History of Economic Thought (Universal Basic Income, EMU, and industries)
June 7, 2017 / Taluer Canli
To first discuss universal basic income, one needs to define four different terms, namely Economics, Capitalism, Socialism, and Philanthropy. Economics is the science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind. It deals with the allocation of scarce resources in an efficient manner.
Capitalism can be defined as a private economic system. In this system, investments and thus ownership of the means of production, distribution, and exchange of wealth is made and maintained by individuals or private corporations. Of course this only takes place under institutions, namely rules and regulations by the governments. Every country has a different situation, so every situation needs to be dealt with independently, albeit globalisation.
According to Marxist Theory, socialism is the stage following Capitalism. This transition from Capitalism to Communism is characterised by imperfect implementation of collectivist principles. Imperfect implementation can be seen in many parts of this world, especially governments, and especially in the European Union. However, the term is outdated. Instead, Philanthropy should be used, as it is a more correct term.
Philanthropy is a new term, which has been mainly guided by Individuals who became super rich in their lifetime. It can be described as from rags to riches. Philanthropy has different meanings. It describes an altruistic concern for human welfare and advancement, usually manifested by donations of money, property, or work to needy persons, by endowments of institutions of learning and hospitals, and by generosity to other socially useful purposes. However, Philanthropy can be summarized as an organisation devoted to helping needy persons or to other socially useful purposes. Sounds a lot like a government, right?
Universal basic income requires the government and its population to have a certain standard of living. It requires high income in general and an industrialised economy. As it relies heavily on taxes, new tax reforms need to be introduced, such as taxing “Capital” on top of only labour. Right now, it is too hard to do that, as the economic value added needs to be determined for each unit of capital. This requires a high stock of technology, which has not yet been achieved. Right now, there are many pilots and many social scientists are discussing the idea of universal basic income. In the future, through technological progress, this seems like a possible idea. Many philanthropist, such as Bill Gates, have also stated their concern regarding the taxation system for better worldwide institutions, behaviour and welfare.
Institutions are a key ingredient for economic growth. Inclusive economic and financial institutions enable people to fully unfold their creativity. This enables “creative destruction”, a term coined by Joseph Schumpeter. It describes the process of of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. Institutions play a key role, as we will see.
In the past 17 years, there have been lots of financial and humanitarian crises. We have experienced the dot-com bubble, the global financial crisis and the Greek financial crisis. On top of that, there is war in the Middle East, which also spreads to developed countries, because their beliefs do not align. Beliefs should be aligned for a stable system.
For universal basic income, technology and transparency are two key ingredients. Taxes need to be paid correctly, and collected in an efficient way. Data here is most important, as it needs to be transparent. This was not always the case in economic history, especially looking back to the Greek crisis.
Inspired by the Jean Monet lecture of the old Greek finance minister in Maastricht, Brexit and luckily failed Frexit, one can analyse the short comings of the European Monetary Union and European-wide fiscal policy. The European institutions were and are not aligned in their fiscal policy. European countries need to recognize their dependence, as they share the same currency, the Euro. As long as this does not take place, the long-term future of the Euro is uncertain. The Euro requires one common and aligned fiscal policy, on top of the European Monetary Union.
For the Greek financial crisis, a prisoner’s dilemma in game theory context is appropriate. No one wanted to take the blame for the crisis, so it just grew and grew. This undermines the instability of Europe.
North America, in comparison, has stability in their fiscal policy and institutions, as it arguably only consists of two countries, the United States of America and Canada. There have been new legislations in some of the states of the US and parts of Canada, namely a legalisation of weed. This has brought up a new industry, and new ways of investing. Changing institutions enable creative destruction as mentioned earlier.
Historically, restrictions of weed have begun in the 1906 onwards. The first national regulation was the Marihuana Tax Act of 1937. However, since 2013 more and more states in the US legalizing both recreational and medical weed. Parallels can be seen with the alcohol prohibition in the US from 1920 and 1933, and the alcohol prohibition in Canada from 1898 until the 1920’s.
The legislative change brings up new companies, which need to be valued with different metrics. This new industry is currently in an upswing, as it changes historical boundaries. Expecting further institutional changes, a long-term investment into this industry is a good idea.
The main companies in the industry go for different strategies. The main companies consist of Aphria, CGC and Aurora Cannabis. First of all, Aphria is defensive, as it uses a cost-leader strategy. On the other hand, CGC is going for international expansion. In contrast, Aurora Cannabis tries to ramp up production capacity at home to fully utilize the market concentration. For people, who would look to diversify their portfolio HMMJ, an exchange-traded fund might be a possible idea.
On the upside, there is the high demand of people, and further legislative changes in the US. Using basic game theory, this will probably take place at some point. The reason behind it is intuitive. Legalizing weed does not only increase taxes for the government, but also helps decreasing criminality, and thus makes the police more efficient for “bigger” crimes. In comparison, the main risk, is that the legalisation will not take place as planned on July 1st, 2018.
So for now, it is an industry to look at, due to its high growth potential, which is logically to take place. An investment in the industry should be considered as a long-term investment, since the volatility of the industry is likely to be high. Since the industry is new, not many valuation techniques are known. For now, a ratio of “Price to Growing Capacity” is likely to be a good indicator. A first mover advantage is present. It is also an interesting industry, since its revenues come from a shift from the black market to shareholders.
From a government perspective it also makes sense. Looking at the Netherlands as an example, it can boost social infrastructure such as student financing, lower housing prices. It also aids decriminalisation. Also, the GDP per capita of the Netherlands is higher than Germany, which is always seen as the best example of good institutions. In the long-run creating new industries will definitely help making Universal Basic Income an achievable goal. Keep in mind, it is only expensive if you don’t use it.
Deloitte. 2016. Recreational Marijuana: Insights and opportunities.