A BIT MORE ON KEYNES AND SMITH

OK, so Keynes was an easy topic. You take from the rich (who are few) and give to the poor (which are many), and you are popular for a few years. Of course, as Ayn Rand alluded to in “Atlas Shrugged”, eventually the rich leave the taxing area, and then no one has money. But by then, the ones that started the problem are dead, and someone else has to try to fix it.

Smith is more complex (but it works).

If there is a need, then human greed will create it, so it can be sold for a profit.

If you are making a profit, someone will try to get ‘in on it’ by producing it and selling it cheaper; ergo prices are controlled.

If there is competition, quality will become an issue, so employers will offer slightly higher wages for talented people, Wages are controlled.

As prices and wages are controlled, efficiency increases to enhance profits. Innovation is encouraged.

As innovation increases, efficiency goes up, allowing competition to reduce prices slightly, and increase wages slightly, to increase profits. The “Market” is working.


Now enter Government. They see a need to regulate and tax, which increases costs, thereby increasing prices, resulting in lowering demand, that forces producers to lower prices by reducing costs to get sales. This means no more research for innovation, and reduced wages to produce the product in an affordable manner.

Reduced wages, is a part of a reduced work force. Since these people are now out of work, the government again steps in to ‘help’ them, by giving benefits, with money they don’t have. To get the money, they increase taxes, which increases costs to producers, etc, etc, etc.

Smith had a simple idea.

Economics is a natural evolution of human nature. Leave it alone, and it will work.

Intervene and it will fail.

Next I will mention some of the ‘Interventions’ the government has had in the past. The list is long and bloody.

OK - Keynes isnt quite a moron - just short sighted.

So I was a little harsh when I said Keynes was a moron.

To be fair, Keynes saw a problem and came up with an immediate solution. Unfortunately, it was only that – immediate.

Keynesian theory, which is basically to redistribute wealth thru government taxing and spending, has never once worked in the long run.

Ever.

Five years, maybe ten, things get alittle better. Sometimes, it is fairly good for 100 years or so. Then either communism takes hold or the whole house of cards falls. Either way, everyone is miserable.

What typically happens, is the government continues to tax more, to fund more social programs, and soon, individual income is non-existent. At this point the economy collapses, and the believers in Keynes say THEY must have strayed from the plan. Maybe (they think) they didn’t spend enough, or tax enough. Perhaps the programs they choose were wrong, or somehow became abused. Maybe there was someone committing fraud.

That is what Congress has been doing the last 70 years or so, and is still doing today, in 2009. Today, we are on the full path of destruction – create money that doesn’t exist and spend it.

It will help things, maybe, for a few years, if we don’t fall apart completely in the meantime.

The worst part is, once this path is chosen (which we have), to correct it we must return to Smiths free market. The pain is deep for 5 to 20 years. After that it gets better, and stays better. As long as no one messes with it.


More on Smith next.

ECONOMICS FOR DUMMIES

Not saying anyone reading this is a ‘dummy’. Just that I am going to try to keep this simple.

In my opinion, and many students of economics would agree, there have historically been two major economic minds; John Keynes, and Adam Smith.

First Keynes. Easy to explain, and to be honest, I think he was a moron.

There are 10 people in the world, and they all want a car.

One guy makes cars, and owns 10 cars. No one else can afford to buy a car. So a committee is formed, they confiscate 9 of his cars, and give one to everyone. Now all are happy, except one single person, but face it, he can only drive one car at a time anyway. As a bonus, you have a 90% ‘Happiness’ factor in the world. Darned successful results.

Now apply that same logic to everything, including money, TV’s etc.

That is an overly simplified explanation, but pretty accurate.

Smiths’ thought was the opposite, and it is many times referred to as “Invisible Hand”, free market economics.

In a nutshell (though he would hate this comment) the whole thing is based on greed.

Greed is a MAJOR motivator, and is not always a negative thing. Self-preservation IS a slight amount of selfishness. Wanting to be efficient and prudent in planning for the future, is a low degree of greed.

A society cannot exist, if there is an absolute void of selfishness, and greed. We would simply give everything we have to each other, while never consuming ANY of it. Then while it traveled in a circle, we would all starve to death.

If there had not been enough greed and selfishness for example, Henry Ford would have never went into the car business.

He wanted an easier way to travel, and saw a potential to make, and then sell them for a profit. Notice, that is only a potential. He had some money, borrowed some money from family etc, and gambled it all on what everyone said was an insane idea (“Horseless carriage indeed – it will NEVER last!”).

But it did last, he did win the gamble, and make a profit.

Humans being what they are, others saw his success, and jumped on the bandwagon due to their own greed, and he had competition. Each of them, tried to sell as many cars as they could, by selling for less than the others. The publics’ greed, then bought what was believed to be the least expensive (balance of price, efficiency, dependability, and product life).

So Corporate greed gave two things to the public; cheap cars, and a place to work.

Apply that to all the goods and services in the world, and you have it. That is how Capitalism is supposed to work.

The problem we have now, is that public greed, overran the ‘gamblers’ greed, and the corporations are not making profits.

I’ll get into it more later, but simplistically, mob mentality applied Keynesian theory, in a Smith styled economy.

Look at it this way. Ten people in the world, two of them have 10 cars each. One wagers all the cars, in a coin toss. One wins and has all 20 cars. The committee gets formed, and they give 2 cars to everyone. Happiness is at 85%, since one guy went from 10 cars to 2, but hey – he had lost all he had in the coin toss!