Economics 101

Several years ago I heard a story on the Internet. This was attributed to "some European economist." The story was about six farmers, probably on an island. They existed in harmony - each farmer would barter with the other farmers for the goods and services they needed to exchange. After a time, a banker came to the community. He pointed out the advantages of using money. To start things out, he gave each farmer, 1 dollar. Therefore the farmers could now use the money for the transactions rather then barter. Things worked well.

One year latter, the banker told the farmers he would come back to collect interest, and he did. He took one of the dollars. The farmers economy sputtered, because now there wasn't enough money to do the business.

This was used to illustrate that banks are, in fact, the cause of all our economic woos. The problem is it is not true.

Later, I found out (on the Internet) from a source that was obviously neo-Nazi that this is the economic theory that Hitler used to solidify his power in Germany. That is, the banks are causing all the problems, so Germany nationalized the banks. Of course, many banks had belonged to Jews, which was the real reason, and, in addition, it made everyone dependent on the government for credit, which gave the government even more power.

When this illustration was first made to me, I had to think about it for almost a minute before I realized the problem. The problem is they assume that the banker is someone from "outside." Yet, every banker I've ever meant is a person, and needs to spend money for food, etc. (I also criticized this for the granularity. It would have been much more reasonable for the banker to have given everyone a thousand dollars.) Therefore, the farmers would pay the banker, and the banker would return the money by buying food.

I met the guy who told me this story maybe a year later, and he informed me that as soon as he figured out what was wrong with my complaint he would e-mail me. That was years ago, and he never has.

While this might not seem important, it is, or course, because of the connection with Hitler. I have to admit that I believed the neo-Nazis, not because I believe all their propaganda, but because they would have been much better off if they had not brought up the name of Hitler (much as McCain would not bring up Bush's name even if they agree).

The lesson here is that economists are not always right. When I took economics in college, it was pointed out that macro-economics is really a very new field, that is, less than 100 years old. Therefore, for example, the Great Depression hung on for a long time, to be ended only because of the Second World War. Therefore, economists teach that war stimulates the economy, and reasons are given. My teacher, when this question was put to him specifically, he pointed out that "war destroys much more than it creates" therefore, war will not stimulate the economy.

The war in Iraq is starting to make his comments obvious, although my daughter pointed out that she was taught in school that war stimulates the economy.

Now, in the United States, no one listened to Hitler's economist. However, they did listen to an economist named Keynes. Now, I must admit to never have read Keynes, so it is possible Keynes words may be different.

During the 1930's, the word was that Keynes said that government spending would stimulate the economy. Therefore, Roosevelt created programs that used people to do make work. That is, some of the programs resulted in good works - new roads, new parks, etc. - but they did not stimulate the economy, the Depression hung on.

The problem is that Roosevelt's interpretation of Keynes ignored where the money was coming from. The money was taken out of the economy by borrowing. That is, some people were given money that had been taken from someone else, so the amount of money remained the same. And, since the people were used to do make work, rather than goods and services that people might want (the government shouldn't compete with private business) the economy wasn't changed. The same number of dollars chasing exactly the same amount of goods.

The Second World War changed that. The war started in 1938, even though the United States wasn't involved until December, 1941. The war destroyed European industry, therefore, the Europeans were forced to come to the United States to buy goods and services, which stimulated the economy by adding more money. This continued until at least 1960, and probably later. The influx of cash from Europe stimulated the economy, not the war.

From the Second World War until Reagan, the result of the war was the biggest economic influence. This is not to say that Reagan broke the connection, he just managed to throw a bigger wrench in the mix. That is, as Europe prospered, the economy in the United States had problems. Primarily this showed itself in inflation prior to Reagan. During the 1970's, the inflation rate was very high.

Personally, I noted that the problems that caused the Great Depression had never been addressed. Only the symptoms had been addressed.

Reagan made another attempt at a Keynesian like approach to the economy. That is, rather than government spending, he suggested that cutting taxes would stimulate the economy since people would have more money to spend. Of course, the same objection I mentioned above held. That is, where is the money coming from? Its coming from loans from the economy, so the result is that money simply was taken from one hand and given to someone else. (This is "Republican Income Redistribution," or it might be better to say, "Reagan Income Redistribution" because many old Republicans would be just as upset with this as I am.)

At the same time, a new stimulus appeared, so the United States economy didn't do as badly as it could have. The new stimulus is the computer. That is, in the 1980's personal computers were becoming common, and the United States was a definite leader in this area. Therefore, when Bush, Sr. and Clinton, decided to roll back the Reagan stupidity, the economy prospered, and became very healthy, probably the first time since 1929. In my opinion, Reagan and his tax cuts were totally discredited.

Unfortunately, Bush came along, and reinstated Reagan's stupidity, with the expected result. That is, "If you keep doing what you've always done, you'll keep getting what you've always gotten." Therefore, the economy went back to the Reagan malaise. The only real difference it that Bush pushed this to its logical conclusion. That is, the current financial mess.

The solution to the problem is clear in my mind. We need to increase taxes to bring the economy into line with reality. Just as it did with Clinton, this would stimulate the economy. Of course, one can talk about where the increases should be - that is, the wealthy receive most of the government services in the form of contract awarded, interest payment on investments, etc. therefore, it would be right that the wealthy should pay disproportionately more tax.

There are some other tax suggestions that may have some merit, but I'm not going to cover all of them.

If there is a lesson form all of this, I think it would be this: Money is a human invention, which can be used for whatever people want to use it for. Traditionally it is used to reward people for creating the goods and services that people use. In recent years, this has not been the case, however. I remember Barack Obama saying once that the economic problems result from rewarding wealth rather than rewarding work. He is correct in this statement. If work were rewarded more than wealth, then there would be more goods and services for people to buy, therefore, the economy would prosper.

I'm not sure if any other economists would agree with me, but if they don't, they are wrong.