There is an interesting thing happening right now in the United States. We literally are a people divided between this group or that group. Labels are flying around like birds on a clear day; liberals, conservatives, moderates, far-right, far-left, etc. This hasn’t developed overnight, rather, it’s been building for decades as the grand plan of the neoclassical economists played out through multiple administrations starting in the 1960’s. Regardless of the starting point in my processing of our current state of affairs, I inevitably keep coming back to the economy and the growing wealth gap between the lower/middle class and the upper class (using only three for my own sanity). Wealth is the base of the pyramid, what makes all the closed-door deals possible. It’s the nuclear engine powering the government machine built on top.
There are three central assumptions of neoclassical economics (1):
- People have rational preferences between outcomes that can be identified and associated with values.
- Individuals maximize utility and firms maximize profits.
- People act independently on the basis of full and relevant information.
My own theory as to why the neoclassical model is not working has multiple points of thought. The most egregious theory is that the individual has been removed from the equation all together and firms have managed to “game the system” to their own benefit. The individual (non-wealthy) is left to piece together the scraps of what is allowed to trickle down from the top, which lately, has been decreasing significantly. An individual is unable to act in independently due to the fact the media is not providing unbiased relevant information or, if they do, it isn’t the full story. For example, the NYT has already apologized for their biased reporting of Donald Trump to the American people during this past election, however, less than a day after posting it, they removed the line “We believe we reported on both candidates fairly during the presidential campaign.”(2) Interesting retraction.
The founding of country, and well into the late 1800’s, our country ran on something that was closer to classical economics (3).
Classical economists observe that markets generally regulate themselves, when free of coercion. Adam Smith referred to this as a metaphorical “invisible hand,” which refers to the notion that private incentives are aligned with society welfare maximization under certain competitive conditions. Smith warned repeatedly of the dangers of monopoly, and stressed the importance of competition.
Within the last century, following the Great Depression, a new model emerged that was referred to as Keynesian economics (4). This model was argued to be a possible solution to the Great Depression to stimulate the country with two approaches:
- Reduction in interest rates (monetary policy).
- Government investment in infrastructure (fiscal policy).
The Federal Reserve was the answer to the first point above and was created after the stock market crash in 1907 where a run on the banks almost collapsed the economy. In regards to the second point above, multiple projects were started in the 1930’s that included bridges, roads and public buildings that were created by the government for the benefit of all Americans. These projects were all funded and coordinated through the Works Progress Administration (5) and ran through to 1943, at which time the United States became involved with World War II. It is interesting to note that it was far from a perfect system.
By the end of the Second World War, Keynesianism was the most popular school of economic theory in the non-Communist world. Beginning in the late 1960s, a new classical macroeconomics movement arose, critical of Keynesian assumptions, and seemed, especially in the 1970s, to explain certain phenomena (e.g. the co-existence of high unemployment and high inflation, or “stagflation”) better. It was characterized by explicit and rigorous adherence to micro foundations, as well as use of increasingly sophisticated mathematical modelling. However, by the late 1980s, certain failures of the new classical models, both theoretical and empirical hastened the emergence of New Keynesian economics, a school which sought to unite the most realistic aspects of Keynesian and neo-classical assumptions and place them on more rigorous theoretical foundation than ever before. Interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.
What we’re left with at this point is a warped version of economics that has parts of classical, neoclassical and Keynesian economic systems. The last sentence of the above quote is very telling of the system the country has put into place (largely by the wealthy elite). They’ve selected using economic forces that led us straight into war (8 countries at last count) that has multiple mechanisms in place to ensure that the wealth generating machine pumps out as much money as possible. Create war, destroy things, rebuild things, repeat. At all steps, the wealthy elite make sure they get their payday.
The question still remains as to what President-elect Donald Trump is going to do for the next four years. His current filling of key administration positions with establishment insiders is certainly not a good sign.