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The Zeitgeist of Today & The Pendulum between Market and Government I

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"History doesn't repeat itself but, it does rhyme"

Mark Twain

“The only thing that is constant is change” Heraclitus


There has been the rise of the populist movement in the last few years. Some of the conventional media have dismissed the outcry by labeling them anarchists, socialists, and communists. They have reminded people the fall of communism and provided contemporary examples such as of Venezuela. On the other hand, many politicians, academics, hedge funds managers and corporate leaders are proposing to introduce wealth tax on high net worth individuals to solve the problems.

This blog post will develop on the second part of 'The Global Economy: Capitalism and Schizophrenia', regarding the rise of inequality and the non-linear possibility of government intervention to re-balance the economic pie. There could be few possibilities -

1. The marginal tax rate on the highest-earning individuals could rise.

2. Governments and Central banks could do what the modern monetary theory proponents suggest such as debt demonetization to re-balance the economic pie. They could also fund public spending by printing it's currency. It is also referred to as 'People's Quantitative Easing'.

3. There could be creative destruction maybe by innovation or by the government policies such as anti-trust and subsidies for inclusive innovation and growth. This will re-distribute the pie among different classes.

4. There could be conflicts with-in a country or there could be conflicts between countries.

The possibilities are not scientific, it would be a reflexive process, and it is contingent on several feedback from the market, politics, and economy. The period of these possibilities will vary from now to the end of next decade.

At stake of being labelled as Marxist, I would explore the historical evidence of the pendulum between the market and government, the reasons for the failure of communism, the rise of the market, the limits of the market, the need for the government intervention, the proponents of it, the vested interest to stop it from happening and the limits of the government-backed economy. The blog post will conclude by stating the cyclical nature of economic history from the market to the government and the opposite.

I have borrowed some arguments from Randall Wray and Paul De Grauwe. All opinions in this blog post are my own. I have used political cartoons to keep the post less boring. There will be two parts of the exploration.

1. Introduction

There are limits to the expansion of the market system. Sometimes the resilience and growth of the system seem unstoppable, precisely because it generates material wealth and prosperity as no other system can, but it repeatedly stumbles on limits and falls victim to its success.

The failure of the system forces the government to step in, and political management and control become essential again. Over time the government management systems also show vulnerability and inefficiency, and the market overthrows them.

The reason for this is because of the following equation.

Net Financial Private Wealth + Net Financial Public Wealth + Net Financial Foreign Wealth = 0

One person's financial wealth is another's a financial liability. For example, the private (households and firms) wealth could be in the forms of government bonds, and the government will be indebted. It is essential to make one distinguishing factor; the country's real wealth is its 'Real Assets.'

Total Financial Assets + Real Assets = Total Assets

Total Assets - Total Financial Liability = Real Assets

They could be of three types: 1. Income earning assets; 2. Non-income earning assets, and 3. Intangible assets.

If it is a closed economy, i.e., foreign financial wealth = 0; and if private financial wealth >0, then the government will be indebted.

In another way, if net private wealth = 0 and if net foreign wealth > 0 then the government will be indebted to foreigners.

In a communist economy, the real assets are operated by the government, while in the 100% liberal economy, real assets are operated by the private and in a colonized country, the foreigners manage the real assets.

The equation mentioned above could be extrapolated:

Net Private Balance + Net Public Balance + Net Foreign Balance = 0

In other words, for someone to accumulate wealth, another will have to run on deficit. For example, the US Economy's historical balance:

In the process of the accumulation of wealth, new real assets are created, and they increase the wealth of the nations.

You might ask, why can't the government disappear and let the market compete domestically and internationally? It is because, in the process of this liberalization, private wealth gets accumulated by the very few individuals in the world.

Source: Ray Dalio

The ones who are left behind uses the form of government to redistribute wealth. If there is no government, then eventually they form a collective revolution and try to overthrow the domestic elites or foreign influence.

Some people can also ask, why can't the government take over the system? It happened in the Soviet Union and many other countries, but eventually, no one is motivated to work, and the central decision making by the government becomes very inefficient.

It is as if the three are fighting a perpetual battle, attempting to win ground from one another, toppling one another again and again.

This blog post doesn't elaborate on the conflict between nations. I will write it in another post. So it goes.

2. Historical Analysis

A. The Passions and the Interests: Political Arguments for Capitalism Before Its Triumph

The ideas of capitalism developed in the 17th and 18th century by many philosophers and economists such as Adam Smith.

In the dawn of the modern era, there was an emerging belief that the pursuit of economic interests would stimulate the “benign human proclivities at the expense of some malignant ones” (Hirschmann). Before the dawn of capitalism, the pursuit of economic interests was considered one of the worst passions; avarice was always a foe of the Platonic conception of Reason and the Christian view of the Truth. Nevertheless, with the decline of feudalism and the rise of absolutist monarchies, the great concern of thinkers like Hobbes was the rising power of the state and the passions that led monarchs into ruinous external and civil wars. In this context, the pursuit of wealth was transformed in the seventeenth and eighteenth centuries into the pursuit of material interest. And money-making – now defined as interest – became a sort of mid-way mode of thought and motivation that, since it was “exempt from the destructiveness of passion and the in-effectuality of reason”, provided “a message of hope” (Hirschmann). Positioned half-way between passion and reason, in other words, interest had the politically salutary effect of restraining the more destructive vices of “ambition, lust for power”.

B. Triumph of 19th century Capitalism

Capitalism officially gained influence in the 19th century, and it brought great prosperity to many nations because of the interests and rationality of men.

Source: Paul De Grauwe

C. The collapse in the 1930's

It ended a few years after the great economic crash of 1929. The markets collapsed, and there was a rise of government control and management with the rise of FDR in the US, National Socialist party in Germany and the Communist party in Russia and China. It was followed by:

1. Rise of Government spending and;

2. Rise of marginal tax rates in these countries.

Source: Paul De Grauwe

Source: Paul De Grauwe

The globalization and capitalism were led by the British Pound as the reserve currency of the world. The global debt was denominated in the same currency, and the currency started showing vulnerability and collapsed with the onset of World War II. The debt burden reduced with the fall of the global currency.

There were other phenomenons such as the conflict within the countries between - 1. Rich and Poor, 2. The haves and the have nots, 3. Several ethnic groups; and of-course, there were conflicts between countries.

Also, there was a wave of anti-trust and nationalization of monopolies and industries. There were many reasons for these conflicts and corporate distrust. But the three major ones were wealth inequality, corporate concentration, the great economic crash, and corruption in politics.

Source: Piketty

Source: Paul De Grauwe

D. The fall of Communism and Government controlled economies

"For many people in the post-war period the rise of governments as the controllers of economies seemed an inevitable and permanent fact. Many people saw the superiority of centrally planned economies as self-evident. In the famous 1959 Kitchen Debate between Richard Nixon, then vice president of the United States, and Nikita Khrushchev, then leader of the Soviet Union, Khrushchev declared with great conviction that the Soviet Union would catch up with the US before the end of the century. Many people were indeed convinced that this would happen. The famous American economist Paul Samuelson who received the Nobel Prize in 1970 was also the author of the most popular and influential economics textbook. The 1967 edition included an extrapolation of GDP per capita in the US and in the Soviet Union showing that by 1995 the Soviet Union would have caught up and surpassed the US. In later editions this catch-up moment was pushed further into the future, until the 1985 edition dropped this extrapolation altogether. Six years later the Soviet Union collapsed" (Paul De Grauwe, 2017).

There were two significant reasons for why the government-controlled economy collapsed:

1. Supply chains and industries were inefficient due to central decision making. The cost of running a centralized economy was very high such as allocating resources, distributing resources, collecting information, etc.

2. People were not motivated to work; they relied on government spending. Most of the work was done because of the orders given by the government, and people were not intrinsically or extrinsically motivated.

3. And of-course there was corruption.

D. The Rise of Neo-Liberalism

Once again, capitalism provided spectacular growth in the world. It was not only the G7 countries, but emerging markets also became prosperous. The schools and universities became subject to market principles, and professors treated as market professionals — cultures and theaters, which government funding started looking outside.

Companies became more and more efficient, and ROE improved. Companies also out-sourced jobs, and the emerging countries became more and more prosperous. The Soviet Union collapsed, and many countries became more liberal.

Capitalism was unstoppable until the great economic crash of 2008. The government provided monetary, fiscal and unconventional quantitative easing to promote the market.

Now we have the global slowdown led by massive wealth and income inequality, high corporate concentration, low consumer spending (due to wealth moving from spenders to savers), low government spending (due to high public debt) and international conflicts.

Source: Bridgewater Associates

This begs the question, have we reached the end of market led economy, is the government going to strike back with more power and influence?

Is History going to rhyme itself? I would leave that to your interpretation of it. In the next blog, I will talk about the limits of the market, the need for the government intervention, the proponents of the change, the vested interest to stop it from happening and the limits of the government-backed economy. The blog post will conclude by stating the cyclical nature of economic history from the market to the government and the opposite.

“Homo Economicus” at Cabinet Ayreen Anastas and Rene Gabri

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