A blog post could hardly solve all the world’s problems, offer the key to history, or create a new economic paradigm. But, for those who follow my writing enough to even care what I think, I will put forward what is probably not original to me–a theory of economics that pertains to maximizing labor and productivity concurrently.
Adam Smith’s error is that he posited that people are always trying to maximize utility. This is obviously untrue. Thorstein Veblen observed the existence of “spontaneous consumerism,” but one does not need to be a world class economist to figure out that people buy Honey Nut Cheerios instead of the store brand, even if they could not taste the difference in taste blindfolded, because people decidedly do not maximize utility. Anyone who spends more than $20 for a bottle of wine probably knows that they are not really getting a real return of their investment. It is well known that even great “taste testers” cannot tell the difference between mediocre and “world class” wine. I recommend anyone interested in this topic to watch Penn and Teller’s “The Best” if they want more on spontaneous consumerism. (Here’s a clip of people doing a fancy water taste test.) That’s enough said about that.
Karl Marx’s error was that prosperity could be attained with no regard to capital accumulation. To get into every error of Marxism is not something I can do, simply because reading The Communist Manifesto once does not make one an expert on Marxism. Nevertheless, his fatalistic view of history has obviously not panned out, nor were people everywhere and in every place ever reliably going to be productive without the accumulation of capital and some element of self-gain.
The real beast of the modern day is Keynesianism. Every economy on Earth essentially runs off their central banks pumping liquidity into markets and working hand-in-hand with governments deficit spending to stimulate economic growth in bad times. This is all theoretically financed/balanced out by increasing interest rates and balancing deficits in good times–which politically can never happen if politicians want to be re-elected. One of the oldest observations in history is that people never employ long term thinking–especially with democratic forces at work. The rule of the mob is never given to nuanced thinking or sacrifice. This was just as true during Alcibiades’ sorry reasoning for the Syracuse Expedition, which brought about the ruin of the Peloponnesian League, as it is today. People want what’s good right now and they want it to be easy. Yet, the same morons swayed by this reasoning would likewise recognize the commonsense proverb, “Nothing good comes easy.” The masses are masters at Orwellian doublethink.
And this is where we find ourselves today, our planet literally on the brink of complete societal destruction. No, not from Coronavirus. The human race is far too resilient. We have survived for worst plagues and survived. Coronavirus, and other diseases, cannot end the world. Any disease that would kill everyone would be too deadly to ever spread, as it would kill all its hosts too quickly to reliably spread to the uninfected.
The real threat is Keynesianism taken to its logical extent. This, I do honestly believe, is predestined and cannot be reversed. People want what’s “good” fast and easy. They will not tolerate solutions which employ some level of long-term thinking. We have every major nation on Earth and their central banks operating on the principle of fast and easy.
The result is every single nation is in debt to the tune that debts generally outnumber actual annual GDP. Interest rates have hit the negatives, which means, on the macro level we are all charged to keep money in the bank and accumulate capital. On top of this, we have reached complete monetary-policy fantasy. Central banks literally buy their nations’ own treasury bonds if there are no customers who want them. So, they create money out of thin air in order to offer a “solid” backing behind the nation’s treasury. Now, the central banks are purchasing corporate bonds (and soon companies themselves, effectively socializing them). They do this all with the imaginary changing of numbers on computers–why even bother printing actual money. No surprise, the Federal Reserve is floating the idea of having an entirely digital currency. (See Rev 13:17) In fact, initiating digital currency is actually part of the recent Coronavirus Bailout law.
And so, what keeps the whole rotten system together is a collective hallucination, far exceeding that of Fatima. People daydreaming that we can have perpetually increasing debt forever on the national level, and centrals banks can just throw money out of helicopters and put guns to our heads (through negative interest rates) to spend money faster than we can save it–and magically, people are not going to wake up and realize the money is worthless and the system cannot continue. Why not qualitatively ease the currency into infinity if, in reality, money does not have some real value equivalent to something tangible for it to be worth something to someone?
How are the central banks putting the gun to the People’s head? Think about it. The US Treasury is offering negative interest rate bonds. In plain layman’s terms, that means for the privilege of giving them $100 as an “investment,” they will give you back $99.99 in six months. Such an investment only makes sense if one anticipates the interest rates will go more negative so that it is a “better buy” to invest $100.00 and get back $99.99 than waiting a year and your best treasury bond will net you $98.00 for that same $100.00. Yes–we have hit The Twilight Zone of economics, though even Rod Sterling honestly thought this would have been too wacky and idiotic that no one would have bought that a parallel universe could even operate this way…but killer dolls and manikins that come to life, that’s totally legit.
And there is no other direction, in the long run, to go but more negative and more into debt–until there is no reason to trust the money, the banks, or anything at all in the global financial system.
Ibn Khaldun, the father of economics itself, observed perhaps the most basic and important of economic tenets: labor=capital. It is very simple. I farm wheat. You mill the wheat. Johnny takes the milled wheat and bakes bread. Our labor produces a product (i.e. capital) which is useful to someone else predicated upon the product exchanging several hands. Money simply is the agreed upon means of exchange that represents the value of the labor.
So, at the very core, the solution to any economic problem is how do we motivate people to work more, and efficiently? Or, in other words, how do we maximize productive labor? It’s not like the Communists who enslaved people in salt mines and so, with no incentive to produce any real good work or be inventive, were terribly inefficient. Having 0 percent unemployment in such a system does no one any good. Digging holes and refilling them with dirt does not produce capital, even though it takes effort. Neither are 40 people digging a hole preferable to five people working in the excavator factory, one person at the oil refinery, and another person operating a finished excavator. Obviously, the latter produces equivalent, if not more net labor–with less actual work–due to efficiency. Hence, maximizing efficient labor, through any means whatsoever that are proven to work, is the solution to any economic problem. Period. It’s not some sort of rocket launch. It’s that simple.
Negative interest rates and throwing wads of cash out of helicopters does not accomplish this end. No central bank or macroeconomic policy, alone, creates maximally efficient labor. In fact, it can often backfire. Here are a few ways it can:
- If negative interest rates make it where saving money to buy a house becomes a fool’s errand, I may stop working so much overtime and instead use my time to get a loan and spend it on what I want before my savings become worthless. Hence, productive labor activity, which creates real capital, will be converted into worthless spending activity. Something I would have bought through work would be purchased through debt. And, in the long run, the more people that follow this behavior, the less there will be to buy, simply because there is less labor producing goods–the result being people have money, but nothing to spend it on. Sort of like the Soviet Union which had price controls, gave everyone jobs and salaries, but people could not buy the low priced bread because it simply was not produced in enough quantities.
- Basic Smithian economics teaches us that when one incentives a behavior, we get more of it. Now, that does not mean everyone does it. But, if getting married means entering a higher tax bracket, while having children out of wedlock equals getting less taxes and perhaps food stamps plus housing assistance, more people are going to choose the latter than the former. So, if we have negative interest rates that encourage spending, well, we will get more spending and less saving. “But spending gives people jobs!” Not really. Spending gives some people jobs for a while, but ultimately capital (produced by labor) gives people jobs. So, a short term spending spree may result, but the actual creation of products is decentivized because the incentive to work, instead of spend, is decreased. Dependable capital accumulation incentivizes work, because people work in order to acquire things. When they can, in the short term, acquire something without labor–then they will not labor for it. Which, as I discussed, means less actual capital.
- Banks are not stupid. Banks are not going to work for free, let alone be charged money by the Central Bank to loan you free money to buy stupid crap. They are going to turn everything into a fee. (Remember when checking accounts cost you money? Don’t worry, if you forget you will never forget ever again soon.) Further, they are not going to lend for low interest house loans or business lines of credit. They are going to want to push microfinance and credit card schemes–because schmucks who want their big screen TV and iPhone 14 NOW are willing to pay 30 percent interest as long as the installments are “manageable.” So, even in a negative interest rate climate, lending institutions can make money as long as they lend money for things that are profitable. Which means, encouraging people to make high interest, moronic buying decisions and not lending for productive endeavors–such as low interest small business loans.
And so, I think it is pretty clear. Simply making rates negative fixes nothing. It kicks the can down the road…until people realize they cannot pay $25.99 a month for their iPhone 14 for the next nine years and holding onto Yen does not make sense as Japan’s debt eclipses 300 percent above annual GDP. Eventually, that “can” will not be able to be kicked any farther and the whole rotten structure collapses.
What’s the solution?
There is not an easy one. In short, labor and its efficiency must be maximized. If this is done, there is the greatest possible amount of capital. And, in so doing, even the poor are better off in such a system.
For one, usury must be done away with. Not lending. Usury. Usury is lending for non-productive ends. Lending someone money so he can buy an iPhone 14 is not productive. So, in fact, the society loses net capital. It is a parasitic arrangement (as the loan does not get the person into debt to produce something more–it in fact gets someone into debt for simply gaining a product.) The debtor, in fact, is incentivized to save less, which means he labors less, due to his debts acquiring what he wants instead of his work alone. If the only means to buying the iPhone 14 was to pay cash for it, the once debtor would in fact have to labor and pay for it after laboring some time.
Lending should be for productive activities. Opening factories. Businesses. Capital-producing entities. I do not think that a house would fall under this criteria, simply because it materially depreciates. But land, with productive use, would. Banks would lend, with usury being illegal, because they legitimately think it is a good investment, i.e. the debtor would be productive and hence pay back the loan and make it worthwhile for himself. Usury lending, what we have now, is predicated upon not whether something is a good investment, but whether more schmucks will pay back their student debt than default–whether the education itself helps the individual become more productive is irrelevant to the lending institution. When is the last time a student loan was predicated upon one’s major and GPA?
The way a culture motivates labor productivity must be flexible so that different cultures can pursue different means towards the same end. Princes of the Yen is a documentary well worth watching. It is simplistic, but it demonstrates that the “window guidance” method of central banking works in Asia. It rose Japan, South Korea, and China literally from the ashes. In short, enlightened central bank leadership purposely lends money towards parts of the economy which, by their success, have the greatest effect of increasing national wealth. Granted, its still Keynesian in many respects (it is a central bank pump priming an economy after all), but it is strategic as it focuses on specific sectors of the economy. After all, how did China, India, and Japan exceed the United States in steel production, with Korea not far behind the United States–when these countries have less raw materials and started with incredible technological disadvantages? Their central banks, and national governments, focused on pumping up manufacturing with the goal of exporting, purposely encouraging what they perceived to be an economic sector which long term would produce national prosperity. Imagine central banks doing the same with AI, medical technology, and sustainable farming today.
I speak of window guidance not because I think it can work everywhere nor that it will always work in Asian economies. I use it as an example as one size does not fit all. What works in Asia may not work here and vice versa. In fact, Japan’s leaving its World War II mode of economy (i.e. window guidance) and pursuing American reforms (neo-liberalism and Keynesianism) has in fact irreversibly damaged their economy.
In the wake of the Coronavirus Recession or the Trump Slump, whatever you want to call the disastrous economic wake of 2020, we must realize that a virus did not cause this economic collapse. It was a catalyst that exposed an incredibly unstable economic system. The real conversation that must be had is how can we, in our own countries with the compatriots whom we are stuck with, devise a system that gets the average Joe to be more efficient and motivated to work? What incremental steps can we take to put this into effect? What works with the society’s values?
What we will find is that there are no fast and easy answers. For precisely this reason, the most obvious solution of all–intelligently maximizing society’s desire to labor and increase their efficiency in doing so–will never be the one pursued. Bah, just send everyone a $1,200 check in the mail. That’ll have to fix everything. Right?!?!