Mark Thoma suggests that the government should both use Tax Cuts and Spending to improve an economy. Which is a pretty common sentiment among economists. Nothing new there. He is simply changing his mind on the value of Tax cuts because they help correct household balance sheets and therefore increase the likelihood of future spending.
In balance sheet recessions, tax cuts that are saved will help to end the recession sooner and hence should be part of the recovery package. The most important concern is still aggregate demand, and policies must be devoted to this problem first and foremost, but tax cuts have a role to play in the recovery process even when they are saved.
One of the posters commented (as leftists do, on his blog Economist’s View) that increasing Demand does not fix the problem. Which I then used as a springboard.
ken melvin said…
The implicit assumption that demand provides solution is not valid, hasn’t been since forever. The model is invalid, has been since forever. Yet, for lo these nearly 40 years. we pursue this model in the face of the ever mounting failure. The model, never really sacred, was built on forensics, and, more, to make the status quo work. From physics and bio-science, we’ve evidence that man is capable of divining forward. Now is the time for economists to ask ‘how should it be’?
But I think he misses the point.
Economists don’t have any idea how the world should be. The failures of the DSEM models are catastrophic. The problem of human memory (Mandelbrot-Taleb-Hume and to some degree Hayek) implies that humans are permanent victims to behavioral boiling-the-frog, and to the somewhere on the order of fifty cognitive biases.
We know, as you state, that demand does not work. We know that innovation is a supply-bias that generates demand. It appears that it is the only means of increasing velocity and volume in an economy.
We know that the state moved from saving-and-investment to consumptive redistribution and debt during the period of rapid industrialization and the act of selling off the american continent.
We know that we assumed we could use mathematics to control this by a number of levers we call monetary policy.
Vast Changes Give Our Ambitions Context
The world is going through a number of changes.
1) repricing due to the asian economies coming into capitalism and industrial production. (Just as the US did to europe in the mid 1800’s)
2) reorganization, as people must learn and move to new forms of production (jobs) without knowing what to move to.
3) the future-assumption-of-growth debt bubble bursting everywhere.
4) the movement of private debt failure to sovereign debt failure, destroying the ‘lender and insurer of last resort’.
5) the demographic shift to an older media age population that is lower production if not non-productive.
6) Increasing urbanization worldwide (urbanites and rural’s have different epistemological biases because of perceived opportunity density – different cognitive biases, but cites are increasingly becoming the home of the poor, and income disparity is largely an urban phenomenon)
7) Decline (as has been predicted since 1945) of american ability to police trade routes inherited from the English after the wars (military influence) and increasing destabilization of trade routes, power, and monetary systems that will come from that change in influence.
8) the permanent decline in the relative economic position of american middle classes that will result from this worldwide rebalancing.
The Failure Of The Democratic Republican Model Of Debate
It appears that the working class’s attempt to bankrupt the capitalist class, and the capitalist class’s attempt to bankrupt the state to defend itself, BOTH worked. States are very nearly bankrupt.
The republican model of debate between opposing forces for governmental decision-making under the unbounded system fiat money has failed. If we are going to have fiat money, we are going to have to find another way to debate the future. Fundamentally, our current republican form of government is government by non-productive people. By priests. It is quite the opposite of early republicanism under farmers, who specifically were productive. The classical liberal revolution failed to adequately define a government for the post-industrial era.
The republican model of debate between opposing forces for the purpose of governmental decision making has failed under fiat money. If we are going to have fiat money, we are going to have to find another way to debate the future.
And since we have a clear difference between class predictions of the future (entrepreneurs must take and absorb risks so they see the future as dangerous while independent laborers and craftsmen and small business people see a similar view, but white collar educated workers and government and union workers tend to see a stable future – because they are isolated from visible flows of capital and risk), then consensus from PERCEPTIONS ALONE (*that’s the issue right there*) between classes of people who are disproportionately distributed across geographies, cannot come to a consensus of PERCEPTIONS.
An emphasis on perceptions here: because a) the perceptions are vastly different, b) the data is insufficient and models are notoriously faulty in prediction c) our method of governance is not factual but PERCEPTUAL.
The most common perceptive difference between cultures and classes is time preference (in the austrian model this is a degree of willingness to wait for gratification.
In simple terms, people from different social classes have different views of time. Higher classes longer, lower classes shorter. There is some evidence that this is simply an expression of having means or not, or one of what a class teaches its children by implication and habit rather than intent, but that is counteracted by research showing that all classes have both short and long term thinking members. That would indicate that austrian model is correct, that the issue is the underlying drive for stimulation. In either case, these perceptions are material determinants of the differences in perceptions.
All mathematical formule are improvements on our perceptions. If they prove true in forecasting outcomes they are extension of our senses. Or better said, they alter our perceptions of the world by improving our perceptions in limited domains. But data must come from categories of actions that we can measure. We cannot measure many dimensions. In particular cannot measure the alternative worlds that people to NOT choose (as we can forecast in physics using alternate world hypotheses). And we tend to measure commodities and ‘flatness’ best, and outside of those who worlds can barely forecast anything at all.
How Do We Make Choices?
SO in this ‘fact-less’ world, how should we know what to do, and how should we CHOOSE what to do, and what mechanism for CHOOSING what to do will work to produce outcomes that are beneficial enough, that productivity increases sufficiently to allow for redistribution, so that status-envy and status-achivement-for-mating-purposes are both satisfied?
(And I am not ruling out that due to status envy a large part of any population will happily encourage the diminution of an economy. There are too many records of this effect in history.)
We have the wrong form of government. We lack shared perceptions of the world – for structural reasons. We lack the tools and formulae to scientifically prove one set of perceptions or another, in order to come to agreement.
How Should We Reform Government?
So, how should we organize society, and what research should economists pursue, so that we can calculate, estimate, judge, plan or whatever, a future that we can agree upon in a democratic society? Or should we simply try to come up with another set of ridiculous religious concepts even if they are metaphysical (marx and Smith) or positivist (keynes and Friedman)?
Or is there yet another way? Is there a way to look not at mysteries (religions and metaphysics and morality tales) or to look at false sciences (formula and application of the constant physical world principles to the heuristic world), as means by which to FORCE AGREEMENT BY FALSITY under the assumption that the world is either externally created, or naturally bound, or scientifically predictable? All of which we know are FALSE.
Or instead, is there a way to cooperatively EXPERIMENT and DISCOVER that world and SHARE COOPERATIVELY in it’s RESULTS?
In other words, is there a way to create a government of DISCOVERY that rewards all citizens for their participation?
And more importantly, is there a way to create the correct SENSATIONS that are PERCEPTIBLE to both the entrepreneurial and the craft and the labor classes, such that the CAUSE and EFFECT of one’s actions allow the productive classes to coordinate and profit, without the systemic bureaucratic pilferage for the purpose of profiting from class warfare? Or better stated, how can we create a system of information post-agrarian, post-industrialization, that stops the priesthood, whichever form of mysticism that they practice, whether it be Monotheism, Traditionalism, or Progressive (Socialist) Democratic Secular Humanism? The rational man asks, how do we kill off religions, and that means all of them, including positivism?
We are asking the wrong question
So, I think both left and right are asking the wrong question.
And if they are not asking the wrong question, then they are simply a band of fraudulent thieves.
The problem is not one of solving economic science, so that we can justify one position or another, using what we claim is science.
The problem is the very nature of our process of government.
The Republican Model Of Debate Is Insufficient For Political Action, because men and women in government are incapable of possessing the information necessary to make the level of decisions with which they are tasked. We know that socialism fails because of a failure of ‘calculation’ and of ‘incentives’. We know the political model of republicanism fails above a certain very small population for the same reason that socialism fails outside of a family: that calculation becomes impossible, and incentives fail to encourage and reward productive behavior.
Sensation, Perception and Complexity
We live in an advanced industrial society with tens of millions of products and hundreds of millions of people, calculating a complex future in a vast division of knowledge and labor, using metaphysical and inherited systems of perception under a government that was designed for a minority of wealthy farmers to coordinate decisions for a large number of farmers and subsistence farmers. WE use religion, and law, and now false application of science (which is simply a process of organized discovery of an existing system) to make our choices. But our choices fail. THey fail here in America. They fail in the more socialist world of europe. They failed in the most socialist and communal world of the east. They fail everywhere. Religion and Law and the republican model are artifacts of the agrarian world which we left behind a century ago.
The Answer Is In Front Of Us
So what is it that we need to do instead?
The answer sits in front of us. It’s our religious cultural fantasies that create the mythos that prevents us from seeing it. It doesn’t matter if that silly religion is christianity (military mysticism), judaism (minority mysticism), or “democratic secular socialist humanism” (positivism: mathematical mysticism).
We create a lot of social habits without really understanding them. We invent behaviors and technologies by accident and define them later on when we finally understand them. We label them and then claim to understand them, as if we invented rather than stumbled upon them by trial and error.
The answer isn’t any form of ‘ism — It’s just to work at it. The question is, how do we get everyone to voluntarily work at it? What institutions do we need to make it work? How do we change government so that these institutions succeed? THe libertarians have been right about a lot of these institutional problems. They have been wrong on selfishness and money. Christian protestants have been right about cultural discipline and production, but wrong about separation of church, state, and banking. Keynesians and Friedmanites have been wrong about free trade and monetary policy. Everyone is just a little bit right.
Or do we, like all other urbanized civilizations in history fall prey to the real reason for Collapse (Diamond was wrong) : the failure of law and religion (punishment and ostracization) in an urban society due to permanent anonymity that breaks the prisoner’s dilemma of social cooperation in families, friends, tribes and among farmers and craftsmen, who are dependent on themselves for their production?
Since we created the market, people have increasingly chosen to enter it. First by making excess production in order to get money to buy scarce goods that they could not produce on their own. Second, by entering the market, by producing ALL goods for the market and relying entirely upon the market for sustenance. They stepped into a world of risk without the comforting cushion of their farms. Then, once dependent upon the market, they started seeking jobs in the market-bureaucracy where they were isolated from the market risk. (this is the purpose of going to college today – to exit the market). And this is the entire issue for our civilization: so many white collar people have exited the market by joining the private sector market-bureaucracy, and are compensated highly for it (as were priests in pre-secular society), that they ‘sense’ that the market doesn’t exist. So we have a productive class (people who speculate with capital whether) we have a dependent class, and we have a bureaucratic class (the state, and the private sector white collar and union workers). The dependent class cannot function in the market. The bureaucratic class lives off other people in the market but are exited from it – living in the best of both worlds, and the capital-risking class is the minority of the market taking all the risk.
The market is a process of discovery. The question is how do we build a democratic society for a world of discovery without having the white collar market-exiters (Schupeterian intellectuals) destroy the market? Or rather, how to we reward the productive classes, whether they are laborers, craftsmen, entrepreneurs or capitalists, and deprive the priesthood who lives off them?
Because all Priesthoods. All bureaucracies. Are predatory. And our Bureaucracy, our priesthood, has simply extended into the private sector.Today’s economists are no different. They are, in large part, part of the positivist priesthood.
That’s the reason for Collapse: Schumpeterian collapse: The dependent and bureaucratic classes cause the collapse of the productive entrepreneurial class, who, like Atlas can no longer carry them, or is no longer willing to.
The solution is to create a government that does not pool information and thereby launder it. But that informs everyone accurately of their contribution, or dependence, upon the cooperative endeavor, the joint stock company that administers the market that we call ‘the state’.