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logo    Inverted Economic Policy


Economists are a strange lot. Instead of critically examining the theoretical foundations of economic theory, these foundations are assumed to be true. These economists then spin their wheels analyzing the mechanisms of a theory into minute detail, forgetting that if the theoretical foundations are bad, so are the analyses of the mechanisms.So leaving all theory aside, what really is an economy?

Etymologically, the word is related to household management. And household management is the essence of the enterprise. An economy supplies households with the things needed to sustain their existence. Over time, the things which are needed change. A household in a primitive society needs considerably less that one in an advanced industrial-technical society, but the essence is constant.

Various means have been used carry out this activity. Self sufficient hunting, gathering, and growing, bartering, exchange, and even criminal activities such as theft. But the goal is always the samemanage the household.

In today's world, the economy consists of (1) vendors who offer products for sale that households need or desire to maintain themselves in some predefined standard of living and (2) buying members of households who purchase the products offered for sale by the vendors. For this type of economy to work, two things are required: (1) sufficient quantities and types of products to satisfy the needs of buying households, and (2) sufficient means in the hands of households to purchase the needed or desired products. When these factors are out of balance, the economy fails. If insufficient quantities or types of products are available, households suffer; their maintenance becomes difficult or even impossible. If insufficient means exists in the hands of households, the needed or desired products are not purchased, and both households and vendors suffer. It becomes difficult and often impossible to maintain either, as for instance, in a severe recession.

So in spite of the plethora of sophisticated economic theory available, the problem is actually very simple: How can we keep the two factors in balance without resorting to restrictive controls on the activities of people be they buyers or vendors?

Consider these factors:

Wage earners and salaried employees have little control over their incomes. So the task of keeping the two economic factors in balance falls on other societal institutionsbusiness and, whenever regulation is involved, government.

If an economy is to expand, it can only be done by increasing the number of households with the means to purchase the available products.

To some extend, this second conclusion is widely recognized, but no accepted mechanism for putting it into practice does. Businesses and government try to expand the economy by emphasizing jobs, because more jobs means more earners and thus more consumers. But adding jobs in sufficient numbers is not always possible, especially if an economy is already in decline.

But increasing the number of jobs is not the only possibility.

Consider the common practice of both business and government. The business community assumes that its responsibility is to its stockholders, and there is a sense to which that is true. However, alternate ways of carrying out this responsibility are available.

The current practice is to focus on the bottom line, i.e., current profits. And whenever profits are not satisfactory, attempts are made to raise them by cutting expenses, including employees or employee wages. But that practice is self defeating, although it may have a temporary ameliorating effect on profits. It is self defeating because its immediate effect is to reduce the means to purchase in the hands of households which amplifies any unbalance that already exists in the economic factors, and that ultimately has the effect of reducing profitsjust the opposite of what is intended.

Likewise, governmental regulatory agencies tend to want to keep wages low. But low wages mean low consumption which has no effect reversing a declining economy's trend downward.

The same is true of global outsourcing. By sending production to countries where wages are even lower than here, consumption is reduced here and not enhanced greatly in the outsourced country. What is needed is a way of increasing the number of consumers both here and abroad.

It should be evident from this analysis that the only way to grow the economy is to put more money into the hands of householders. Instead of trying to keep wages low, the goal should be to steadily increase them, thereby putting more money into the hands of consumers which would result in the sale of more products and increased profits, provided that the increase in wages were not negated by increases in prices.

So whenever sales don't meet expectations, the practice of cutting wages is self defeating.

Of course, Keynes recognized this, but put the burden for supplying the needed income on too narrow a span of society. He placed it on government alone. But since government gets its money from the economy, in a strapped economy, the government is strapped too and cannot supply sufficient resources to boost the economy enough to solve the problem.  However, if our economists could convince the business community that it too must bear the responsibility of rebalancing the economy, the effects would be much greater.

We need to realize that an economy is a cooperative rather than an antagonistic enterprise. For an economy to be robust, the business community must not only provide products, it must also provide society with the means for purchasing them, for in the long run, it is the only societal institution that can, and if it doesn't, then businesses, investors, and households all suffer, and the economy fails in its purpose to manage households. (7/11/2005)