Simply stated, an economy can be defined as the coming into a
community of a number of people who would produce and consume the goods and
services they need to go on with their lives.
There has been a slow and steady evolution in the way that goods
and services were produced and distributed from primitive times to the advent
of the Industrial Revolution. And then, a quantum leap took place that altered
the way those goods and services were produced and distributed.
Before the Revolution, productive members of the community
produced the goods and/or services, which they exchanged (bartered) for other
goods and/or services with the other members of the community. In such
transactions, both sides knew what value they attached to what they gave away,
and what value they attached to what they received in return. They were in
total control of the transactions.
As a whole, the well-being of the community depended in large part
on the weather because much of what was produced depended on what was harvested
for human consumption, and what was there that could be fed to farm animals.
Also, because the economy depended on a supply of fresh water, wood and such
raw materials as stone, gravel, charcoal, base and precious metals, the
geographic location of the community played an important role in determining
the standard of living to which the members could aspire.
The Industrial Revolution changed all that because it altered the
way that the goods were produced and how they were distributed. Also, a
consequence of this alteration, was the need for new services now required to
serve the rising new economy. As to the fundamental reason why those changes
were bound to happen in the first place, is that the production of goods and
services requires energy.
Whereas human beings used to depend on the energy produced by
their own muscles and those of animals, the Industrial Revolution supplied much
of the needed energy as well as the machines that ran on the conversion of
fuels into energy. This made it possible for human beings to toil the land,
mine the resources and produce the goods with the aid of machines that ran on
coal and other fuels. The transformation multiplied by several orders of
magnitude the amount of goods and services that were produced.
But machines had to be housed in factories where the “artisans”
that used to work at home or in their shops, were now sent to work in factories
where they manned the production machines. Called workers, they no longer put a
value on the products they made; nor did they distribute them. The owners of
the factory and their assistants did all that and gave the workers promissory
notes called money in exchange for their labor. Whereas they used to barter the
goods they produced and the services they rendered, the workers now used the
money to buy goods from stores, and pay for services that were proliferating
with every new invention that came along in the fields of transportation,
health, communication, education and financial services.
Humanity moved into the Industrial Age where the creation of a
central bank became a necessity. This happened because it became apparent that
there had to be one central authority to manage the supply of money. The reason
is that –– unlike the pre-industrial age where every artisan was responsible
for what happened to him –– the industrial age created a situation in which the
misfortune of one big institution can spell disaster for many families. Worse,
the failure of one institution can also trigger a domino effect that brings
down other institutions and possibly the entire economy.
And so, the central bank was given the mandate to print the money,
set the monetary policy, make sure that prices remain stable and prevent unemployment
from getting out of hand.
Things worked well for the Capitalist World as long as there was
no serious competition to it from another system of economics. But then it
happened that a new system got incubated in the Orient and started to challenge
the Capitalist system. The new system was nicknamed “Crony Capitalism” because
it is based on a partnership between the private and public sectors of the
economy.
After several decades, the new system strengthened to become a
formidable challenger. Even though it looks like it tolerates big gaps in
income levels between the working people and the high-income earners, it does
not show the weaknesses that threaten it to collapse the way that the same sort
of gaps threatens to collapse the Capitalist system.
That's because in China –– where the new system thrives –– those
who become wealthy are those who produce goods and/or services. In other words,
they are the Bill Gates of the country. What these people earn is proportional
to the amount of goods and/or services they produce. In America, on the other
hand, the investment bankers who are close to the printing press of the central
bank become wealthy. What they earn is proportional to the games they play,
tricking the central bank.
Here is what happens. Whereas the small banks and some of the big
commercial banks perform as the financial utilities which they are, some of the
big banks, the investment bankers and the hedge fund managers do not operate as
responsible institutions. They know the game so well, they do not sit together
and conspire to trick the central bank; they are smarter than that.
But like a well-trained team, each of those in the loop, knows
what to do to achieve the goal of making the central bank print abundant
supplies of money. To this end, they approve the loan application of everyone
that says he has collateral whether true or not. The central bank prints the
money, which goes not to increase the pool of goods and services, but to
inflate the prices of the existing pool, thus create a bubble.
Eventually, the bubble bursts, and the borrowers lose everything
to those who allowed them to borrow … where all the money ends up. Meanwhile,
the institutions that were caught in the draft go bankrupt. To save the system,
the Treasury bails out the very institutions that played a role in the
collapse.
How to fix that? The way to do it is to amend the mandate of the
Central Bank, forcing it to make sure that credit is not given to an
institution where management as a whole, receives more than 10% the sum total
of the company's salaries.