From Charles
To: Thomas

Well, here's the thing: Keynesianism is a hybrid of productivity and waste, a melange of good and bad, favoring the latter. Many of us growing up during the Cold War were brought up to believe that the ideal political-economy was a mixture of freedom and socialism - that there needed to be some limited central planning from time to time to tame the private economy in the best interests of the public - that the federal government needed to steer the ship of industry.

Now, of course, we know that to be a steaming pile of lies. Wealth is created only via the free exchange of goods and services, and the role of government is:

The role of money is to facilitate the free exchange of goods and services. To the extent that the money supply is manipulated by government to siphon wealth away from the private sector, it fails in that role.

One must always bear in mind that money and government exist for the benefit, and at the pleasure, of the individual citizen.

Of course, no government, and perhaps even no money, would be necessary if people were perfectly virtuous, but, ideally, good, government should work for good people, and a healthy culture should thrive under any economic circumstance. On the flip side, no amount of laws can save a nation in cultural decline, which is, of course, a religious issue, and has been since Old Testament days.

Charles


From: Thomas
To: Charles:

Dear Charles,

Well said.  The economic issue confronted by by Keynes was how to smooth the cycle between unemployment and glut.  In the early 1900’s, classical economics was the prevalent theory, and the Constitution still constrained government from regulating the macroeconomic milieu.  When only the laws of supply and demand operated, there was a natural business cycle of boom and bust, an alternation between unemployment and glut.

Keynes was attempting to smooth the business cycle by inserting government forces that would moderate this cycle of feast and famine for employees and consumers.  His theory proposed that government intervene with counter-cyclical forces, which he theorized would moderate the boom and bust of the economic cycle.

The introduction and acceptance of Keynesian Economics into the market has given government near complete control of the entire economy.  The common cultural wisdom now assumes that massive government intervention in the economy (via interest rates, purchasing assets, direct government spending into the economy...) is appropriate and necessary to produce full employment and moderate inflation or deflation.

The almost reflexive public acceptance of the TARP program of 2009 is a testament to how the masses have embraced the notion that government intervention is required to return a nation to prosperity.  We have forgotten that hunger, scarcity, and poverty will naturally beget invention, embracing risk, and industry.  The modern understanding dictates that the market has no intelligence or self-righting capacity, and is dependent upon human direction and intervention to restore its vigor.

The impotence of the market to right itself became common wisdom after the (supposedly) hands-off policies of Herbert Hoover did not work to bring us out of the Great Depression.  Whereas (supposedly) the New Deal, big government intervention of FDR was successful.

But, few now realize that this narrative was a false/inverse rewrite of history.  The hands-off, tax reduction policies of Calvin Coolidge produced the roaring twenties after a deep recession.  And, the big government interventions of Herbert Hoover and FDR prevented the economy from recovering after the market crash of 1929.  The result was the Great Depression.

But, the question Keynes confronted remains relevant, “How do we create an economic system which does not suffer the painful swings of full and partial employment?”

Clearly, the market naturally cycles between too much production driven by need and greed, followed by unemployment when the market demand is saturated and prices fall.  Thus, we suffer the pain of the business cycle when the market is left to itself.  But the alternative, government control of the market, has proven costly in other ways, not the least of which is the loss of independence associated with ever-increasing government intervention in all aspects of life.

Possibly a solution to the problem of the business cycle, is to embrace it.  While it is necessary to work, there is a time for rest after a time of labor.  Making money by the continuous production of goods and services is not the purpose of life, but it is necessary.  Work should be one of life’s activities which adds value to the lives of self and other.  We should engage in work to produce both the consumable value required for necessity and pleasure, but work balancing the other duties and possibilities of life.

The seasons of unemployment should be times of rest and education; times to learn new skills.  After the time of renewal, we should apply our talent, intelligence, and energy to new jobs that produce valuable and life-enhancing goods and services, not just activities which appeal to the flesh or “make money”.  We should incorporate the natural cycles of economy into life, and use the times of rest for renewal of strength, regaining perspective, and training in new productive activity.  The natural Biblical cycle of work, rest, and resumption of labor is a work-rest ratio of 6:1.

The Keynesian Economist has the goal of moderating the cycle of glut and unemployment, and his tools are the big economy-manipulating forces of government (the Fed with monetary policy, and Legislature with fiscal policy).  These tools have been employed since the era of FDR to return the economy to full employment and moderate inflation/deflation.

The problem with government controlling the economy is that only a few men make decisions that direct the lives of literally hundreds of millions (and possibly billions) of people.  Their data, analysis, economic paradigms (and a host of intangibles including group and individual prejudices, feelings, loyalties, and political agendas) direct their decisions about the type, timing, and amount of intervention.  On the most basic level, the question is, “Do these men really know what the economy needs to reach stability at full employment?  And, more importantly, “Do they know what processes producers and consumers must go through before they are willing to change jobs, learn new skills, take out loans, close down a business, move, invent, or retire?”

The assumption that government knows what is best for the millions affected by their decisions is at best only approximate.  The government (The Fed, legislators, Agencies...) have only limited datapoints about the state of the economy, limited understanding of what the economy should be doing, and the effects of government intervention.  And ultimately, the intervention will be transitory since the economic tools of government are either coercive or seductive.  These forces are more like a whip or sugar water, supplying quick energy, but ultimately depleting the body and leaving it resistant to using nourishment.  

Continuing with a medical analogy, there are times when a patient has suffered extreme trauma, and needs life support for a period of time.  But, if life is lived carefully, paying attention to basic nutrition, and engaging in a proper, risk limited, lifestyle, there will be few, if any, times when such emergency intervention is required.  Currently as a nation, we are not living that prudent lifestyle that will produce long life and healthy systems.

The economy works best when it is motivated from the inside, by men who want to do what they are doing.  In other words, when men are self-regulated and cooperating with others in a larger group, there is a synergy of the layers of effort.  There are many layers to a group, and many groups which must synchronize their efforts with other groups.  Every manager, social planner, and thinker knows that a synergistic, integrated economy is the ideal in productivity.  But, until the modern cyber-age, a top down, authoritarian system of coordination and command was the only method of purposefully creating such an economy.  But, the de facto interconnected society of the early 21st century is capable of forming such links organically if government interference is removed.  And possibly, with a public policy that encouraged such connection, these synergistic alliances and organizations would form even faster.  

(Note: A disadvantage to such a plan (and a hindrance to its implementation) is the fact that it would obsolete the need for strong top-down government.  For those forces invested in shaping the world to fit their future planetary vision, such distributed independence would be undesirable, and possibly even threatening.  The good thing is, that we surround them.  We the people are the majority.  Government’s purpose is to serve the people, and until they use deadly force, the ballot box is sufficient.)  

Thus to implement this distributed and integrated allied web of production, I propose that companies, industries, and sectors form associations that openly communicate among themselves to create an independent, non-governmental assessment of demand, prices, technology, innovation, competition, support, infrastructure, and policy.  Industry Associations have probably already formed in nearly every sector of the economy.  To forward the realization of this new interdependent, self-regulated economy, the idea should circulate and become common wisdom that we should create a database, communication link, intra/inter-interconnection within and between sectors, industries, and companies.  The purpose of this intra/inter-economic cooperation would be to provide a self-regulating system that monitors supply and demand.  And ultimately, the purpose of such a reorganization of the economy’s infrastructure/architecture is to efficiently produce massive wealth/value for consumption to create a high quality of life.

None of these Associations would be associated with government, nor carry the force of law or penalty to enforce compliance with their recommendations.  Rather, their effect depends entirely on the force that information has upon those who make decisions about expansion/contraction, production, and innovation.  If the state of the industry is well known, internally and externally, there will be less speculation, less volatility, and less uncertainty in the market, both in terms of production, investment, and rates of return.

Of course, the markets thrive on speculation, and there is a place for that, but it should be in the realm of the startup and growth companies, rather than in the realm of the large cap companies that form the backbone of industry.  Only small daily adjustments need be made for companies to reach and maintain appropriate levels of size and production to maintain a proper level of production and employment to dampen the extremes of the business cycle.

The criticism of this concept is of course, that any kind of individual corporate self-restraint in production for the good of the larger whole is antithetical to the very nature and drive of Capitalism.  But, I suggest that it is not.  

If data is available on corporate, industry, and sector penetration of a particular technology, good, or service, as well as the demographics, technology, and price, etcetera... this data makes it possible for industries to self-regulate production so that the glut and unemployment cycle can be somewhat blunted.  With this paradigm guiding production and investment decisions, to engage in self restraint is ultimately seen as a positive, profitable, and prudent management.  

Industries go through phases.  When a new technology becomes popular, there is a high level of demand, and many companies enter that manufacturing arena.  This is the exponential growth phase, and it continues until the market demand begins to saturate, at which point the companies in that industry begin to contract, consolidate, and enter the next stage of industry-maturity.  After the bust and consolidation, these mature industries reach a steady state output that roughly corresponds to the demands for that good or service.  After maturity, the production level depends largely on the rate of replacement and meeting the needs of a gradually increasing population.  But, if the “growth industry” expansion rate, and production level, is maintained, a glut is inevitable, with resultant drastic and precipitous unemployment.

The business cycle of glut and unemployment may be moderated if each company, industry, and sector chooses to engage in a somewhat cooperative competition by sharing sales and demand data.  Each company would autonomously make production decisions, and adjust output according to independent market evaluation.  Simply having objective data informs judgment.  As aggregate demand declines, different strategies will be employed.  Some will increase marketing, others will modify product, and others will simply withdraw resources from that production and redeploy them in a different area.  Neither rules nor enforcement are needed to produce such self-regulating behavior.  Autonomy and individual judgment dictate a gradual reallocation of resources and naturally produce the desired balance between employment and production.  Note, that the system proposed is not significantly different than our current information rich economic environment.  Thus, expecting continual change, and having the regulatory environment that allows for nimble movements of production.

Companies will not share trade secrets, strategy, or market except under threat of regulatory force.  There is a reluctance for competitors to cooperate on any level.  But, if a place is available for conversation and collegial association, and the right amount of collaboration is found that proves beneficial and self protective, management will choose to participate, and the employees, owners, and economy/consuming public will benefit.