I apologize for my philosophizing, but I have always been attracted to and fundamentally rooted in philosophy, which is my prime motivation for learning and innovating. My favorite lectures in any subject are always the ones involving theory. My personality then leaves the execution of those theories to others who are better executors. I know you will all agree that is true.
Tijs Limburg
Tijs,
I've written two responses to your email, one focused on the technical aspects of your economic analysis, and one on the philosophical foundations and ramifications. I hope our dichotomy of views is helpful to others who read these emails as well as beneficial to each of us in our pursuit of knowledge, independence and freedom.
Technical response:
The use of Keynesian economic theory whenever there is a recession or depression is an attempt to provide a modulus for changing not only the current economic situation but the cultural and political foundations that created the economic situation in the first place.
Keynes' first and most fundamental assumption is that the Adam Smith concept of the individuals "self-interested invisible hand" is at fault for the chaotic cycles in economies and is insufficient to maintain or bring about equilibrium. As the son of an economist and a brilliant intellectual, Keynes was well-schooled in the social philosophies of the early 20th century. As a result, he held the belief that government, particularly big spending government, could have a more positive effect on smoothing out the cycles of economic expansion and contraction, cycles that wreaked havoc on social and political stability. Government could accomplish this by deficit spending to generate consumption and thereby employment during an economic contraction. To this end, modern liberal economists, who typically have a strong socio-political agenda, propound this theory not only as valid but critical to the survival of the nation. Unfortunately, it is effective at appeasing the fears and appetites of the "special interest" class while placating the desires for fairness among the middle class. But is it valid? The clear answer is no.
Nature provides the clearest reproof of the theory by the simple responses to negative environmental factors by all flora and fauna. Built into all successful life forms (whether you believe in evolution or God) is a mechanism that enables them to store up reserves in times of plenty and to consume those reserves in times of scarcity. In the macro-economic environment, people will acquire material goods, homes, car's etc., when times are good and shed them when times are bad, or at a minimum refrain from purchasing them when times are tough. We add the concept of payment over time for the acquisition of goods to the equation and it gets a bit more complex as now we have the ability to anticipate an upswing in prosperity and get what we want ahead of time and stave off the wolf at the door by trying to pay off debt when times get tough. But in all of these systems, there is a limiting factor: the ability to acquire and store reserves and the time it takes to consume and shed them. And economic history shows that the same thing impacts the Keynesian concept of government consumption: the amount of time it takes for government to impact or change the fundamental structure of the economy in terms of production and consumption far exceeds the typical cycle times for expansion and contraction. As a result, we become saddled with government programs that arrive too late, do too little, cost too much, last too long, and saddle the future with the debt of the past. Talk about trickle down economic theory!
So why so many advocates of the Keynesian theory? Because, at its core, it provides a roadmap not for economic recovery but for socio-political change. It posits that government will know better than the individual how to control and influence the economy and, therefore, should involve itself not only in consumption but production and distribution. And remember, "He that controls Arrakis, controls the Spice, and he that controls the Spice, controls the Universe." It empowers those who govern with an intellectual supremacy that masks their real agenda, thereby allowing them to indulge their political ambitions without obvious exposure to the electorate. In a word, economic deception. Not unlike the shenanigans of Wall Street and their bogus securitization of mortgages.
Now onto the trickle-down tax rebate theory. It is, in fact, not trickle down at all but a flood. The most effective way to win a war is to overwhelm the enemy. This implies that arming every available citizen will give you the best chance of killing the enemy. The problem is that, once armed the citizens will shoot what they believe is the enemy, which may or may not be what the real enemy is. In the case of the tax rebate and the nonsensical assumption by government that everyone would go out and spend it on durable goods, the people clearly showed exactly what they thought the enemy was - their debt. Everyone knows that if you don't pay your bills, somebody's going to come and take your paycheck, take your car, take your house. And business is the same way. Amazing that people are smart enough to use an umbrella to keep the rain off when it's raining instead of using it to balance on a wet tightrope. But it has a silver lining – lower debt now means greater purchasing ability in the future. All economists need to do to know what people will do is to get out of their ivory towers and note whether or not it's raining! But, you say, this doesn't stimulate the economy. Well congratulations, you're right. Throwing money around doesn't stimulate anything but greed. Economic stimulation always comes as a result of market demand regardless of whether you're a Keynesian, Smithite, or Luddite. The trick is how to create the demand, which leads us to a review of your fearful consumer.
The concept of consumer and investor control is based on the assumption that neither party can control themselves. Smith weighed this concept in his Theory of Moral Sentiments and concluded that man can make choices beneficial to society precisely because he can see in the mirror that society will benefit him. In today's economic environment, the consumer is fearful not out of ignorance but out of experience. He is reminded every day of the woes of the stock market, of the ever increasing unemployment, of the incredible escalation of national debt. Everywhere he looks, he sees the onset of winter and this is his last chance to gather in the harvest. It's interesting to note that seasons significantly impact consumer confidence. I believe it is built into our genetic code. But I digress. When analyzing how to reconcile the fearful consumer or investor with the need to increase market demand, we have to look simply at what motivates a man. At his core, he has a need for food, shelter, and sex (reproduction, technically speaking). If he is fearful of loosing any of these three things, he will go into survival mode, storing and stashing whatever he can. If, however, we can reduce his fear and help him to see that the rain will stop, we can motivate him to venture out of the nest again to indulge some of his higher desires. The biggest problem is that it is still raining and government spending is a big part of the storm. The reason for the tax deductions on home mortgages is because we have to compete with the government for available credit and it was a Keynesian incentive to increase home ownership in the post WWII economy. I believe that, if the government would reduce it's consumption, reduce it's taxation, and reduce entitlements, the consumer would be instantly encouraged and would literally come out of hiding, along with the investors.
But I don't see that happening, do you?
So what about your analysis of Expenditure based GDP? We're probably in agreement as to the status of the first two items, Consumption and Investment, although I believe we diverge on their cause and effect. And the initial discussion of Keynesian vs Smithian economic theory pretty well establishes our differences on the Government Expenditure part. So let's investigate the Net Exports concept. While you spent a good deal of time discussing globalization, game theory, and Nash's equilibrium, you appear to have missed the most fundamental part – our economy is no longer based on the exportation of goods but on the consumption of goods. This has come about because of the transfer of technology and industry developed in the US to other countries who are not bound by the same socio-eco-political rules (and that's eco as in ecological, not economical) nor have had to pay the price for industrial revolution in terms of time, capital outlay, or environmental impact. As a result, they are able to produce oil, durables, etc., far cheaper than we can, even if we were to choose to return to an export based economy. The upside is that we have steadily increased our standard of living. The downside is that, in our pride, arrogance, and self adoration, we have put ourselves into environmental and political straight jackets that are all but impossible to get out of. And just like the Chinese who lost the silk trade to thieving Indians who stole their great secret of the silk worm, we have yielded our industrial strength to the competition in order to appease our environmental guilt. As a result, the ability to rapidly increase exports as a correction to the economic downturn is virtually impossible. But that is a global view. If we look internally, we still possess the ability to produce and trade internally in a way no other country can. Freed from government restraint and the ridiculousness of the sue-happy eco-extremist left, we could produce all of our own food, fuel, and shelter far cheaper than any exporting country. And we could do it with reasonable conservation and environmental stewardship. And from this most stable of all economic bases, we could do some of what you suggest – export value added goods and services. But don't kid yourself, the export genie is out of the bottle and has returned home to its master – China, the worlds greatest exporter for more than two thousand years.
So, what can we do now? I believe that the first thing we need to do is to stop pretending that some grandiose economic theory justifying outrageous government spending and expansion will in anybody's universe result in improved economic stability and prosperity. The second thing we need to do is reduce the size of government at all levels and give economic power back to the people in the form of earnings retention, resulting in the triggering of the first and strongest pillar of the expenditure based GDP - consumption. The next thing we need to do is to allow the recession to do it's job – collapse of businesses that are inefficient and outdated, reduction of extravagant salaries, bonuses, and dividends, smaller meal portions at restaurants, over-stocking in stores, general consumer wastefulness, political pay-offs and paybacks, a return to thrift and self-reliance, pain and suffering sufficient to change hearts and minds, etc., all of which I refer to as the leaning and weaning of America. And lastly, but most importantly, the re-education of the American people as to both the rights and responsibilities of constitutional governance and individual agency. Is this an economic theory? I believe it is – it is the theory that good people, when left to their own devices and with full responsibility and accountability, will do good things not only for themselves but for their neighbors, their country and their God. Not because they are forced by might or compelled out of fear, but because they choose good over evil.
Philosophical Response:
Don't warp out at me but you're at it again. Over intellectualizing the theories leads to getting caught in the trap. As you've heard me say before, regardless of what a man says or claims to think, watch what he does and where the money, power, and sex go.
The attached article by Dick Armey from the Wall Street Journal yesterday is one of the best "exposures" to the reasons behind the current use of Keynesian Economic Theory to justify the "stimulus" mentality sweeping the nation. As with most theories, one must look carefully at the motivation behind the developer of the theory and his associated proponents.
I've also included an article by Robert Reich on Keynes that gives you background on the man and his philosophies from one of the most liberal, interventionist, and, I believe, evil men in modern political times.
As I analyze Keynes economic theory and his life experience, two very powerful views come together and into focus. Keynes firmly believed in the idea that an intellectually independent mind could throw tradition, experience, and history to the wind and come up with some better solution than the old tried and true. He also believed that those so "enlightened" intellectuals should be given authority over other men's assets and lives in order to provide greater social harmony and put an end to both the economic and war cycles that plagued Europe for a thousand years.
The current use of his theories is not because they are correct in the slightest but because, as Dick Armey so clearly puts it, it gives those who gain power from politically motivated spending the intellectual cover to dupe the middle and "special interest" classes into believing them. As with all intellectual deception, it is insidious, contagious, and damning because, at it's heart, it is an attempt to usurp the agency of man, co-opt his future and dreams, and garner power, glory and honor (and thereby money and sex) unto the deceiver.
I recommend reading both articles and then the following:
Moses 4:1-4
- And I, the Lord God, spake unto Moses, saying: That Satan, whom thou hast commanded in the name of mine Only Begotten, is the same which was from the beginning, and he came before me, saying—Behold, here am I, send me, I will be thy son, and I will redeem all mankind, that one soul shall not be lost, and surely I will do it; wherefore give me thine honor.
- But, behold, my Beloved Son, which was my Beloved and Chosen from the beginning, said unto me—Father, thy will be done, and the glory be thine forever.
- Wherefore, because that Satan rebelled against me, and sought to destroy the agency of man, which I, the Lord God, had given him, and also, that I should give unto him mine own power; by the power of mine Only Begotten, I caused that he should be cast down;
- And he became Satan, yea, even the devil, the father of all lies, to deceive and to blind men, and to lead them captive at his will, even as many as would not hearken unto my voice.
The acknowledgement, ennoblement, and empowerment of the agency of man, along with the requisite accountability and responsibility, in our constitutional form of government is what has made us powerful, wealthy, independent, and resistant to the political machinations of other nations and peoples.
Unfortunately, we (as a society, not necessarily individually) have abused that agency of late and have taken more than our share while selling our birthright for a bowl of pottage. As a result, we are faced with accepting and dealing with the consequences. To remove the consequences and the associated pain is to deny society the opportunity to repent, change, and improve and to ultimately usurp the agency that we have suffered so long and fought so many wars to obtain and defend.
From the macro economic view, getting government out of the way has a much more powerful effect than getting them more involved. I think that if you carefully examine the results of government consumption to stimulate the economy in terms of the increase in the size of government and the loss of individual control, you will find exactly the opposite of what you claim. In every case, the recessions have been prolonged due to governmental "stimulation." To use your medical analogy, we treated the pain caused by a cancer but failed to remove the cancer infecting us. And as a result, the cancer has grown with each successive cycle to the point that we are now facing a global economic collapse.
And what is that cancer? The cancer of covetousness, gluttony, self-indulgence, and self-centeredness.
And what is the cure for us in the US? The purging fire of suffering, loss, and humiliation, coupled with the most powerful redemptive construct in government ever know to man – bankruptcy.
This is what has enabled Americans to take risks, fail, and try again. Is it tough? Yes. Is it uncomfortable, Yes. But it enables us to keep the hold of the greatest source of growth, liberty, and prosperity – our individual agency.
This is also what will most effectively turn the political tide. If those who have robbed the middle and upper class, who would rob from our children and grandchildren to pay for their political promises to the "special interest class" are cut off from their drug supply and can no longer feed the habit, the "special interest class" will turn on them like a shark to a bleeding swimmer. And who will be there to take care of the reasonable needs of the "special interest class?" Hmmm, let me think. Would it be those who already give 3 to 1 over their liberal counterparts? Indeed, it will be those whose self-reliance has made them prosperous, who know the struggles of life first hand, and who have suffered enough that they would that no one else should suffer. It is they who will feed the hungry, clothe the naked, visit the sick and afflicted because they will have the desire, prosperity, and agency to do it.
If you're still with me and have read the article by Dick Armey, I think you will see that putting the needed recovery in the hands of the individual by reducing taxes – and the requisite REDUCTION in federal spending – is far faster, powerful, and lasting than anything the government could possibly spendulus. Yes, people will conserve, pay off debt, and save instead of spending but that is what we should have been doing anyway. And in the end, we will return to what has made us the greatest nation in history – a nation of individuals who can not only provide for themselves but willingly for their neighbors, who can rise from the ashes of defeat to try again and again, a people who will individually and collectively grow and learn, innovate and expand, protect and defend, live and let live.
It's not just a dream, it's the true path and where we need to be.
Individual agency, my friend, is not just an inalienable right, it is the key to true economic freedom and stability.
Thanks,
Steve Dupaix
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