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Why a century of textbooks on economics is wrong

Dec 05 2017 06:00
Edward Ingram

WHY are the main media not paying attention - yet?

  • I’ve been told that my words trigger instant lock-out by some leading economists.
  • And my book has not yet been published by a world famous publisher.

But the peer reviews are good, and the university up the road from me finds it fascinating – something to be worth creating a discussion forum about at the course which is now on offer – part lessons and part workshop and brainstorming.

We are getting there.

The trigger words which switch off some economists are ‘free markets’.

It is like what happens when you tell a physicist that you have invented a perpetual motion machine.

THE ISSUE

Joseph Stiglitz won a Nobel Prize for showing that free markets do not exist. So why would I be trying to invent them?

ANSWER

To overcome this supposed objection, I wrote this Introduction paper on my website.

This shows that there is nothing I have written which contradicts anything that economists believe. I have just changed the meaning of the trigger words from complex to simple – something easy to understand.

What we need is an ability of savings and assets and loan costs and loan values to adjust to offset the falling value of money, not by intervening, but naturally, using market forces which are free from obstacles.

If this can be achieved, then we create what I have called the 'KFPP platform'. It is like putting every economic and business activity onto a Floating Platform whose costs, earnings, values, and prices all float like a ship does when the water level rises.

Everything economic and financial happens on board ship and the level of the water is not relevant. Business carries on as if money had never changed in value.

All of those costs and incomes which are rising – they are all on board this platform/ship.

A PARADIGM SHIFT

This would amount to a paradigm shift in the way that economies behave and are managed - a revolution. It ruins a century of academic textbooks. And it is right; it can be done.

In 1923 Macmillan published a revolutionary paper by J M Keynes. Keynes had no degree in economics, like Adam Smith, the ‘father’ of economics, and the Wright Brothers who first flew before any of the highly qualified people with government backing could get their heads around the problem.

According to a report from Harvard, most prize winners for innovation do not come from the discipline in question.

In his paper, A Tract on Monetary Reform, Keynes wrote to the effect that if money halved in value, which means that all prices and costs and asset values were to double, and all earnings were to double, then people would be wholly unaffected. They would all be on this ‘KFPP - Keynes’ Floating Platform, a paradigm shift for economics.

What Keynes was saying was that all prices, including all costs, values, and earnings (someone has to pay those earnings), have two parts to them.

  • There is the usually understood part whereby prices adjust as supply and demand change, on board the ship/platform.
  • But there is also the core price part of those prices which should adjust to offset the falling value of money. It means that all prices should rise together in harmony when there is too much money and too much spending going on. Only then can people be unaffected. Incomes rise, costs rise. The excess spending affects EVERYTHING.

If that happens, then that mops up any excess money in circulation and brings inflation to an end. The whole economy runs on ‘automatic’. Management becomes much simpler.

FREE MARKET FORCES

Should any one price fail to adjust, it becomes cheap. What happens when a price is low?

Normally the price would rise as demand increases.

What happens if that price cannot rise?

FREEDOM DENIED

It means that freedom to adjust the price has been denied. Then you get a hugely complex economy, just like we have today all over the world. Complex, unmanageable, and unfair.

LET ME EXPLAIN

The first example given by Keynes in the very next statements involved fixed interest bonds, sometimes called treasuries or gilts when issued by a government. As the value of money falls, so does the value of the bond’s maturity value – its final payout is just your money back. It does not adjust. It is not FREE to do so.

This redistributes wealth. There is no value adjustment at all. It’s in the contract.

Another example is the cost of housing finance and the way that monthly repayments vary. The leaping around is caused by the way in which regulations force lenders to calculate these figures. Instead of borrowers paying back the wealth which they have borrowed in a steady and regular way, paying back more in the early years and less later on, they rely upon inflation to have that effect. It doesn’t always work. Inflation is never constant, and it can be deflation.

So I have worked out the general equations for lending which, when followed, make the kind of adjustments that are needed to put lending and savings onto the KFPP Platform, even when there is deflation.

Doing this will create the hugely important list of benefits which I outlined in my last essay for Fin24.

More next time…


edward ingram  |  macro-economics  |  opinion
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