Welcome

Established 4/14/2012.     Version 2.16 (03/7/2014)

(Work in progress until we get it right and save America in the process)

INTRODUCTION

The Riddle:  Adam Smith, the father of economics, in 1776 left us a riddle that, in my opinion, has yet to be solved.  In what form was this riddle?  It was Smith’s reference to an Invisible Hand (self interest) which in his opinion was the force which guides a capitalist free market towards prosperity and stability.  But is this really true?  Unfortunately, I will argue that this beautiful reference is incomplete as the basis for an economic principle.  One only need consider that an economy in recession does not suffer from a sudden lack of self interest.  In fact, it is self interest (excessive saving) which lies behind a speculative-bust driven recession.  The root of this analytical error lies in Smith’s failure to “see” the  primary role of a domestic labor unit in establishing the value of domestic money in a closed economy (no free trade).  This notion of the domestic labor unit interlocked to domestic money is not recognized in any economic textbook that I am aware of.  It is the same mistake all schools of economics make to this very day. In fact, open any introductory textbook of economics and it will probably escape the reader that monetary theory (money) is not even addressed. Instead, the models are built on “real” economics, a form of barter. Money in economics is an afterthought.

Money as an afterthought is essentially the so called Quantity Theory of Money (QTM). In short, it is the belief that the quantity of money determines the price level, and not vice versa. This is the key mistake of 200 years of flawed economic theory. It is this notion of money that makes free trade theory possible. The economists of the 1700 and 1800s, James Steuart and Thomas Tooke, who argued against the logic of QTM have all but been forgotten. In spite of their best efforts, Steuart and Tooke’s logic was incomplete. Neither considered the full implications of a fully closed society and its impact on tracking productivity gains. (added ver 2.16 3/7/2014).

Evidence that this riddle has not been solved is evident in many forms, not the least of which is the countless waring schools of economics which persist today.  Consider that Karl Marx said the fastest way to destroy capitalism is with free trade.  Daniel Webster in contrast observed that the main reason America has its Constitution is to stop free trade.  Lincoln and his party followed in these protectionist footsteps until the 1960s.  Oddly, China has adopted Lincoln’s logic and America has adopted Marx’s.  The results are what both men would have predicted, a boom for China and a bust for America.  It is clearly time to solve this riddle, before it destroys us.  Lincolnomics (protectionism), I propose, is the big fix.  (added ver 2.0, 9/1/2012).

Objective: Expose the fundamental errors of mainstream and historical micro, macro, and international (free trade) economic theory. Provide in its place, the theoretical pieces needed to justify a restoration of American protectionism in the form of the freshly dubbed New American System of economic theory. This effort is based on the 2013 Christian-orientated book The Leviticus Soultion by author Van Geldstone. The book is written with the layman in mind, while this website assumes a background in economic theory. (edited 2.6 3/13/2013)

For the layman wanting to tackle this website, here is a one sentence summary of modern economics: 1) microeconomics= supply and demand determine goods prices and wages (barter prices, not nominal), 2) macroeconomics = high wages cause unemployment, 3) international economics = free trade makes the whole world richer (winners gains outweigh losers losses). I contend all three propositions are flawed (ver 2.15 6/21/2013)

Proposition:  There has never been a sound school of economics, only sound industrial policy in the form of the American System/American School of Republican protectionism (from mid 1800s to first half of the 1900s).   It is the abandonment of Republican protectionism in the 1960s and lack of sound economic theory which will lead to America’s economic ruin in the form of free trade.  The mainstream economic models are flawed due to the notion of flexible wages/prices, which in turn are built on their erroneous idea of money as a veil.  What is overlooked here is money’s critical role in providing long-run stability and the key mechanism for macroeconomic growth based on a labor theory of value.

What then is money? Gold is not money; fiat paper is not money, but instead a unit of labor defined by government decree via a minimum wage baseline ultimately creates money in a modern society. This action gives the wage structure its rigidity (foundation). Anything else would amount to price confusion. Relative wages as Keynes noted is the result of a comparison process. This ultimately makes money a national phenomenon. This in principle means a closed industrial economy could simply function on credit. Credit for the creation of industrial goods is non-inflationary (industrial loan extinguished following creation and sale of goods), while credit for items limited in supply, such as real estate are inflationary. (added ver 2.12, 5/29/2013).

The claim that there has never been a sound theory of economics requires further elaboration. The classical school (1700-1800s) was built on a flawed model consisting of a free trade economy composed of subsistence wages and residual profits. The modern neoclassical school (1800s to today) is flawed due to its infinitely flexible prices and wages built on a model of money which is treated as an afterthought in an open economy. This barter-imagined price flexibility can only be true if money’s key role is rejected, as it is by calling it a veil. Heterodox schools, such as the Post Keynesians treat capitalism as inherently falling short of full employment and argue money is the root of instability. I argue precisely the opposite, domestic money is the source of full employment in a closed economy. In addition, the Post Keynesian argument of contracts as the basis of wage stickiness, I also reject. Instead I suggest that the very purpose of money as a fixed unit of labor provides the root cause of stickiness, with contracts merely as a secondary effect. Other heterodox schools, such as the Marxists in their latest approach simply argue everything is too complex to analyze (everything effects everything). In my view, this type of defeatist attitude won’t get you anywhere. Marx did recognize the destructive force of free trade, but failed to asked if a closed economy could resolve the problem of subsistence wages. I suggest capitalism can only function properly (full employment, max prosperity) in a closed economy built on a labor theory of value (need to trace productivity gains) which serves as the basis for a new interpretation of money. In economic jargon, Say’s law (supply creates its own demand) only holds true in a closed economy (add ver 2.13 5/31/2013, modified 2.14 6/8/2013)

Economic theory of the people, and by the people:  America can only be saved by a grass roots movement.  The time has come for “open-source” economic theory to challenge the mainstream system of economics based on the flawed applicaton of supply and demand.  As a result, mainstream and heterodox economists are very welcome here, because we need your help to fine tune the argument.  We need sharp economists of all persuasions to help us correct any unintentional misunderstanding of mainstream/heterodox thought.   The goal here is not to distort or misrepresent the mainstream or historical social science but to fix our economy by offering a new line of theory.  Unfortunately, because economics is the victim of countless disagreements and interpretations, something as seemingly straightforward as distilling the various nuances of the economic debate is no task for a single individual.  Of course, we are hoping the arguments here are convincing enough to cause the academically-trained economist to abandon his or her present school of tought and become part of what Geldstone suggests be dubbed the New American System of economics.  If you find the logic sound or at least worthy of debate, please contribute your ideas under the Blog tab and bring this site to the attention of your favorite economic or business sites.

THE FUNDAMENTAL ERROR OF ALL ECONOMIC SCHOOLS OF THOUGHT

Geldstone’s proposition:  The definition of money is incomplete as it stands: 1) Medium of exchange, 2) Unit of account, and 3) Store of Value.  These three definitions overlook its most critical role: the establishment of a domestic wage baseline (labor unit) as the basis for a true cost-of-production model in a closed economy.   Note the casual sequence that is missing in these definitions of money.  In order to have acquired it for exchange a wage must have been paid first.  In order to store it, again a wage must have been paid first.   And as a unit of account, it is treated as a result, instead of a cause.  Money is not a veil; money is a signaling mechanism used by superior industrial domestic competitors to reveal labor cost reductions due to productivity gains and therewith allow industry sector size adjustments (worker mobility) to accommodate increasing sector diversity. Modern fiat money receives it domestic value through decree (i.e. tied to a minumum wage unit). The wage structure that emerges is thus “rigid” and unique to a nation due to a variety of factors to be discussed later.

The implication of productivity gains means reduced labor content in a good. A productivity gain to the chargrin of modern economists of the general equilibrium (GE) school means necessary disequilibrium (unemployment). Money serves three critical purposes here. First, money’s role in wage rigidity introduces a temporary and necessary instability to the flawed and beloved modern theory of wage and price flexibility (i.e. supply and demand pricing). As a revolutionary proposition, Geldstone suggests that the holy grail of stability and clearing markets that GE models pursue is precisely what makes them flawed. It is what allows them to treat money as veil (money sprinkled on a model of barter in the form of the Quantity Theory of Money). Geldstone instead introduces money as the foundation of economics(i.e. minimum wage baseline by national decree). Wage rigidity then serves a very critical role by introducing absolutely necessary instability (job loss) resulting from productivity gains as an economy grows. This is the complete inverse of mainstream models. In addition, Geldstone suggests wage structures have an inheret domestic component based on Keynes’ argument that workers are only concerned with a relative comparison process (i.e. an American carpenter compares his wage to another American carpenter, not a foreign carpenter) Thus productivity gains can only be measured between domestic competitors, not international ones as a result. (added, ver 2.6, 3/10/2013)

The second role of domestic money lies in worker mobility. The workers who have lost their jobs will move to new sectors because the cost saving is passed on to the consumer who is now flush with cash. The consumer will spend the savings in these new sectors which will hire the newly unemployed. Worker mobility is ultimately the macroeconomic aspect of the labor theory of value (cost of production). Since money’s value is defined by the domestic wage unit, it provides the means to ensure worker mobility due to competition and productivity growth. This is the critical mistake of the classical school; it improperly treated the labor theory of value as a microeconomic variable (price theory). (added ver 2.8 4/7/2013)

Thirdly, increasing sector diversity, at full employment, is a reflection of increasing national wealth; measures of GDP are not a measure of wealth because wealth is immeasurable. Rigid domestic wages make this progression of increasing sector diversity possible through the worker mobility mechanism. Domestic money is ultimately a social contract which by establishing rigid domestic wage levels solves the problem of fairly redistributing immesurable wealth (national output). It achieves what no Marxist in his rage was able to achieve. As a result, domestic rigid wages allow for fluid employment movement between sectors, because domestic purchasing power is reflected in domestic wage units. Domestic wage-units therefore allow labor from subjectively low wealth content output to be traded for labor of subjectively high wealth content output (labor of cleaning windows exchanged for the labor of constructing an automobile) at the expense of sector size, not wage levels.

Ultimately then, factories ARE the economy! The revolution of productivity they represent in goods production relies on rigid wage structures to distribute the weatlh in the form of national output. Should you remove the industrical base, you remove the core mechanism of the economy. Game over. (added, ver 2.8, 4/7/2013).

A fourth dynamic, not fully addressed in the second edition, is illustrated by taking Ricardo’s logic to the extreme. I believe the example goes to the heart of the failure of micro and macroeconomics. Our goal here is an attempt at showing the logical flaw of free trade theory by taking the model to the extreme.

Assume a country’s goal is to acquire all our factories and in exchange sends us for FREE 1/2 of the industrial goods we presently produce for a given time period. Assume it amounts to half of our economy. Notice the implication. Under Ricardo, the cost savings would imply that the remaining half of the domestic economy would double in size. But in our case there would be no exports needed, instead American consumers would buy double the quantities from the domestic sectors that remain since they are flush with cash. They can only spend it on domestic goods, since imports are free. Unemployed workers move into these remaining sectors to follow the money so to speak. But notice the problem with this logic as you expand the imports to cover more and more of the domestic economy. If imports account for 99% of the domestic market so to speak, then all domestic workers end up in two sectors so that they spend all that they earn. Again there are no exports needed to balance trade, since imports are free. The domestic workers can only buy from each other in the two sectors. The entire domestic economy, measured by GDP consists of two monster-size sectors now. Clearly something is wrong with this model. In a closed economy, the trend is precisely the opposite, more and more sectors (with less and less workers in each sector) emerge as productivity gains grow the economy.

What flaw then does this example expose? There must be a subtle link between a domestic labor theory of value, demand, and sector size which has yet to be recognized. In our example, long before we reach only two remaining sectors demand would have been satisfied, resulting in massive unemployment. In a closed economy, Geldstone suggests unemployment could not happen due to such sector distortions. We argue this is due to the error in the notion of scarcity at the heart of modern economics. Let’s take our model further to see this. Assume all goods are free and unlimited in supply. Demand would be ultimately limited. There is only so much we can consume in a year. As a result, demand would be allocated across a diversity of goods. The same limiting demand behavior applies to goods priced on domestic labor content. Since domestic demand is a direct result of domestic labor content, sector sizes match the desire for diverse goods. Imports on the other hand do not reflect the match between domestic demand and domestic sector size. With product price based on domestic labor content (money’s correct new role), diverse domestic demand matches diverse sector supply sizes. A closed economy is sound. Ricardo’s failure then is to have overlooked the limitations of demand diversity that constitute the heart of macroeconomics. (added, ver 2.11, 5/24/2013)

In summary, the 200 year error of economic thought is the failure to recognize the labor theory of value as macroeconomic mechanism (work mobility) instead of a microeconomic one (price theory). In other words, the price of goods must be based on labor content so that productivity gains can allow an economy to grow and adjust properly. The contention amounts to the claim that a labor theory of value only holds true in a closed economy, because imported goods disrupt this critical mechanism of tracking domestic labor content. (added, ver 2.7, 4/2/2013)

Pulling it all together then, with a new definition of money, rigid domestic wage structures are an absolute necessity. Rigid wages by providing the growth/productivity/mobility mechanism provides the logic and necessity of an economy built on a domestic labor theory of value (i.e. cost of production). Rigid wages are required to introduced a NECESSARY disequilibrium into the economy (goodbye Walras) in order to track a productivity gain (unemployment due to less labor per good). This is a short term instability, because the consumer will spend the savings elsewhere creating a new demand for the unemployed worker. As a result, I contend free trade models which are ultimately built on barter (instantly flexible and infinitely flexible) and whose imports do not reflect a domestic wage destroys this critical mechanism. Money is an afterthought in the barter based GE models and are constructed with incorrect causality. A money-based economy is not a barter based economy (good bye Walras). Money is not an afterthought, it serves a critical macro role which has for 200 years been overlooked. (added ver 2.9 4/9/2013)

Mainstream position:  Neoclassical economics considers rigid wages an economic distortion, leading to unemployment. In other words, high wages cause unemployment. New Keynesians apply a level of “stickiness” to wages, but do not consider this the ideal.  In contrast, Geldstone argues money’s role is to introduce stickiness as an absolute necessity for the proper functioning of an industrial economy.

Historical position: The marginalist school laid the framework for the present-day neoclassical school of flexible wages and prices (supply-and-demand wage/pricing);  classical school relied on erroneous subsistence wage theory for its analysis.

Implications:  According to Geldstone modern economics based on supply and demand wage/price flexibility is fundamentally flawed, and the error in subsistence wages was the economic distortion introduced by mercantilism (export intensive society) which allowed subsistence labor to persist in 1800s England (discussed further below).  The notion of supply-and-demand pricing or subsistence wages allows money to become a viel; the error of economics.

Possible forerunners of this proposition:  None identified yet.

Reader critiques, correction, and clarification:  Under construction.

MONEY’S MECHANISM TO ESTABLISH WAGE RIGIDITY

Geldstone’s proposition:  Commodity money (i.e. gold) established wage rigidity through domestic labor constraints in an ounce of gold.  Fiat money establishes rigidity through a national minimum wage (establishes an arbitrary base line).  Minimum wages are a necessity, not a cause of unemployment.  Domestic wages are rigid in the sense that the base line is a point of gravitation from which other wages levels are established.  This remains a national phenomenon, not an international one.

Mainstream position:  Rejects the notion of wage rigidity, since the labor market is argued to be based on supply and demand.   In other words, there is no baseline.    Geldstone argues the rigid baseline is absolutely necessary.

Historical position:  Flawed foundation of subsistence wages (discussed below) in the form of shanty-town wages (i.e. Adam Smith, David Ricardo, Karl Marx).  Wages under the classical school is fixed at the level needed to barely sustain the worker and his family.  The purchasing power of money does not set this level, instead it is set by  an employer empowered by the ability to exports his goods (mercantilism). The causality in the classical school is reversed from a properly functioning economy as a result (profit is the residual, instead of the worker’s buying power in the classical school).  The marginalist school (forerunner to mainstream neoclassical school) treats wages as imputed via an established barter price of the final good. In other words, the price of a product set by supply and demand (not cost of production) will eventually determine the associated (imputed) wage.  This is the consequence of barter at the heart of mainstream economics.  Barter price establishment does not result from  a wage cost.

Implications:  Geldstone rejects the mainstream labor market model of leisure and work tradeoff (utility)/(disutility).  Instead, he inverts the model and suggests a starvation (disutility)/work (utility) framework.   His model rejects the mainstream model and brings it in line with reality:  More labor is required at lower wages (i.e. two jobs at minimum wage), not the mainstream inversion of reality which suggests labor drops out of the workforce as real wages drop.   This pulls the rug out from under a labor market model at the heart of neoclassical economics.  

Possible forerunners of this proposition:  Unknown at this point.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AS A NECESSARILY NATIONAL PHENOMENON

Geldstone’s proposition:   Builds on Keynes’ absolutely critical observation that wage establishment is a relative comparison process.  Geldstone suggests Keynes fumbled on the one yard line and did not take this observation far enough.  This process can only take place in a domestic economy.  An American carpenter bases his wages on the going rate of American carpenters, not on hundreds of different foreign carpenter wages.   Domestic industry sector size adjustment depends on this relative domestic wage process to maintain full employment, and more importantly, signal who the superior competitor is based on labor content of a manufactured good. The rigidity prevents an inferior competitor from lowering his wages to gain a competitive advantage.  This wage comparison process is built up from the baseline of minimum wage reference point.

Mainstream position:   Wages are an international phenomenon.  Wages are adaptable to any foreign competitive pressure and are infinitely flexible.

Historical position:  Wages ebb and flow with gold flows into and out of the country, making the wage level an international process.

Implications:   Geldstone argues if the domestic comparative wage process is undermined (i.e. free trade, inflation, gold-flow, etc), economic chaos will ensue (see below).

Possible forerunners of this proposition:  Keynes makes initial observation of relative wages.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES VERSES REAL WAGES (added,  ver 1.6, 6/11/2012)

Geldstone’s proposition:  Neoclassical’s theory requires that nominal wages adjust to the national price level of goods in order to ensure full employment.  This ratio of nominal wages to product price levels is referred to as the real wage level.  This construct implies a disconnect between the cost of production and wages.   Geldstone therefore rejects this notion of real wages, because it presents the worker with an adjustment mechanism beyond his grasp.  In short, how is a worker to determine if his real wage is too high or low?  This would imply the worker would have to be able to determine the quantity of labor in all products produced in a nation.   Instead, Geldstone suggests we should combine  Keynes’ relative wage comparison process with a  true cost of production model (wages determine the price of a product–rejecting neoclassical price theory).  The real wage concept simply collapses into the price of the product.  There is no longer a disconnect between the wage and price level.  The worker no longer needs superpowers to determine the real wage; he simply needs to compare his salary to others in his field. Workers can grasp a minimum wage. For Geldstone’s argument to be complete, it requires a theory of unemployment other than wages being to high (see below).

Mainstream position:   Supply and demand sets the wage level in the labor market, while supply and demand in the goods market sets product prices.

Historical position:   Labor theory of value, but with an incorrect basis of subsistence wages and profits as not a markup, but a residual (revenue over cost).   The real wage was just what it took to keep the worker living in shanty town.

Implications:   The mainstream theory of unemployment is incorrect, and wage adjustment mechanisms lack any basis in reality.   Real wage theory amounts to a model which is not a true cost of production.

Possible forerunners of this proposition:  None identified yet.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND QUANTITY THEORIES OF MONEY (added ver 2.2, 10/3/2012, revised 2.5 11/17/2012)

Geldstone’s proposition:  Fisher’s exchange equation and the Cambridge equation of price levels suffer from the same fundamental error: money is a veil.  The notion of the veil amounts to the idea that output’s price is a function of the money supply (Fisher) or money demand (Cambridge). In either case, money does not set up the wage baseline, but instead the quantity of money is independent of the quantity of goods. Fisher’s equation focuses on exhange, while Cambridge builds on the idea on holding cash. Geldstone suggests that neither equation recognizes the key driving factor in determining the money supply: establishing a wage baseline (by decree) combinded w the rate of production. In other words, quantity of money is not independent of the quantity of goods, since money’s key role it to define the wage needed to produce the good. Imagine a factory which produces one widget a week with a $100 wage cost.  Imagine a bank which creates the credit to pay the weekly wage at the start of the week, and then extinquishes the loan in at the end of the week after the widget is sold.   The money supply amounts to $100 annually, with a total output per year at 52x$100.  The amount of times the $100 is turned over in the year, velocity (52)  as Fisher would call it, is determined by the rate of production.  Note what happens if the widget takes 4 weeks to make.  The bank must lend out 4 weeks of wages.  The money supply is now $400, resulting from a production rate (velocity) of 12.   This is not a consumer driven phenonomen as taught in textbooks.  Instead, money by definition defines a weekly wage, production defines a velocity, which in turn determines the money supply.    Distortions to this process will be addressed else where.

Mainstream position:  The quantity of money determines the price level.

Implications:  Production rates  result in a demand for money independent of interest rates. (edited 2.6, 3/10/2013)

Possible forerunners:  None identified yet.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND NON-INDUSTRIAL GOODS (added ver 1.7, 6/15/2012)

Geldstone’s proposition:  An increase in the quantity of money not applied to industrial goods increases the price level as traditionally taught, but it also reduces total output.  To see how this might happen, Geldstone makes the distinction between the purchase of an industrial good verses an asset such as real estate.  Purchases of industrial goods generally speaking amount to an exchange of wage units.  Purchases of real estate in this example does not.  Assume worker #1 purchases a piece of land in the first year for $1K and then sells it in the second year for $100K to worker #2.   To simplify the discussion, assume worker #1 takes the $100K and stops working for the year to spend his $100K.  Worker #2 to pay of his land purchase is redirecting his income to worker #1.  In effect, worker #2 is simply handing #1 a significant portion of  his income.  Total output is now reduced because worker #1 is able to go about purchasing goods for a year so to speak without producing for a year.

Mainstream proposition:  An increase in the quantity of money only impacts the price level, but does not change the total output.

Implications:  The traditonal quantity theory of money is flawed.

Possible forerunners of this proposition:  None identified yet.

Reader critiques, correction, and clarification:  Under construction.

WEALTH DISTRIBUTION UNDER RIGID WAGES

Geldstone’s proposition:  Wealth is impossible to measure (see Ricardo).   Wealth can only therefore be fairly distributed based on domestic wages units.   Profit is a markup and therefore a “given” under competitive pressures.  Profit is not the result of supply and demand mechanics.  Wages, in terms of share of national wealth, is a residual. For example, a national average profit of say 7% is required to ensure wages can be payed, amounting to a wage residual of 93% of domestic output.

Mainstream position:   Wealth is distributed based on a factor’s contribution to final output and supply and demand pressures.  Profit in neoclassical economics remains a residual (revenue over cost).  The original neoclassical model by Walras did not have room for theory of profit.  Profit considered a distortion. Profit added on as an afterthought.  Perfect competition lives on vanishing profits.

Historical position:  Subsistence wages were a given, and profit a residual.   Geldstone’s position suggests the classical school, like the modern school had it backwards (see Smith below).

Implications:   Only a closed economy based on the cost of labor can properly distribute national output (immeasurable wealth) fairly, because free trade undermines rigid domestic wages units on which wealth distribution and healthy sector sizes hinge.

Possible forerunners of this proposition:  Post-Keynesians on profit as a mark up.  Ricardo on immeasurable wealth.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND UNEMPLOYMENT

Geldstone’s proposition:  Flexible prices of supply limited goods (e.g.  real estate) at the heart of economic speculative busts. Wealth loss of the consumer results in consumption reduction in an attempt to restore lost wealth.  Because there is no disconnect between prices and wages in a cost of production economy, wage adjustment will have no impact on employment levels as a result.  Instead, unemployment has its roots in the process of industry sector size reduction due to historical productivity gains.  Industrial sectors met all demand prior to an economic bust and therefore industrial sectors cannot absorb the unemployed resulting from consumption reduction.  In short, the industrial revolution creates an industry size “stickiness”, not a wage stickiness.   Stimulus will not work, because the recession is the result of millions of unique buying patterns pulling back.  Each consumer has a subjective luxury from which he abstains.  Paving a road won’t resolve this issue.  The only solution is to restore lost consumer wealth as quickly as possible (tax cuts) or restore confidence (stop free trade).  If the individual wealth loss is too great, tax cuts will probably be ineffectual in the short run (several years needed to restore lost wealth/savings). Immediate work-around, restore the industrial base with tariffs and therewith consumer confidence.

Mainstream position:  Mainstream theory suggests wages are sticky and it takes time for the adjustment process to full employment to take place.  Again, the logic behind this assumption is that wages are out of synch with product prices.  Keynesian position suggests factory investment levels are out of sync with the consumption behavior (excessive saving) of the consumer.   Geldstone rejects both positions (Keynes had it backwards, investment does not lead consumption).

Historical position:  Supply creates its own demand in the long run (Say’s Law).  No long run unemployment possible.  This is only possible if subsistence wages resulted in no consumption reduction, since all goods are necessities.

Implications:  Wages adjustments, nor stimulus, which is generally very focused on a few sectors, cannot solve unemployment problems which are based in the historical path of  a near infinite array of industry sector production gains. Tax cuts may be too small to be effective. Say’s Law is only true in a closed economy, and does not hold in a speculative bust.

Possible forerunners of this proposition:  None identified yet.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND SAVINGS (added ver 2.10, 4/11/2013)

Geldstone’s proposition: The second edition of the book adds a simple model of an economy which does not rely on interest rates or savings. In short, a computer creates industrial loans out of thin air, with the loans extinquished each week when a production/sales cycle completes. In other words, this is a model which does not require savings in a tangible form. This at its heart reflects the new role of money as a simple token which acquires its value by a link to a domestic unit of labor. It also reflects the assumption that net savings are zero in a healthy non-recessionary economy. In other words, decreases and increases in saving over the long run average out to zero. Savings therefore are largely ignored, except for speculative-bust driven recessions where excessive wealth loss results in a non-zero net saving behavior (i.e consumer stop spending to restore lost wealth).

Mainstream position: Investment must offset non-zero net savings to avoid unemployment.

Historical position: Savings will always equal the value of investment. No unemployment possible.

Implications: The strong focus of modern economic theory on investment, savings, and interest rates is a distraction and unnecessary theoretical complicating factor. They should be treated simply as background noise for non-recessionary models (speculative busts).

Possible forerunners of this proposition: None identified yet.

RIGID WAGES, WAGE STRATIFICATION, AND UNEMPLOYMENT

Geldstone’s proposition:  (This corrects an error in the first edition of the book). Imagine four different sectors with wages, $8/hr, $16/hr, 32/hr, and $64/hr. Now imagine the various hourly wages as sums of $8/hr. These sums of $8 output reflect various quantities of goods produced and sold to others in different wage groups.  In other words, one simply can draw circles around various quantities of $8 between different sector employee’s buying power to see that wage stratification does not cause unemployment either.

Mainstream position:  Wages converge through an elaborate supply and demand equilibrium across the entire economy.

Historical position:  Wages converge to a subsistence wage.

Implications: Differing wage levels do not contribute to unemployment in a closed domestic economy. The only contribute to a disparity in the standards of living.

Possible forerunners of this proposition:  Unknown

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND ECONOMIC STAGNATION

Geldstone’s proposition:  Traditional theories of stagnation overlook the key driving force behind economic spending:  the unquenchable desire for a greater diversity of goods.    In other words, industrial cost reductions drive a greater and greater diversity of industries to feed consumer demand for variety.   Since rigid wages allow the consumer to realize cost savings resulting from labor reduction, a greater variety of industries and products can emerge as the industrial revolution moves forward with productivity gains which free up consumer spending.  Stagnation is not possible in a closed economy, except following rapid wealth loss following a speculative bust or the radical distortion of an economy by free trade.

Mainstream position:  Full employment always achievable with flexible wages.

Historical position:  Classical position feared either profit reduction due to increasing food costs (Ricardo) or the automation of the factory (Marx).   Keynesians believed increased wealth would result in decreased spending behavior (the consumption function) resulting in stagnation if investment increases did not compensate for the lost consumer spending.

Implications:  No school properly takes into account the necessary foundation of rigid wages to allow industry sector size adjustments to properly respond to cost savings, and therefore create a greater and greater diversity of goods.  This is a path forward for capitalism, not the dead end predicted by most schools of economics.  A society’s wealth is not reflected in its output, but in the diversity of its industries, because only cost reductions can allow an expansion of sector diversity.

Possible forerunners of this proposition:  Unknown

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND MARGINAL UTILITY  (title modified ver 1.5 5/27/2012)

Geldstone’s proposition:  Rejects entire notion of marginal utility.  Preaches “Demand is Digital” (all or nothing).   Proposes behavior does not result in decreasing quantities of purchased goods with diminishing resulting utility.  Instead, diversity of goods drives threshold behavior (either-or buying patterns).

Mainstream position:  Buy more and more bananas until they make you sick.

Historical position:  Ricardo’s diminishing farmland is essentially a model of vanishing sectors as more and more workers are needed in farming in the long run.

Implications:  Demand irrelevant in pricing of industrially produced goods. Geldstone rejects demand as a factor in pricing, except in supply limited goods such as real estate.

Possible forerunners of this proposition:  Unknown

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND FOREIGN IMPORTS

Geldstone’s proposition:   Since wealth is immeasurable, then foreign imports which are not based on rigid and measurable domestic wages create a destructive distortion of a domestic economy.   In a closed domestic economy cost reduction reflects labor freed to move to new sectors.  In an open economy low cost imports break the fundamental mechanism to move unemployed workers from one sector or domestic competitor to another.   Geldstone uses an example which uses balanced trade where imports reflect 10% of domestic GDP, but create 90% unemployment because the embedded labor units in the foreign import are not reflected in its price.  In other words, the labor cost between the two countries is 10 to 1. This distortion can persist with balanced trade, implying there are no adjustment mechanism to resolve this dilemma.  Even if the money paid for imports returns in the form of foreign direct investment, it only repairs 10% of the damage done.

Mainstream position:  Free trade models require flexible wages/prices to maintain balanced trade and resulting global wealth gains.

Historical position:  Free trade provides low cost goods for subsistence worker.

Implications:   Geldstone argues Smith-Ricardo-Marx failed to recognize that subsistence wages are only possible in an open export intensive societies (pre-Civil War cotton plantation economics in action).   Assume a country exports 90% of its GDP, with no imports.  The factory owner does well, the worker has lost 90% of his standard of living.  Geldstone argues the mainstream’s requirement for free-trade models built on flexible wages will result in massive trade deficits and economic collapse following the departure of the industrial base.

Possible forerunners of this proposition:  Marx called on free trade as the fastest non-violent means to destroy capitalism.  Daniel Webster claimed the number one reason we have the US Constitution was to stop the economic chaos that had been unleashed by free trade with Britain under the Articles of the Confederation.

Reader critiques, correction, and clarification:  Under construction.

RIGID DOMESTIC WAGES AND EXPORTS

Geldstone’s proposition:  Exports are a potential source of wage distortion and economic harm.   The pre-Civil War South was able to maintain slave-wages due to the ability to maintain sales outside of the nation.  In short, exports allow subsistence wages to persist.  Export 90% of your output, and your workers are 90% poorer so to speak.   This key point was overlooked by the classical school (Smith, Ricardo, and Marx to some degree).

Mainstream position:  Free trade makes the whole world richer, but there are winners and losers.  Winners must compensate losers.

Historical position:  Free trade makes the whole world richer.

Implications:    Not only are imports harmful, so are exports.   Exports distort normal industry sector sizes of a healthy closed economy.

Possible forerunners of this proposition:  Marxist  ****

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND THE EUROZONE  (added ver 1.3 May 4/2012)

Geldstone’s proposition:  Building on Geldstone’s emphasis of money as a national phenomenon needed to accomodate sector size adjustments resulting from productivity gains (employment loss), we apply the model to the Eurozone and consider the possible implications.  Say for argument’s sake the superior manufacturer of metal goods is country A.  The inferior competitors in all Eurozone countries are put out of business.  Unfortunately, in the Eurozone, there are very serious reprocussions which are not present in a closed domestic economy.   Normally in a domestic economy with a common language, the unemployed will find new employment at the superior competitor who now for example has tripled his market share.  This is not readily possible in the Eurozone where unemployed workers in countries B,C, and D cannot migrate to country A sector’s where the sectorsize is assumed to have tripled.   Language barriers prevents this from happening, the key cultural aspect of a domestic economy, reinforces Geldstone’s emphasis of money as a domestic factor, not international one.

Mainstream position:  Uncertain; assume issues of language and importance of money as a domestic factor not introduced.

Historical position:  Uncertain; Assume issues of language and importance of money as a domestic factor not introduced.

Implications:  Extensive high unemployment will result in nations which do not have a superior competitive industrial sector.  The future of the Euro looks bleak.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND AUTOMATION  (added ver 1.3 May 4/2012)

Geldstone’s proposition:  Factory automation in a closed economy increases national wealth.  Long run employment is not the result, because the consumer savings will be spent elsewhere, inside of the closed economy, where the unemployed will be rehired.   Factory automation in an open economy is potentially a source of unemployment in the long run.  An exporter who automates receives his income from outside the country.  Such an exporter does not need to rely on the purchasing power of his nation’s workers.

Mainstream position:  At least one mainstream school blames technological leaps for business cycles (i.e. recessions).

Historical position:   Textile workers destroyed machinery in export intensive England.

Implications:   Free trade undermines the primary workings and gains of the industrial revolution.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES, INTEREST RATES, AND INVESTMENT (added 1.9, 6/29/2012)

Geldstone’s proposition:  Keynesian economics relies heavily on interest rates as a driver of investment levels.  Investment levels in turn are believed to determine the level of employment.  Geldstone fully rejects the importance of interest rate in economic modeling.  Instead, he proposes that investment is simply a function of the state of technology.  Consider a primative society which plants its crops with its hands.  One day, a genius learns how to work metal and develops the hoe.  Assume crop output triples as a result and 1/3 third of the villagers are now free to leave farming and start new industries.   If an interest rate of say 10% was needed to supply capital for the hoe making factory, hoe’s would be a bit more expensive.  The banker lives a little better, while the farmer and customer pay slightly higher prices.   Hoe’s will not cease to be produced due an interest rate.  In short, interest is nothing more than a cost of production and therefore impacts the size of the industry sector, not the level of employment.

Mainstream position:  Different schools of thought place different levels of importance on interest rate mechanics.  The mainstream IS-LM model is built around the idea of interest rates as the key factor in achieving general equilibrium.

Historical position:  Interest rates determine, through supply and demand of money, the level of saving and investment.

Implications:   The foundation of mainstream models have placed all their chips on the importance of interest rates, when in reality is amounts to background noise.   Manipulating interest rates will not fix an economy whose rigid wage structure has been underminded by free trade. China’s boom is not due to interest rates. It is due to protectionism.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES, CLASSICAL ECONOMICS, AND GOLD (added 2.4, 10/13/2012)

Geldstone’s proposition:  The failure of classical economics to deal with money and wages properly is compounded by the failure to recognize gold’s value as only properly determined in a closed economy. It is not too difficult to imagine that the labor required to produce an ounce of gold will be unique to each country (e.g. more hours of digging in a gold-starved nation).  This is not a supply and demand phenomenon (assuming no speculation), but the cost of production of gold as unique to each nation.  Thus gold flows with different labor content between countries is economically destructive because it undermines economic stability as the history of the US under the Articles of Confederation illustrates. It drove the nation out of desperation to draft our modern Constitution in order to provide the legal authority for national tariffs (i.e. stop free trade with Great Britain). According to Daniel Webster stopping free trade is the number reason we have our Constitution.

Mainstream position:  Money is a necessarily a veil in order to maintain a foundation of barter (i.e. supply and demand worship).

Historical position:  Gold under free trade (flowing in and out of a nation) allowed for inflation and deflation, help setting the stage of money as a veil in modern economics. Classical had the function of money backwards.

Implications:    The classical school’s failure to understand the proper role of gold (domestic wage rigidity) sets the stage for the quantity theory of money and the mechanics of ruinous free trade theory.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND ADAM SMITH (FATHER OF FREE MARKETS)

Geldstone’s proposition:  Smith fails to make the critical distinction between free domestic markets and free international markets, because he does not recognize domestic wages as a residual which amounts to a share of national wealth.  Instead, Smith treats profits as the residual. Smith fails therefore to see exports as the true source of subsistence wage pressure.

Mainstream position:  Smith fails to explain wages as a price (i.e. supply and demand).

Historical position: Subsistence wages the norm, but not properly explained. Gives Karl Marx his basis for worker and exploitation and eventually leads to roughly 90 million deaths at the hands of Marxists.

Implications:  Smith’s misguided fix for subsistence wages is free trade (low cost imports for the subsistence worker).  Smith therefore gets the solution completely backwards.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND RICARDO (FATHER OF FREE TRADE THEORY)

Geldstone:  Ricardo paints himself into a corner by jettisoning labor based pricing of goods in domestic markets for supply and demand based pricing in the international market.  Because Ricardo relies on Hume’s gold flow theory to make his model work, he is blind to the notion of rigid wages. His model is based on diminishing returns to farmland (increasing stagnation) and thus is blind to the critical role rigid domestic wages play in a growing economy. He sees free trade as the cure for stagnation as a result.  

Mainstream position:  Ricardo’s theory of comparative advantage (free trade) results in balanced trade and greater global output in his model, not economic reality of chaos as was witnessed under The Articles of Confederation.

Historical position:  Ricardo crowned father of free trade theory.

Implications:  Ricardo overlooks the necessity of rigid wages, and fails to recognize subsistence wages as the result of export intensive society.  He is too focused on a unit of labor instead of the price of labor which provides the signaling mechanism needed to grow an economy.  Free trade is therefore radically flawed and ruinous.  Hume is the anti-thesis of Geldstone.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RICARDO’S MACRO ERROR (add ver 2.4, 10/13/2012)

Geldstone’s proposition:  Though not clearly addressed in the first edition of the book, an attempt is made here to pin down the larger error of Ricardo’s rent model (diminishing returns on farmland w growing populations as a macro economic model).  In short, Ricardo is intellectually trapped by the notion of worker subsistence wages, and therefore draws the incorrect conclusion that profits fall while real wages are maintained in a normal economy when productivity declines.  In a modern industrial economy, this is not the case.  Profits are maintained at a competitive level regardless of the standard of living and state of technology so to speak.  Ricardo gets it completely backwards.  In the case where a lower standard of living arises, this would normally mean both worker and business owner’s standard of living would fall, but the profit rate and wage rate would be maintained.  Only the price of the product would increase due to increased labor requirements.

Mainstream position:  Rejects subsistence wages.  Workers earn what they produce, but built on a flawed notion of labor supply and wages.

Historical position:  Workers live on shanty town wages with inevitable stagnation.

Implications:  Profound.  Ricardo’s labor theory of value is flawed due to an incorrrect understanding of wages, profits, and growth.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction

RIGID WAGES AND KARL MARX (FATHER OF ABOLITION OF PRIVATE PROPERTY & COMMUNISM)

Geldstone’s position:  Karl Marx’s claim that free trade will accelerate capitalism downfall is correct.  Marx, like Smith and Ricardo, fails to consider a closed society as a possible solution to subsistence wages.  Marx, like Smith, incorrectly sees profit as a residual and wages as a given at the subsistence level, but with an odd twist:  Marx erroneously concludes only labor can generate a profit, not machines.   Geldstone notes a fully robotized factory could not turn a profit in Marx’s mixed-up reality.   Marx’s theory of value is thus fundamentally flawed.

Mainstream position:  Neoclassical economics rejects exploitation and claims the worker, like all factors of production, earns what he or it contributes to the marginal output.

Historical position:   The free markets of Smith clash with the revolutionary vision of Marx.

Implication:  Marx’s logic drives him to call for the abolition of private property, because in his rage-covered eyes the factory is the reason for the persistence of subsistence wages.  In other words, it is the factory owner’s profit which results in the lousy wages.  Geldstone suggests 90 million people died at the iron-fist of communism due to a radically flawed theory of subsistence wages and profit adopted by generations of Marxist henchmen.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND THE MARGINALISTS  (WALRAS, MENGER, JEVONS)  (modified ver 1.5 5/27/2012; casuality contrasted)

Geldstone’s proposition:  The foundation of supply and demand of modern economics should be fully rejected.   Since supply and demand economics requires limited quantities of goods, scarcity is a necessity for modern theory.  Barter is a form of exchange which does not require wages, nor production, and therefore meets the requirement for a supply and demand model.  As a result, demand in the mainstream logic plays a role in price determination, instead of solely the cost of production (pricing of Smith).   Rigid domestic wages have no place in these models, because if the barter price of the product is flexible, so then will the imputed wages have to be flexible.  This distortion of reality is so extreme that barter exchange requires the introduction of an invisible auctioneer in the Walrasian model.  More importantly, the very foundation of the supply and demand model has its causality reversed from reality.  Because the basis of Walras’ models was pure exchange, essentially “manna from heaven”,  a random fixed quantity of goods appear out of thin air (no labor required).  The value of these goods is then determined in the market place in the form of auctioneering (supply and demand).  In short, this is no different from real estate price establishment (real estate simply exists without the need for labor).  The quantity of a good is a given (x number of houses in a city), and then prices follows.  This is precisely the reverse of an industrial economy built on rigid wages and cost-of-production pricing.  First the price appears (number of labor hours required to build a cellphone) , then the market demand determines the quantity produced.   The two approaches are not compatible.  One is radically flawed.

Mainstream position:  All modern economic fundamentals rely on the dynamics of supply and demand.

Historical position:  Only the supply side of the equation determined pricing.  Demand was irrelevant in the long run, except in international trade exchange (big red flag).

Implications:  Because models based on barter do not require a national identity based on domestic wages, it clears the path for modern free trade theory.  Since the causality at the heart of these models is flawed, it will amount to economic ruin.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND KEYNES (FATHER OF UNEMPLOYMENT THEORY)

Geldstone’s proposition:  Geldstone rejects Keynes’ model of bonds/interest rate/investment driven economics as the explanation of unemployment. Keynes appears to be suggest that if investment falls, so will aggregate demand, resulting in random unemployment levels. Geldstone suggest’s Keynes’ causality is backwards (investment follows consumption, not vice versa) and interest rates are simply a cost of production.  The kaleidoscope of consumption patterns define a kaleidoscope of investment patters. Consumption leading to investment is a one street. Thus Keynes suggestion of investment driving consumption is flawed, because the pull back of 100 million buying patterns during a recession cannot be managed from the top down. (modified 2.12 5/31/2013). In addition, the state of technology defines the percentage of investment which makes up an economy. Different interest rates simply impact sector size  (i.e. buy a smaller house or car).  Keynes thus incorrectly places the blame on unemployment on insufficient investment, instead of insufficient consumer consumption.  Keynes never fully rejects flexible wages either, but makes an absolutely critical observation regarding wages based on a relative comparison process.  Unfortunately, Keynes never fully considers the domestic implications of this observation and its implication for free trade theory.   Geldstone argues the relative comparison process explains the domestic component and rigidity of wages.   Geldstone also suggests supply and demand based pricing and wages as a solution to unemployment is the reversal of reality, because it is flexible pricing of real estate and stocks which lead to a speculative bust and unemployment in the first place.   Geldstone also concludes Keynes’ free trade equation overlooks the impact of labor units embedded in a foreign good, because it calculates values in dollars.

Mainstream position:  Keynes’ did not overthrow neoclassical wages, but only brought to light the impact of sticky wages.   Wages do not have a domestic component.  International price pressure will act in a supply and demand fashion on domestic wages.

Historical position:  Economy tended towards full employment. Supply created its own demand.

Implications:  Keynes’ theories fell short, but his observation regarding relative wage comparison process serves as the key to building a rigid wage model of economics.   Geldstone considers Keynes’ observation of the relative wage process one of the most important in the history of economic thought.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND KEYNES’ STICKY WAGES  (added ver 1.4/May 5, 2012)

Geldstone’s proposition:  The interpretation of Keynes which suggests wages are sticky downward yet flexible upward is rejected.  Instead, wages are considered to be rigid in both directions as a result of money’s newly defined role (see above).   Since Geldstone fully rejections the split between prices and wages (adheres to a “true” cost of production model), the underlying causality is rejected.

Mainstream position:  Prices simply rise before wages based on the supply and demand for goods.

Historical position:   No room for unemployment theories in the classical school.

Implication:  Keynes should have fully abandoned the notion of real wages which makes up the very school he was criticizing.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.

RIGID WAGES AND SRAFFA

Geldstone’s proposition:   He does not address Sraffa in his book, due to difficulty in various interpretations of Sraffa’s work.  We propose the following interpretation to open it to debate and gladly stand corrected:  Sraffa’s model is the complete reversal of Marx who suggested a fully automated factory could not turn a profit.  We suggest Sraffa’s model concludes a fully automated factory will turn a 100% profit.  If this is the case, then we suggest it illustrates the fundamental flaw in Sraffa’s model.

Mainstream position:  Unclear.  Asking for assistance from Sraffa supporters.

Historical position:  Unclear.

Implications:  If interpretation is correct, Sraffa’s model does not solve our problems.

Possible forerunners of this proposition:  Unknown.

Reader critiques, correction, and clarification:  Under construction.