JOHN MASON - Keynesianism and wealth inequality

Governmental problems built around Keynesian-type models and Keynesian-type thinking creates opportunities for people

Keynesianism and wealth inequality

In my article from earlier this week I made a plea for government’s to stop building economic policies based Keynesian-type models and Keynesian-type thinking.

The reason for this request is based upon my long held view that governmental problems built around Keynesian-type models and Keynesian-type thinking creates opportunities for people…not unlike Mr. Keynes himself…to take advantage of the programs and make lots and lots of money.

Mr. Keynes, himself, referred to these people as “profiteers.”

In this earlier article I wrote:

“To Keynes, profiteers could not be accused of moral blame for their actions, they were just active entrepreneurs whose windfalls were a consequence” of the specific programs and policies that were created by the government.

To follow up on this I would like to quote from the work of W. Brian Arthur who wrote an article titled “All Systems Will Be Gamed,” which appeared in his book of essays titled “Complexity and the Economy,” published by Oxford University Press in 2015.

Mr. Arthur writes:

“There is a general rule in social and economic life: given any system, people will find a way to exploit it. Or, to say this more succinctly: All systems will be gamed….that given any governmental system, any legal system, any regulatory system, election system, set of policies set of organizational rules set of international agreements, people can—and will—find unexpected ways to exploit it to their advantage.”

The “exploitation” can grow and expand in cases where the “system” remains in place and is sustained for extended periods of time.

As I mentioned in my previous article, Keynesian-type fiscal policies came into being in the early 1960s initiated by the administration of President John F. Kennedy and then were applied almost continuously, based on the economic research of William Phillips, creator of “the Phillips Curve” that showed the empirical tradeoff between unemployment rates and inflation.

As this program of credit inflation became the foundation for much of the government’s budget policy, “profiteers” began to take advantage of it and “exploit” it as much as they could. And, they were very successful.

But, didn’t economists, especially the economists that built these programs and helped to execute them have any idea about how “profiteers” could use the outcomes of the policies to make lots and lots of money?

Mr. Arthur concedes that some did, and put out warnings. But, according to Mr. Arthur, “such warnings normally have little effect.”

This is because of the nature of the field of economics.

“The reason is that economics, in the way it is practiced, contains a bias that inhibits economists from seeing future potential exploitation. Economic analysts assume equilibrium of the systems in question, and by definition equilibrium is a condition where no agent has any incentive to diverge from its present behavior.”

‘It follows that for any system being studied invasive or exploitative behavior cannot happen: If a system could be invaded, some agents would be initiating new behavior, and the system could not have been in equilibrium.”

“Equilibrium economics then, by its base assumptions, is not primed to look for the exploitation of systems, and as a result systematic studies of how systems might fail or be exploited are not central to how the discipline works.”

As a result, changes in behavior are not discussed or examined in most cases beforehand and hence the “unintended consequences” that accompany new programs and policies are not thought through or assessed.

For example, the tax cut program that was passed by the United States Congress in December 2017. It was just assumed that when corporations received saw there profits increase due a reduction in their taxes that they would primarily use these funds to go out and purchase physical capital investments.

As we found out, a large part of the tax reductions applied to corporations ended up in stock repurchases and not capital investment. Consequently, the tax cut program has not had near the impact of the US economy that it might have had.

Furthermore, in other cases, we see investors taking government programs and creating asset bubbles or windfalls that wealthy or sophisticated investors can take advantage of…often at the expense of lesser informed persons. Asymmetric information is one of the major ways people some people can take advantage of the system, while others miss out.

In other cases, a small group of agents or managers can take control of some significant portion of the resources of a system and use it for their own purposes. This happened within the AIG insurance giant in the years before the 2008 financial crash.

And, in some cases agents use the behavior of the system itself to manipulate the system. Or, players find a rule they can use as a loophole to justify behavior the designers of the system did not intend.

Finally, we know that not all economic agents are rational. This realization has led economists to build up the field of behavioral economics. No one really disagrees that every economic agent is rational. A large number of individuals are myopic in their behavior, risk avoiders, and lazy. Tie this with the fact that everyone works in a world of incomplete information and you get the situation where “rational” agents can anticipate future taxes, whereas others are too myopic to anticipate what might have to be paid; where normal risk-takers or even risk-lovers can take advantage of those that are risk averse; and where people who are willing to do their homework can play on those that are lazy.

All these situations point to the fact that, as Mr. Arthur argues, there are many markets and exchanges in the world that are not in equilibrium. And, the working out of these disequilibrium situations, depend…. They depend upon the many forces that are already in play, but they also depend upon how individuals assess the situations, and how they adjust their thinking and their ways of doing things in order to respond to each specific disequilibrium.

Keynesian-type models and Keynesian-type thinking does not take these factors into account. That is why, in my mind, the continued usage of them has resulted in such a large increase in income/wealth inequality. All that the people taking advantage of such programs had to do was to encourage the politicians to keep on creating and supporting programs based upon the Keynesian objective of achieving lower rates of unemployment…and then smile as they took their rewards to the bank.

Comments

Stories

Fresh Conversations