This small book is about the slow recovery from the recent recession. In its Part I it addresses the Tea Party and other economic conservatives and sets forth thirty statements they don't want to believe, but must come to believe if they are ever to stop blocking private and government investment spending that will speed our economic recovery. But economic conservatives are not alone in their need to make changes. Economic theory needs to recognize more expansively and more rigorously that getting things done in an economy and especially in a sick economy requires a combination of free markets and economic organization, not free-markets alone. Part II of this book essentially provides the basic postulates of a theory of economic organization. Core principles of economic organizations are: that they exist to economize on the communications costs of markets; that above all truth and open information (transparency) are essential to the communication that supports economic cooperation; that economic organizations exist to serve individuals, not the other way around. This book joins the many other publications that have found Wall Street and all the other major financial markets wanting in respect to both first principles. The third part of this book sets forth specific examples of the changes needed in three major parts of current mainstream economics: Microeconomics; Macroeconomics; and International Economics.

Economics Lessons for the Tea Party, Most Conservatives and Some Economists

By William T. White

AuthorHouse

Copyright © 2012 William T. White
All right reserved.
ISBN: 978-1-4772-6450-8

Contents

Aknowledgements.............................................................................................................................viiPreface.....................................................................................................................................ixChapter 1: Introduction.....................................................................................................................1Chapter 2: On Spending and Income...........................................................................................................9Chapter 3: Money and Inflation..............................................................................................................17Chapter 4: Two Defunct Money Models that Survive in Conservative Economic Thought...........................................................23Chapter 5: On Budget Balancing..............................................................................................................27Chapter 6: Immigration: Legal or Illegal, it Benefits Everyone—Especially Those Already Here..........................................29Chapter 7: The Persistence of Stupidity in International Finance............................................................................33Chapter 8: The Recession Trap and Private Business Investment Spending......................................................................37Chapter 9: Individuals in Their Organizational Setting—Two Disputes and an Escape.....................................................47Chapter 10: Some Prior Contributions—1: Planned Economies; Institutional Economics and the Law and Order Approach.....................51Chapter 11: Some Prior Contributions—2: Catholic Economics............................................................................55Chapter 12: Utopian Communities as Economic Organization....................................................................................61Chapter 13: Economic Organization, Communication, and Financial Markets.....................................................................67Chapter 14: Communications Costs and Microeconomics.........................................................................................75Chapter 15: Communications Costs, Economic Organization and Macroeconomics..................................................................79Chapter 16: Communications Costs and International Economic.................................................................................91Post Script.................................................................................................................................95Appendix....................................................................................................................................97Index.......................................................................................................................................99(Endnotes)..................................................................................................................................101

Chapter One

Introduction

This book has three parts. Part I sets forth a number of statements that contradict articulated conservative views. The defenses of the statements in Part I are based primarily on modified Keynesian income theory and, to a lesser extent on classical/neoclassical economics. Taken together, these constitute "mainstream" economics as it has developed and prevailed over the last half-century and more, both as an academic discipline and in national economic policy of most economically developed nations.

There is one exception in the defenses. Neither Keynesian income theory nor the classical/neoclassical capital theory adequately treats criticallyimportantprivatebusinessinvestmentspendinganditscurrent (2009 +) weak responsiveness to monetarist attempts to speed recovery from the current recession. The needed corrections and expansions in economics are basic and require a whole new approach to societal economic cooperation among self-serving individuals (functioning under the "economic man" assumption.)

The missing element in economic theory is consistent recognition that economic organizations, including economic elements of government, complement as well as compete with, free markets. They do so by reducing the costs of the communication that enables, shapes and ultimately limits economic cooperation.

Part II presents suggested new economic theory of economic organization. It ends by showing that aggressive and rational combination of economic organization and its component contracting combined optimally with free markets can bring private business investment spending to a level that not only can eliminate the recession but also prevent an unneeded expansion of national government control of the economy, surely an objective of economic conservatives.

Unfortunately, Tea-Party members and their followers have reacted to "stimulus" government spending as an abandonment of free-markets in favor of national government management of the economy. For policy, they have retreated to an over-simplified homespun belief in austerity, severe spending cuts and government budgets balanced at all costs. Yet, such measures have been known since the Great Depression of the 1930's to be counterproductive and more likely to turn a recession into a depression than to end a recession in a timely manner. Perhaps more importantly, market fundamentalists have advocated a return to a free-markets-only economy, which has never existed and cannot exist, as even the most avid market-fundamentalists, including Milton Friedman, have acknowledged.

In the real world, as in a rational economic theory, individuals are best served by a combination of markets and economic organizations. Even Tea Party members and their supporters must recognize that we live in a pluralistic society, using economic organizations to produce most of our goods and services and provide most of our employment. The specific role of economic organizations is to reduce the communications costs of economic cooperation, primarily by extending market results over time or other dimensions to spread and make manageable their market costs.

It is important to recognize that the economic organization components of economic cooperation need not always be at the nation-state government level, or even governmental at all. The thousands-upon-thousands of economic organizations of a modern complex economy are mostly private not governmental. They are born and die apace, to serve the individuals who create and sustain them when they are needed and allow them to die when they are not needed. The markets-only approach is a classic case of "throwing out the baby with the bath water."

Economic theory has long lacked adequate recognition of the role of economic organization in economic coordination. The chair of a department of economics does not hold an auction market each morning to determine which of all the economists in the world will teach the 10:30 section of Econ. 101. The chief executive officer of a major manufacturing company does not use markets to determine his suppliers for the day. Instead, both will use economic organization to extend in time or some other dimension of expansion the results of expensive research and bargaining in markets. They will do so sufficiently to justify their marketing costs, very likely using contracts to reduce uncertainty along the way.

Part II presents an innovative expansion of economic theory to recognize and integrate economic organization into a newly unified economic theory. The new theory has two specific objectives. First, it must bring into economic theory the economic organizations between the individuals functioning in markets (microeconomics) and the nation-state seeking economic growth and full employment without triggering unacceptable inflation (macroeconomics).

The second objective of the new theory is to recognize that economic organizations provide net benefits to "economic man" individuals, who select, shape and use those and only those economic organizations that provide net benefit to them. This second essential characteristic is in sharp contrast with the long-held but vague beliefs that individuals must make some regrettable but necessary sacrifices to have social order. Tea Party members and their followers must recognize that economic organizations, only some of which are in government, can and must be beneficial economically for individuals.

Part II also touches on the relevant research and writings from selected disciplines other than economics, with special attention to evolutionary biology and its long-running dispute about how individuals in a species can sacrifice to an organization, as they obviously do, and still survive long enough to procreate in competition with species that do not make such sacrifices. This unsolved problem reportedly troubled Darwin himself for most of his life. However, for the theory presented here, the principle that self-serving individuals will choose to use only those economic organizations that provide net benefits avoids Darwin's problem. It also posits an important derived principle that economic organizations exist to serve individuals, not the opposite.

Related to Part II, but reserved for treatment in a book of its own, is the question of organizational leadership. The author's personal experience includes two incidents that join the many others that confirm that leadership exists throughout the animal kingdom, of which the human species is a part. The incidents are described in the Appendix, placed there because they support, but only tangentially, the natural order view that economic organization, including altruism is innate.

The acceptance path of new economic theory is long and almost always laden with dispute, but there are nonetheless two principles derived from and central to the new theory that should command immediate acceptance and action. The first is the need for truth and open information, (now "transparency") with its essence derived from the role of economic organization in reducing communications costs. Plainly and simply, economic cooperation requires communication, and communication requires truth, not for any religiously or culturally imposed rules, but simply because it is "good business."

The second important ideological principle is the philosophical primacy of individuals over organizations, derived from the role of individuals in creating, selecting and sustaining economic organizations that provide net benefits to them as individuals. Putting it colloquially, individuals eliminate any sacrifice to gain order and support society in general by choosing to use only those economic organizations providing overt net benefits to them.

Both of the "essential nature" principles, and especially the first, are little followed in most large financial markets, sometimes earning for them the pejorative label "liars' paradises." An immediate practical step while the new theory is being debated is withdrawal of the popular legal support for information security systems, the source of highly profitable but economically unproductive insider trading. Reduced use of the stifling "need-to-know" criterion is especially important to the creation of successfully competitive new economic organizations.

Part III recognizes that combining new theory of economic organization with existing theory into a unified economic theory requires revision of long-used models to reflect communications costs and to deal with the almost unbelievable technological advances in communications since the end of World-War II. Any attempt to discuss all or most of the required changes in the basic models of mainstream economics would be bogged down in the resolution of detail that would defeat the purposes of this book at this time. However, discussion of selected examples of the needed changes in familiar models is presented in the hope that showing by example that which can be done will cause it to be done.

Part III also acknowledges that the demand for money includes large amounts that are economically irrational but based on the view that holding money is prudent in itself. The historical and current mercantilism is a major example of this type of demand. The unwillingness of some economic conservatives to compromise wherever debt, deficit and balanced budgets are involved is related more to worship of money per se than to its economically rational use, however rational and useful compromise might be.

Chapter Two

On Spending and Income

(Statements 1-8)

Statement 1: The source of income is spending. One person cannot receive income until someone, some company, or some government spends it. Ben Franklin's pronouncement that, "a penny saved is a penny earned." is correct only partially and only for an individual and not at all for society as a whole. The correct statement for society as a whole is that "A penny spent is a penny earned." The total of income can but equal the total of spending; and a reduction in spending cannot but be a reduction in income. Nevertheless, it would be a stretch to imagine that radically right political leaders would substitute "income" for "spending" and call for a cut in income.

In the long economic decline from 1929 To 1933, the most common advice to the president, to the and to anyone else who might be listening was taken from the personal experience of individuals and it was, "tighten your belt, liquidate, and above all reduce spending." This was certainly good advice for an individual, But was it good advice for the country as a whole? An Englishman, John Maynard Keynes, thought not, and in 1936 produced a book saying so: The General Theory of Employment, Interest and Money, which quickly became known, as "The General Theory" or simply "Keynesian income theory,"

Keynes' ideas were not universally accepted, and as late as 1937-38, President Franklin D. Roosevelt reverted to drastic cuts in government spending that plunged the American economy into a recession that was a much steeper decline than the longer decline begun in 1929. Only the beginning of building arms for the World War II Allies could reverse the 1938 decline.

Economics as an academic discipline and as a guide to national economic policies of most nations ultimately accepted most of Keynes' income theory, including the lessons of the Great Depression and even that the level of national income and employment was determined by the total of business investment spending and government spending. But there were and still are objections. Economic conservatives believed that the surest road to failure of an individual business was to spend for new capacities when it was not fully using the capital it already had. Further, the Keynesian solution appears to violate scientific logic that the whole must equal the sum of the parts. Crutches like the "fallacy of composition" were used in economic classrooms to explain why the lessons of personal experience did not apply to the economy as a whole.

Statement 2: The source of savings is spending. People save part of their incomes. Income received is consumed, used to pay taxes or saved. If there is no income there cannot be any savings. It is not money that is saved, but a part of income, which may or not be kept in the form of money. If a farmer sells his farm and puts the money he receives in a bank savings account, he has not saved anything, but simply converted a part of his wealth from one form (farm) to another (savings account). When people say that a person "has money" they usually mean that he has wealth. Society as a whole can save only by spending to build something, to include human capital through education and research experience or otherwise create something with lasting value.

Known sometimes as the "paradox of savings," reducing consumption to increase savings can have perverse results, ending in a decrease instead of the intended increase in savings. The short explanation is that a decrease in consumption causes a decrease in income (of those who receive income from consumption), which in turn causes a decrease in savings, (that which is left over after consumption and taxes) one of the first things to go when income declines. Elaborating: an increase in savings means a decrease in consumption. This means a decrease in sales, which is then followed by a decrease in business spending for new capital equipment, which brings a multiplied decrease in incomes. Since savings is a fraction of income, savings then declines. Therefore, an increase in general frugality, with an attempt to increase savings, can result in a decrease in realized savings.

Statement 3: Presidents of the United States, one and all, are wrongfully blamed for recessions, inflation and other problems of the economy. To a somewhat lesser extent, they receive credit for "good times" in the economy. They deserve neither all the blame for a bad economy nor all the credit for a good one. While the Full Employment Act of 1946 sought to make the president and the Congress responsible for full employment, it provides neither with any new authority to manage the economy. Often the best that a president can do is try to persuade the independent Federal Reserve System and the independent Congress to accept his economic recommendations. If he is lucky enough, his party may control both houses of Congress, and he can incorporate his economic recommendations in his proposed budget submission to Congress, with some hope that it will be approved, albeit usually with major changes. As often as not, his budget will likely be "dead on arrival" in Congress.

(Continues...)

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