A number of concepts in economics still escape most people,
and there is a need to clarify them if only to render future debates on the
subject a more fruitful undertaking. To see what these concepts are, what role
they play in the economic system and how they affect the public, we need to
stage a fictitious situation. To this end, imagine yourself going to another
planet aboard an armada of spaceships containing a million people and
everything you would find in a city of this size on Planet Earth.
You reach a suitable planet after a dozen years of travel
during which time the relationships you had with the individuals you knew on
Earth have changed. You are still in command of the operation but your
underlings, friends, associates, acquaintances and cronies have all changed.
Your new entourage is loyal to you, which is what you will need to execute the
task ahead – that of starting a whole new civilization in a whole new world.
You will start it from scratch but not from a primitive point. Rather, it will
be a technically advanced civilization whose people have lived for ten years
under a system where everything was planned for them by computers. But having
acquired no social skills that will be required for a natural setting, these
people will be unleashed on each other and asked to fend for themselves.
You decide that unfettered individualism will not work for
now. And so, you prepare a plan whereby life will start on the new planet
substantially the same way that it was on the spaceships. You will gradually
loosen the rigid rules so that after a generation or so, the citizens of the
new world will have acquired the wherewithal to live in a political and
economic system that is as free as it can get.
Now on the new planet, and with every family living in a
comfortable home containing the necessities of life and the other amenities,
the million citizens of the city-state you govern go about their daily lives
with a little more liberty than before but still constrained by the fact that
nobody earns a salary based on merit. Instead, each family has an amount of
money deposited in its account depending on its size. Those who run enterprises
producing goods or services are allowed to buy shares in them by paying the state
a portion of their monthly salaries. The idea is to have each entrepreneur own
the enterprise they run within a generation.
Having tasted a limited amount of freedom when deciding for
themselves, having enjoyed the fruits of their labor when they succeeded and
having suffered the consequences of their failures, the citizens of the
city-state love the arrangement so much that they ask for more economic leeway
to unleash their full potential. More specifically, they ask you for the right
of businesses to borrow money and pay their employees according to merit. You
approve the request and order the deregulation of the financial institutions.
But you ask the central bank and the treasury department to stay connected to
the account of each family because you expect that some breadwinners will be
visited by bad luck, and will need a safety net to catch them when they stagger
and before they fall.
While the new economic regime is being implemented, you ask
the computer engineers to put together a system that will visually represent –
in real time – what is happening in the economy. They come up with a wall size
screen that shows a three dimensional image of a sea. When the computer is
turned off, the sea is calm, and the engineers call its surface the economic flat
line. It sits close to the middle of the screen between the floor and the
ceiling. Because the computer is plugged to every sector of the economy, it
shows waves that grow or shrink when it is turned on. This happens because each
wave represents an industry such as iron mining, wheat growing, textile,
nano-technology, hotel occupancy, mortgage borrowing and so on – all of which
produce goods or services at a different rate. Thus, depending on the rate of
change of each industry, the corresponding wave grows or shrinks in a cycle
over a season, a few days or a few hours.
At first, the economic sea appears normal with waves bobbing
up and flattening out to indicate that a given industry started to overproduce
but that the marketplace responded by cheapening the product. This forced the
producers to cut down on their output, a move that brought the supply-demand
equation back into balance. At times the whole sea would rise above the base
line indicating a high tide that is due to one of two possibilities. If the
color of the sea turns into a deeper blue, it means that productivity has risen
and that society is becoming wealthier. But if the color of the sea turns into
a lighter blue, it means that the increase is due to more money being pumped
into the system without a corresponding increase in production. This condition
is brought about by excessive borrowing done for the purpose of speculation and
not for business expansion; a reality that has the effect of diluting the
economy.
Usually, this phenomenon appears in conjunction with the
wave of one or more sectors of the economy growing massively – sometimes to a
size approaching that of a tsunami. It indicates that a potentially destructive
bubble has formed in those sectors which is a worrying sign. When this happens,
fiscal and monetary remedies are applied, and the economy is usually brought
back close to the flat line. It is then allowed to resume a real growth rate of
about three percent a year.
Fast forward fifteen years or so, and history has recorded
that the city-state you govern had a number of booms and busts as well as a
housing bubble that was followed by a financial crash. Some people were hit by
bad luck and relied on the safety net to save them before they hit the ground.
Some of these were then retrained and returned to work where they resumed their
productive life. Other people have aged and retired to live at the expense of
the state. As well, programs were created to help the children develop and be
all that they can be while growing up. Other specific programs were created to
encourage people to move into unpopular activities such as the launch of a
business in frontier areas where life is harsh and people fret to go.
You look back and realize you have created a welfare state
that nevertheless adheres to the principles of capitalism. You are satisfied
that it is a good system but you worry because the wall screen is indicating
trouble ahead by the fact that the base line of the sea is rising, the color of
the water is diluting into a lighter blue, and the commodities as well as the
financials are forming giant waves. Not only that, but you see something you
never saw before. While the level of the sea is bulging fast on one side, it
remains at a lower level on the other side despite the fact that the laws of
physics say the surface of the water must always level off. It is as if an
invisible wall was keeping apart the two sides of the sea, preventing the flow
of the water from the high level to the low level.
Unfortunately, you do not have the time to gather all the
information about the phenomenon or determine what precisely is happening. What
you know, however, is that what you see is saying something ominous. It is
saying that whatever is out there; it is packing a powerful punch and is about
to hit. You determine that matters must have gotten to this point because there
was a tsunami of borrowings. You reflect on the matter, and after careful
consideration, you conclude that the situation can only be remedied by pushing
back against the tide with a tsunami of giveaways.
You call your council of elders to a meeting, and you tell
them about the plan you have in mind. After listening to you, they all agree
that the plan is paradoxical and contradictory. You ask them if they have
another idea but no one comes up with one, so you go ahead and implement yours.
What you do in this regard is instruct the central bank to work with the
treasury on depositing money in every account of the households. The intent
will be to double the amount that is there now. You attach a proviso with the
instruction to the effect that should an account hold a small amount or nothing
at all, ten thousand dollars will be deposited in these accounts because no
family should have less than that.
The net effect is that all of a sudden, the money supply of
the city-state jumps from about 5 billion dollars to 8 billion dollars. This
dilutes he economy even more and increases the price of goods and services by
about half. But it has the salutary effect of leveling off the surface of the
sea which has been your aim in the first place. The trouble is that it also
raised the base line of the sea, and brought it close to the top of the screen.
You call the computer engineers and tell them to adjust the system so as to
reflect the new normal. They do so by bringing the base line of the sea back to
the middle of the screen. They also turn the color of the water back to the
pre-dilution level of blue.
The wealthier people in society – be they individuals or
businesses – come to you and protest what you have done. You ask them to
explain their reasoning since you took nothing from them but only gave newly
printed money to those who had less than they, and had a difficult time making
ends meet. They say that although they retain the same amount as before, their
purchasing power has been reduced because the money that was added to the
economy has raised all the prices. Thus, even though no money was taken from
them and given to the poorer folks in society, they were nevertheless robbed of
their superior purchasing power because some of it was transferred to the other
folks. The net worth of these people has doubled but the prices have increased
by only half – and this leaves them well ahead of the game.
Great, you say, because these people will now be able to
make ends meet which is how things were before he deregulated the financial
institutions. So you ask your wealthy interlocutors how it is that they
acquired a superior purchasing power in the first place. They each give you a
story as to how they succeeded in business. But no one is able to show that
they added as much value to the gross domestic product in terms of real goods
or real services as the amount of money they got out of the system. Some of
those who work in the financial services even admit that most of the gains they
made were speculative in nature. It was almost like winning at the gambling
table, they say, something they could do because they were closer to the table
than the clients they were supposed to serve.
And so you tell them that because they got wealthy by gaming
the system over a period of years – knocking it out balance – you have with one
stroke of the pen, restored that balance. The system should now work better for
everyone, including they who depend on a clientele they would rather know is
wealthy and possessing a high purchasing power than poor and unable to pay for
the products or the services they make.
They see the wisdom in your logic and go back to their homes
and their businesses reassured that the city-state they live in is in good
hands.