By Hema Senanayake –

Hema Senanayake

Global Economic Revolution Is Overdue; Part 9

We have a macroeconomic system that follows boom-and-bust cycles. Let me ask this simple question. Does the development of physical productive power is cyclical? No, it is not. Physical productive power set the limit of human civilization’s ability to produce goods and services for the wellbeing of people. Therefore, if the development of physical productive power behaves in a boom-and-bust cyclical pattern, then we have to tolerate the boom-and-bust cycles of total output and the system as a whole.

But if the progress of the physical productive power or even the potential of the increment of physical productive power is progressive and does not follow “boom-and-bust cyclical pattern”, it is not necessary to tolerate the cyclical behavior of the total output of the economic system. Since, if we remove the boom-and-bust cyclic behavior subjected to the consumer preference, then the distribution of distributable output which really matters for the wellbeing of each individual of the society is truly a question that can be resolved fairly easily; no revolution is needed to do it. We do not need Professor Stiglitz’s advices to do it. Why?

It is because, capitalism has already learnt as to how to separate the distribution of distributable income (commonly mentioned as redistribution of income) of an economy from the ownership of means of production. What does this mean? This means that the distribution of distributable income is not a matter which controls purely by capitalist owners of businesses in a good democracy. Even under any socialist model which accepts the use of money, it is necessary to do this separation of distributable income from the ownership of enterprises even though enterprises could be owned by the workers or by the unions or workers or by the government.

However, the above does not mean that the business cycles within the microeconomic system under any economic model should not be tolerated; instead, such cyclic behavior is necessary in order to ensure business efficiency. This means that inefficient businesses should be allowed to fail and new businesses should be allowed to emerge based on business efficiency justified by the choice of the consumer. But periodic macroeconomic system failures occur not due to any of above two reasons but due to the general illiquidity of consumers arising from cyclical bad-debt crises. This is where we need advices from Stiglitz or from any other mainstream economist.

The general illiquidity of consumers is not a physical phenomenon. Also, the general illiquidity of consumers does not arising purely from the choices of individual consumers in borrowing amounts that they cannot be paid back or risk taking lenders. Instead the illiquidity of consumers arises from the economic system’s inability to ensure that consumers would get enough debt-free money in order to buy what they have collectively produced as producers. Let me explain this point differently.

The demand-and-supply equilibrium is an important thing in the economy. This is not difficult to understand. For example let us assume that a producer produces a certain consumable product. He expects that consumers will buy what he offered to the market. If consumers did not buy, the producer cuts back his volume of production, which leads to an economic recession because reduction of output is defined as a recession.

However, the demand-and-supply equilibrium takes place in three different output levels. First, the said equilibrium takes place at increasing output levels year after year. When that happens we identify it as a growing economy. Second, when the equilibrium takes place at decreasing output levels quarter after quarter then we identify it as a recessionary economy. Thirdly, the equilibrium takes place at constant output levels year after year, and then we name such an economy as a stagnant economy. However, the said equilibrium in all three situations takes place with the creation of non-repayable component of debt in the economic system. This is a systemic problem inbuilt with any economic model which accepts market exchange of goods and services and the use of money.

Debt is a monetary thing or phenomenon and hence the component of non-repayable debt accumulates in the economic system must be a monetary phenomenon. That is why this particular problem can be temporarily resolved by increasing public debt or consumer debt or by increasing debt in stock & derivatives market. What is the practical effect of this? The effect is that the debt bubble should crash and as a result economies would crash. At present the growth of global debt has surpassed the real growth of economic output. According to a certain study the global debt which includes household debt, government debt, corporate debt and financial debt, now rose to 286% of Gross World Product.

When the income increases what do you expect? Do you expect to reduce debt levels or to increase the amount of debt? The nature of the macroeconomic system is that it does not go in line with your honest answer or expectation. Yet the present macroeconomic system is our own design. Hence we can change it. But one thing is sure.

That is that if we hang on to the debate that the present economic problems are arising from the widening gap of the rich and the poor or the problems are arising from the expanded government or social welfare or any other sundry problem, then we will ignore that there is a systemic problem in the economy that needs to be resolved. This is the most important thing, rest of the reforms I discussed in the series of articles are just details. Yet, let me list a few most important reforms that we should envisage to.

Already I have proposed a few reforms and in our new model we would have following elements:

1. Reject the existing notion in economics that human needs (including wants) are unlimited. This relates to the creation of abundance. We can remove economic risk of the members of society only by producing of goods and services in abundance.

2. Remove the systemic push for extreme consumerism. We will remove the unemployment trap to achieve this.

3. Increase the efficiency of the economy. We will reduce the regrettable component of GDP to achieve this.

4. We will achieve full employment so as to facilitate above 2 & 3. In regard to this matter, certain policies adopted by Austria subsequent to the Great Financial Crash of 2008 and subsequent studies done by ILO could be used to develop a better model.

5. We will deflate systemic debt (not individual debt) time to time. In this regard, we will use the principle of wage increase bound moderate inflation.

6. In order to facilitate the deflation of debt the pension planning must be based on a principle which would make automatic adjustments to inflation and for the increase of productivity. Hence it cannot be based on the principle that you must save for your pension.

6. In our new economic model we are going to accept the credit-based money creation system or in other words we are going to use Fractional Reserve Banking System. Sovereign money creation system with Full Reserve Banking System is negotiable and will be further studied.

7. We will accept the notion that even land is not scares and new land use policy and regulations would be adopted in order to remove the scarcity in land for economic activity. By doing that we would ensure that most of the cost of doing business/economic activity would not be pay for land-lords.

8. Human civilization can create abundance in goods and services for the wellbeing of its all members. The market mechanism is the conduit through which we can reach that goal. Upon reaching there, it requires unprecedented adjustments for the market mechanism because it is common sense that with having abundance in goods and services the normal market mechanism cannot prevail.

As I mentioned above the distribution of distributable output is not a bigger issue and hence that question is omitted in this discussion but a number of simple reforms would be required.