Interest rates rise once again

In a politically charged decision, the Reserve Bank has lifted interest rates for the first time during a federal election campaign.

In a move that underscores its independence, the country's central bank raised its official cash rate by a quarter-point to 6.75 per cent, the highest rate in 11 years.

- theage.com.au

The way I see it, this was always going to happen.

Why? Back in June when the government announced their federal budget for the 2007-08 year, they were implementing expansionary fiscal policy.

This means that compared to last year, they were putting more money back into the economy, stimulating economic growth and thus putting upward pressure on inflation. With Australia's economic growth just within the 3-4% target of sustainable economic growth and last year's rate rise to 6.25% to deal with inflation, I predicted in July that this wouldn't end well.

In addition, giving tax cuts to higher income earners, leaving them with more disposable income and in effect allowing them to spend more. Encouraging people to spend more is only going to increase economic growth and inflationary pressure further.

When I found out today that the cash rate had been raised by the Reserve Bank to 6.75% i wasn't at all surprised. It only reaffirmed my predictions.

Remember the Liberal government's 2004 election scare campaign based on interest rates going up if a Labor goverment? Interest rates increasing three times within the past 18 months, seems like some sort of political backfire to me. Evident in Labor's new TV advertisement, they've been quick to capitalise on this recent change in the economy.

The effect of waste on resource allocation and labour

Without waste, capitalism cannot charge high prices for a flawless aesthetically pleasing product (Essig, 2002)

As our system of capitalism has “progressed” a number of our essential needs have been turned into a commodity. Just as there has been an emergence in a superficial ideal that applies to housing, food has experienced the same. It is no longer enough to have a tomato that gives us the nutritional benefit of the vegetable, it must also be the right size, shape, colour and texture.

I will discuss the implications/reasons for this from a sociology point of view in another article because right now I will focus on the effect this wastage can have on resource efficiency as well as the need for labour.

In Agnes Verda's documentary, The Gleaners and I, there are scenes of her and others gleaning potatoes from mounds that are several metres in height, width and length. Tonnes of potatoes had been dumped from the local commercial farm because these potatoes were either too big, too small or not in a shape deemed “sellable”.

By not rejecting these potatoes that don't conform to the same beauty ideal there will be a greater supply of potatoes available, and with all things being equal, the price of these potatoes will decrease.

But what to do with the excess potatoes that will not be sold as a result of a greater supply of the vegetable? Won't they go to waste? I guess they will, however, the “market” should realise that the supply is exceeding demand and there is less need to produce that many potatoes. If there isn't the need to produce that many potatoes, there will be more land that could be used for producing another type of fruit or vegetable. Hence, not rejecting the aesthetically imperfect potato allows for a greater efficiency in the allocation of resources.

This same idea would translate to other food industries, because just like an out of shape potato, there are out of shape chocolate bars, biscuits, cheeses, etc, etc.

Now, moving on to labour. If there is less need to produce, does that mean people will be working less? I guess so, but that doesn't mean we aren't going to be able to survive. The farmer who grows the potatoes will receive a better price for each yield because more is being bought and less is being wasted. Another thing, if one of the main reasons for the use of our labour is for survival (to be able to obtain goods and services that allow us to remain alive), then we won't be needing to work as much anyway, because with the greater efficiency that comes from less waste, comes lower prices.

From all of this I am able to conclude that it is possible to have a higher standard of living (in the orthodox economist sense) and work less at the same time, by using products that don't meet a certain aesthetic value.

Now just a quick not on where gleaning may come into this: Gleaning uses goods that would otherwise be wasted. In doing this, the gleaner attempts to use what is already being supplied as well as decreasing the demand for the good, while placing the focus back on using food as a means of survival.