My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “Rock bottom became the solid foundation on which I rebuilt my life.” – JK Rowling
This week we are looking at the nature of Keynesian economics, the systems we have used globally today and have been in place since WW2. Lord Keynes said that countries should increase the money supply and invest when economies contract and, more significantly, save the surpluses when time are good. I think that most governments have missed the second part. This has significant implications because our financial world does not truly reflect our net energy world as explained in this article: https://dothemath.ucsd.edu/2011/10/the-energy-trap/
Here is the link to last week: Issue 58
Now that Brexit will not be coming to a final conclusion after three years, I will continue to provide weekly updates as events progress:
Brexit Update – 5th July 2019
The Brexit deadline remains 31st October 2019 and stays in place unless the next PM can get Parliament to agree a new exit plan.
The progress of Brexit will be halted until a final decision is made and in the coming weeks I will report what the two candidates are saying about their ‘plans’ to execute Brexit by the end of October. ‘Mish’ has a good summary on the options for Brexit and it is possible that a general election could be called during early September so all bets are off for a final solution by Halloween:
Details of Parliament’s deliberations can be found here:
CHAPTER 11
MACROECONOMICS 101
“I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave”. – Joseph Campbell
“Gold and silver are not by nature money, but money is by nature gold and silver.” – Karl Marx
“When people find they can vote themselves money; that will herald the end of the republic” – Benjamin Franklin
Keynesian economics
Modern macroeconomics has been heavily influenced by the works of John Maynard Keynes; an excerpt from Wikipedia will clarify:
“Keynesian economics are the various theories about how in the short run, and especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.
The theories forming the basis of Keynesian economics were first presented by the British economist John Maynard Keynes during the Great Depression in his 1936 book: ‘The General Theory of Employment, Interest and Money’. Keynes contrasted his approach to the aggregate supply-focused classical economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy. Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle. Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions.
Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the oil shock and resulting stagflation of the 1970s. The advent of the financial crisis of 2007–08 caused resurgence of Keynesian thought which continues as Neo-Keynesian Economics.”
Other schools of economic discipline
A major alternative school of thought is referred to as the Austrian School. Wikipedia has this to say: “Since the mid-20th century, many economists have been critical of the Austrian School and consider its rejection of econometrics and aggregate macroeconomic analysis to be outside of mainstream economic theory, or “heterodox.” Austrians are likewise critical of mainstream economics. Although the Austrian School has been considered heterodox since the late 1930s, it began to attract renewed interest in the 1970s, after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences.”
Sometime during the middle of the twentieth century, Austrian economics became disregarded or derided by mainstream economists because it rejected model building, and mathematical and statistical methods in the study of economics.
Austrian economist Walter Block says that the “Austrian school” can be distinguished from other schools of economic thought through two categories – economic theory and political theory. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism.
It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis, and societal groups rather than individuals. Austrian economist Steven Horwitz argued in 2000 that Austrian methodology is consistent with macroeconomics and that Austrian macroeconomics can be expressed in terms of microeconomic foundations.
The Austrian school of economics, the once dominant school of economic thought at the turn of the 19th century, focuses on the individual and his or her actions and motivations to explain economic life. It derives its name from the many scholars from Austria who developed 19th-century classic liberalism into a coherent explanation of economic life. “Economics is in reality very simple. It functions in the same way that it did thousands of years ago.
People come together to voluntarily engage in commerce with one another for their mutual benefit. People specialize and divide work among them to advance their condition,” writes modern Austrian economist Philipp Bagus in his book “Blind Robbery!”
A bedrock principle of this understanding is that exchange should occur voluntarily and not under the coercion of the state or any other party. If exchange is voluntary, the individual or company must offer something of value if it wants to obtain something of value. This premise encourages innovative, creative, and productive behaviour.
It also forces individuals to think about what their fellow humans may appreciate or need. On aggregate, this decision-making process is much more elaborate and prudent than any central planning decision, which must use force to compel its subjects to conform.
Austrian school economist Ludwig von Mises (1881-1973) writes in his book, ‘Human Action’: “Production is directed either by profit-seeking businessmen or by the decisions of a director to whom supreme and exclusive power is entrusted.” We need to ask who should be Master. Should it be the consumers or the director?
To be continued next Saturday
In America, the Federal government now decides who we must sell to and do business with; who we must provide services to; who gets admitted to college and gets assistance; who we must hire and promote; who we cannot fire and teachers cannot fail; and opened our country to everyone. America was a Meritocracy but the government has turned it into a Kakistocracy. We are now a house divided; a country built on Capitalism is now infested with Communist Termites and Maggots and being invaded by millions of vandals. A 250 year old Economy of Austrian Prudence has been replaced with one of a Foreign Central Bank’s Keynesian profligance which will totally collapse US like the Congo, Cuba, Zimbabwe, Venezuela, etc, within a decade.
I agree with all you say and predict. Robert, thank you for shouting it out! There seems to be no solution to this ongoing dilemma of the western world in general. The patients have taken over the asylum.
The immorality alone of the FED counterfeiting our “money” (currency) is evil enough. It steals 2% (targeted inflation) annually and buys real assets with this counterfeit money while diluting the value of any savings we might have. Truly unbelievable and as morally corrupt as it gets.
I agree Steve, the system is broken. It is only now a matter of time before the inevitable result will create the next GFC2 and it is unknown how the Fed et al will react. I doubt that QE will be effective this time – we live in interesting times.