short term a system of licensing might stand in for the grant of freehold and leasehold property rights in land. Licences would be granted to people to occupy land for a temporary period (anything up to 50 years) subject to them using the land productively for some approved purpose.

Longer term, I think there is no doubt that for successful economic development, Mars needs an independent self-governing entity that can create secure property rights without reference to the Outer Space Treaty (to which it will not be a signatory, and so will not be bound by its terms). Such rights on Mars may be more circumscribed than is common on Earth, given the imperative for land owners to contribute to economic development.

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