The Rise of a New Economic Model

Established 4/14/2012.     Version 2.17 (05/8/2015)

UPDATE:

In spite of a long absence, I’ve been busy digging deeper into the various critiques of the Quantity Theory of Money (QTM), in particular Monetary Circuit Theory. Core elements of Circuit Theory have only strengthened my confidence in my new economic model of protectionism. After 6 years of fine tuning the economic model, it is time to take the argument to Washington. Because Governor Huckabee’s recent Maximum Wage video campaign struck me as the perfect starting point for such a discussion, I’ve added a new tab (Huckabee versus Hume) to the site today (5/8/2015). The essay found under this tab is an attempt to summarize the model as simply as possible, and argue that its logic represents the only path to Maximum National Prosperity. It is an ideal starting point for the reader new to my writings.

Also new in this post is a germ of an idea regarding inflation. I had intentionally avoided tackling inflation, since it struck me as noise in the system, not the signal itself. My goal was to first establish a sound foundation model (i.e the signal), before trying to analysis the noise in the system (i.e.inflation). The entire history of economic thought has always struck me as models built on theories regarding the noise in the system, ultimately leading into a logical cul-de-sac. This simple model of course assumes the government does not resort to the printing press to pay its own bills, because in spite of what you have heard most governments don’t print to pay their own bills. Instead they tax or just go deeper into depth. Keep in mind, that the creation of credit of out of thin air is not the equivalent of a printing press (the loan is eventually paid off). Instead, credit creation is nothing more than a form of national book keeping (IOUs). As a result, the following model of inflation does not rely on traditional QTM.

In short, building on the notion of Circuit Theory, I propose that “base” inflation results from bankruptcy. Normally, industrial loans created out of thin air are extinguished by the final sales of finished goods (see Huckabee vs Hume tab for basic model). But if under competitive pressure, a company goes bankrupt, the industrial loan can no longer be extinguished. A similar argument could be made for real-estate defaults. Unlike “healthy” bank deposits which all have their origins in wages, the deposits resulting from defaults will never be removed from the economy. This is similar to digging gold out of the ground in the Wild Wild West days–there was no associated production of an industrial good associated with its introduction into the economy. Thus, when these “orphaned” deposits are spent they are effectively inflationary (more dollars than goods or service produced).

In the spirit of a fresh new start, I’ve removed nearly all of the original home page, and will refer the reader to some of my recent blogs for more in depth analysis: http://www.economicpopulist.org/content/myth-middle-class-economics-5665.

To keep abreast of recent trade news and opinion, I recommended the following sites:

Tradereform.org
Americaneconomicalert.org
Manufacturingnews.com
Economyincrisis.org

My Amazon Kindle book: Just Measures by Van Geldstone

And finally one big thank you to my one follower! :)

INTRODUCTION

The Riddle:  Adam Smith, the father of economics, in 1776 left us a riddle that, in my opinion, has yet to be completely 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).