Given the renewed interest in the way that the economy can
be transformed and made to work better for everyone, I propose to discuss a
theory that has been brewing in my head for some time. The purpose is not to
give a toolbox full of tools that can be used to revamp the economy, but give a
package of ideas that can help others enlarge the discussion by providing a
field on which to sough new seeds, and from which to harvest the resulting new
ideas.
I begin with two postulates that are self-evident. The first
is that to be efficient, an economy must achieve an exact balance between its
production side and its consumption side. The proof is that an economy which
produces more than it consumes will eventually junk or give away the extra
production. On the other hand, an economy which produces less than it is able
to consume, is an economy that functions below capacity. As to the second
postulate, it is that people experience a higher standard of living when both
the production and the consumption of goods and services increase in their
economy.
Thus, the idea of managing an economy efficiently rests on
the notion that it must be sustained not at a static level, but maintained with
a growth that is repeated year after year … and doing so without experiencing
large cycles of booms and busts. If this can be achieved, the economy will
deliver maximum employment, which means maximum production of goods and
services. It will also deliver maximum payroll payouts, which means maximum
consumption and a higher standard of living. How can this be done?
To understand this part, we need to know what sort of
consumptions powers an economy. There are basically two sorts. The first is the
consumption of goods and services (known as consumer items) that allow the
general public to live the lifestyles that people choose to have. The second is
the consumption of capital items (mostly machinery and the maintenance that
goes with it) done by the businesses which produce the goods or the services
that the general public consumes.
Now, the Industrial Revolution and then the advent of fiat
money split society into two camps: the one that owns the means of production,
and the one called general public which consumes the goods and services produced
by the first camp. Industry and fiat money created a gulf between these two
camps … a gap that kept widening with the passage of time. This resulted in
some producers getting fabulously wealthy while the consumers got poorer by
comparison. The effect has been the creation of a disconnect between the
production side of the economy and its consumption side. With this phenomenon,
came the inefficiency that poses a new challenge: How to narrow the gap between
the two camps?
Aware that increased production happens when the public
saves more of its take-home pay, we conclude that capital formation is what
helps the economy grow. But fiat money can also contribute to this effect. That
is, when the central bank eases the interest rates, or when it buys assets to
inject cash into the economy, more “capital” is put at the disposal of those
who have the prerequisite to borrow it. So we ask: What do these people do with
all that money? And the answer is disappointing.
A phenomenon of our time tells a sad story. It is that the
debt levels reached by governments, by institutions and by the general public
are at an all time high … and still growing. This means that capital is not
going into the activities which increase production; it goes into the debt
instruments that allow the lenders to get wealthier at the expense of borrowers
who may not even have a high paying job to help pay off the debt while
sustaining a decent standard of living. The result is a wealthy small camp of
individuals who get wealthier at the expense of a camp that works harder yet
gets poorer by comparison. What can be done?
To answer that question, we do a thought experiment. It is
said that Mitt Romney has 250 million dollars. He certainly does not need this
much to live on because, like every one else, he cannot eat more than 3,000
calories a day, cannot wear more than one suit at a time, cannot live in more
than one house at a time, and cannot ride more than one car at a time.
Also, he does not use the money to develop one new mine,
plant one new acre of land or engineer the fuel cell of the future. So then,
what does he do with the money? He does two things. First, he lends it out to
earn interest on which to live. Second, he displays it to tell those who have
less, he's more “successful” than they, and tell those who have more; he'll
soon catch up with them. This waxes his ego, but how many people do such
non-activities employ, and how much production do they add to the economy? The
answer is very little.
Now imagine that Romney discovers “religion” and decides to
give ten million dollars each to 25 new or established small entrepreneurs who
would develop new mines, plant new acres of food, or engineer the products of
the future. Just think about it, how many people would they employ, and how much
growth would they contribute to the economy? Now compare that with what Romney
is doing with the money.
The point is that centrally controlled capitalism – that
which remains in the hands of a few – is no better than centrally planned
(Communist) economies. They both result in stagnating the means of production.
The remedy is to decentralize capitalism so as to give a large number of people
the chance to make a contribution. This will happen because more heads are
better than one.