Conjecture on Economic Cycles
June 29th, 2009 |
Introduction
Economic cycles do not occur independent of human behavior rather it is human behavior that causes the cycles. Based on historical observations, the behaviors and therefore the cycles are predictable.
The behaviors create the economic conditions and the economic conditions reinforces the behaviors. Economic environments are the result of behaviors and behaviors are the result of the economic environment. The two are part of an inseparable holographic system and neither one is independent of the other.
Moreover, an economic environment with the condition of abundance� sows the seeds for the opposite condition of scarcity. Abundance tends to cause complacency, arrogance and the feelings of entitlement and these in turn alter behaviors that results in the squandering of resources.
In short, we by our collective behaviors create our economic cycles.
Wealth Creation
Economic boom cycles exists when wealth is created.�Wealth is created when resources are manipulated such that their resulting perceived value is greater than the sum of its parts. That is, the new “arrangement” causes the result to be worth more than the sum of the components.
The judgment of value is a collective one by society. In theory, society will collectively make the right call. A resource that will yield higher profits when used in one arrangement will� acquire the needed resources by out bidding alternate less profitable uses.
Unfortunately, society does not always make the right choices. Sometimes opportunity costs are neglected�or the value of the new arrangement is misjudged.
However, despite its deficiencies, the collective societal judgment it is far better than a central authority setting the values. By the time the information is collected, analyzed, decisions are made and implemented it is far too late.� For any resource there are a veritable constellation of uses. The central authority would need to identify the vast majority of them and set suitable prices. The fact that economies with central economic authorities suffer a lack of goods and services illustrates my point.
Wealth Destruction
Just as wealth can be created it can be destroyed or dissipated. Resources and be used�in such a way�that the result is worth less than the sum on the parts. As before society collectively makes the judgment on the value of the result.
Society also seems to sometimes make value judgments that seem to follow some karmic law. For example, a teachers decides to give all the students in the class an A regardless of merit.� This discourages working and studying. Society would then discount the value of the A. That is, the perceived value of an A in the class of this teacher would be worthless.
Wealth appears to have some sort of merit claim attached to it. In order for wealth to exists it has to be tied to a pile of merit. And the pile of merit is similar to a pile of leaves, it can be collected or blown away by the wind.� Furthermore, if wealth is given or acquired without the accompaniment of merit, it seems to disappear. As the example of the unearned A above illustrates.
The boom and bust cycles seem to be due to wealth creation and destruction cycles. And these cycles seem to be brought on by collective human behaviors.
Policy and Machiavelli
Machiavelli, in “The Prince” states that it is better to control by fear rather than love. The reason for this is that it is far easier to make someone fear you than love you.
Also, in “The Prince” he�states that another method to maintain control is to bind by the receipt of some benefit. In his time, it was the granting of some position and/or land. In our time, it is a system of entitlements that is under the control of the politicians.
With the entitlements, the voters are controlled by the two methods mentioned above. They are tied to the politician by the entitlement benefits� and controlled by the fear that they will loose them. Fear of the loss of the entitlements is used to secure votes. The voters now vote to preserve their benefits.
The problem is that entitlements sometimes lessen or completely remove the consequences of bad behavior. And this, at times, seems to encourage even more bad behavior. The result is that society collectively encourages and subsidizes counter productive actions. The increase in bad behavior�results in requiring even more resources, which further decreases the collected pile and further creation of wealth.
In addition, those that contribute the least, if anything at all, are consuming the majority of the resources. It is reported that 40% of the US population pays no taxes at all yet consume the majority of public resources. The top 50% of wealth creators provide over 90% of the tax revenue.
Nor are all the consumers of public resources those at the lowest ranges of the economic scale. There exists legions of contractors, consultants, special programs (often run by consultants and contractors) and special interest groups that dip into the public resources. In many cases, but not all, these resources would be better used elsewhere.
Tax Policies
Entitlements are used to control those at the lower ranges of the economic scale. To control those at the opposite end, tax policies are used. Tax laws are written to be complicated, punitive and confiscatory. However, those at the top of the economic spectrum can use their wealth and the influence derived from�it to�orchestrate the cutting of custom loop holes. These loopholes can be had through connections to politicians.� They are often bought with campaign donations through various means that skirt the contribution laws.
The result is a very complex tax system that is unfair and expensive to administer, both for the government and the citizen. The system consumes a lot of time and money. It is also prone to abuse.
Middle Class Squeeze
With both ends of the economic spectrum under control, those in the middle are trapped. They are not rich enough to purchase the political influence or poor enough to receive the entitlements. In addition, they cannot� afford the investment schemes or professional services�needed�to skirt the tax laws. So it is this segment of society that is hit with comparatively high taxes. Unfortunately, this group is comprised of a high percentage of the true wealth creating innovators.
All Fall Down
Because of the conditions above, which we have collectively created, an economic collapse is inevitable. Resources are continually squandered and used to support ineffective social programs and/or obsolete companies instead of being used to fund innovation.
Moreover, a system of entitlements exists that encourages and subsidizes bad behavior as well as discouraging good behaviors such as hard work, risk taking and saving. After all why do any of that when you’re going to be taken care of by the government. Also, why do any of that if the fruit of your labors are going to be confiscated.
The collapse comes when wealth creation virtually ceases. Funding for entitlement programs dries up. Huge deficits are created as the government vainly tries to shore up the system.� But eventually, despite best efforts, the system falls down.
As always, society again makes the call on value. Because this judgment is highly influenced by the environment in which is it made, the value of many components greatly diminishes. This includes the judged values of promises made by the politicians and other government officials.
The Rise of the Phoenix
But as with the cycles of abundance, the cycle of scarcity affects and influences new behaviors. Decisions become more thoughtful and fewer resources are squandered. The collapse has served to clear away deadwood and�made way for new growth. The system of entitlements is mostly gone, choked off by the lack of funds, A new class of innovators emerges and the creation of wealth begins again.
And the cycle repeats…
Andre’ M E Nel
