The difficulty lies not so much in developing new ideas as in escaping from old ones.[114]
John Maynard Keynes
Sir Thomas Gresham (1519-1579) was a financier in Tudor England. He articulated a law with further reaching implications than he probably anticipated; Gresham’s Law states, “Bad money drives out good money.”[115] The law describes what happens to coinage when moral laxity numbs society into accepting the theft of gold and silver from the coinage in circulation through scrapping until the lowest common moral denominator triumphs, and more individuals join in debasing their currency to extract a selfish, short-term advantage. Thus, Gresham’s law implicitly points to immorality as a negative externality whose cost is not internalized by the market, resulting in market failure. Similarly, the classical and neoclassical economists’ acceptance of the validity of this law was an implicit, if unconscious, admission of the economics of morality. In fact, Gresham’s Law as it relates to coinage is a special case of a more general law, which the unified theory of macroeconomic failure seeks to bring to the attention of the reader.
Morality and Economic Efficiency
Morality is subtle. Hence, it is easy to underrate its far-reaching economic influences. Perhaps it helps to think of it as an environment. Like the natural environment, morality is a public good that we take for granted until it is contaminated. Invariably, the principal cause of a failing society is a failing morality.
What constitutes morality?
Jesus Christ decreed, “Do unto others as you would have them do unto you.” [116] This call for moral reciprocity sums up the Ten Commandments; it is sometimes referred to as the “Golden Rule” or the “Golden Law.” No doubt, Christ wanted morality to have a civilizing influence, to give society a soul and a conscience, and to shed egotism, injustice, depravity, and barbarism. Hence, technical advancement without parallel moral advancement reduces to advanced barbarism, not civilization.
Remarkably, sixteen religions have shared a similar moral message. It is also present in non-religious, ethical traditions since the early beginnings of man.[117] It is a universal moral code for determining the appropriateness of actions; it has withstood the test of time across religions, beliefs, cultures, and the immoralities and brainwashing of plutocracies.
What is the social utility of this universal moral code? In essence, it is a means for distinguishing, instinctively, between what is good and helpful to societies and what is harmful to them. The social value of morality derives from its promotion of the well-being of societies, hence, its durability. In contrast, its nemesis, immorality, is evil because it furthers the interest of an individual or a small group to the detriment of the rest of society. Thus, economic policies that serve the public interest are, by definition, moral, whereas economic policies that serve the interests of a narrow group by sacrificing the public interest are immoral. Moreover, discarding economic morality is equivalent to discarding the economic compass that guides societies’ public policy with inevitable and significant economic and social costs.
Implementing morally correct economic policies provides added value even to small everyday transactions, because it improves economic efficiency. For example, most religions demand that their adherents practice honesty, the gateway to morality, and fair dealings. Compliance with this basic moral guideline in the marketplace requires the provision of accurate information on prices, weights, measures, descriptions, and specifications of tradeable goods and services, fair competition, and transparent intentions. Those measures improve the quality of information available to market participants and markets’ efficiency. Hence, the functions of a consumer protection agency include insuring that the information on the label of a product for example, such as its volume or weight, is correct, in effect acting as a watchdog of honesty. It is also tantamount to an informal official recognition of the link between morality and economic efficiency. In the public sector, compliance requires governments to provide accurate economic statistics on unemployment, inflation, and other economic data, which improves economic decision-making. These are everyday examples of how morality fosters economic efficiency and the well-being of societies, while dishonesty and amoral practices detract from the same.
Value judgment is a much-touted economic concept. Its lack of constancy makes it prone to manipulation. It is not feasible to use it for assessing the appropriateness of economic policies because it is morally ambiguous. The principal function of value judgments is to bypass moral values—value judgments usher in a Trojan horse of amoral economics, marginalizing morality as a mere personal preference, like a fashion, and presenting good and evil as relative values, not absolutes. Value judgments has been sanitizing amoral economic policies, making them politically acceptable despite their conflict with societal-interest.
Thus, major religions make the rich responsible for supporting the poor, while value judgments justify shunning this responsibility, thus, perpetuating poverty under the guise of economic efficiency.[118] Hence, the only conceivable economic utility of value judgments is limited to choosing between equally moral alternatives, not promoting immoral ones.
Immoral wealth-gathering methods and lack of compassion for the poor, both characteristics of plutocracy, prompted Jesus Christ to declare, “It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of Heaven.”[119] Plutocracies hate everything that Christ loved and they seek all that he warned against.
President Theodore Roosevelt (1858-1919) was known as the trustbuster for his efforts to break up monopolies and cartels. He was concerned about the effect of great wealth on democracy. In his autobiography, he recounted, “…and of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of a plutocracy.”[120]
The subject of plutocracy came up in the context of classical economics in Chapter 2; however, its influence is still strong today, deserving further elaboration. The evidence suggests that throughout history, plutocracy’s tyrannical rule has been humanity’s worst enemy. It employs parasitic capitalism for its wealth gathering and plunders with impunity when it is the law. Thus, plutocracies have trapped the bulk of humanity in a vortex of poverty. The few interludes when poverty was not the constant companion of man coincided with the decline or demise of plutocratic power due to epidemics, religion, revolution, an enlightened ruler, and, recently, the threat of communism. This does not mean that all the wealthy are plutocrats, but only those that use their wealth to gain political or economic advantage to the detriment of the rest of society.
Plutocracies have been indestructible hydras despite their intense social disutility, a remarkable feat. Even when a plutocratic regime falls, its replacement soon tends to regress to plutocracy, making this characteristic plutocratic persistence almost a law of the physical world. At various times, their well-honed political skills have subverted religious institutions, academia, and the press. Another measure of its versatility is that it has penetrated, overtly or covertly, all forms of government. Even communist regimes have not escaped plutocratic creep; hence, we find corrupt communist dictators, like the late Nicolae Ceaușescu of Romania and unending trials of corrupt communist party members in China.
Plutocracies are vulnerable to the ascent of morality. It fears and silences its moral critics to prevent them from alerting the world to injustice. Thus, to maintain its patristic existence it has condemned some of the noblest and the best: compelling Socrates to drink poison, crucifying Jesus Christ, and martyring Al-Hussein, to name a few. [121] Such is the calculus of plutocracy. Plutocracy and crime are inseparable, like a thing and its shadow.
Psychopaths are the worst plutocratic strain. Sadly, the percentage of humanity that is psychopathic is not so small.[122] With the indifference of predators toward their prey, psychopaths feel no empathy or compassion toward those in pain, grief, or hunger. Perched atop the food chain, they are the ultimate predators, but, unlike those in the wild, nothing satisfies their hunger for more riches, regardless how many people suffer or perish.[123] They tend to reach elevated positions in criminality, wealth, politics, and form the backbone of plutocracies, often holding ultimate power, irrespective of the political exterior of a regime—whether autocracy, monarchy, republic, democracy, or some blended version.
What proof is there that psychopaths are politically powerful? Chapter 2 gave examples of their crimes against humanity, which require ultimate political power to escape punishment. Those acts entailed sadistic criminality, regardless of any justification such as serving the greater good.
Science is a powerful tool which plutocracies have abused for their ends. How would they misuse it in future? Perhaps within two decades, advances in automation would make it possible to create robotic armies. Robots, devoid of morality or restraint, can use limitless brutality to suppress rebellious populations and wage ceaseless wars of aggression. The other risk of an amoral transition to intense automation is that it could lead to technological dualism, mass unemployment, and depressed wages.[124] We can only speculate on how powerful psychopaths might exploit such vulnerabilities, or can we? Would they reintroduce slavery? How would they exploit the hungry and vulnerable? For example, in the war zones of the Middle East, terrorists have developed a lucrative niche market, supplying organs of enslaved children to use as spare parts for wealthy psychopaths.[125]
The call for morality in politics and economics is not trivial—the destiny of hundreds of millions is at stake, perhaps all of humanity, including the psychopaths, though they cannot realize it. We are at the gates of new technologies and new barbarism; humanity’s only shield is morality because it can suffocate plutocracy and the evil it generates.
The quality of learning is critical for the future of nations generally and a high standard of economics education, in particular, is essential for guiding vigorous economies. Yet, the economic policies pursued by prominent graduates of the West’s most renowned universities have inflicted terrible economic damage on their countries. What does that tell us about the value and relevance of the economics taught by those eminent universities?
The deterioration in the standards of economic education since the 1980s is a consequence of plutocratic meddling in academic affairs and academia’s subservience to power, best demonstrated by its support of right-wing neoclassical macroeconomics, a major culprit behind the economic crises facing the West. Indeed, academia has been a willing promoter of parasitic economics. This lack of academic backbone has prompted Professor Noam Chomsky to conclude that the “intellectual tradition is one of servility to power…”
With rare exceptions, the celebrated centers of Western economic learning have been teaching inadequate, irrelevant, and flawed curricula of which the following is but a sample, in no particular order:
• Deafening silence on the economics of morality
• Lack of examination of societal-interest versus self-interest
• Lack of concern for the inefficiency of the presently regressive tax regime
• Teaching economic dogmas such as neoclassical macroeconomics as core subject matter
• Support for deregulation of markets without regard to its empowerment of monopolies
• Acceptance of modern portfolio theory
• Acceptance of usury and usurious capitalism
• Support for the downgrading of the role of fiscal policy
• Lack of serious criticism of the Federal Reserve or its boom-bust policies
• Non-objection to plutocracies’ progressive hijacking of the political process
• Silence on the role of psychopaths in setting the economic agenda
• Allowing political agendas instead of objective science to set their macroeconomic curriculum
These and other failings have undermined the quality of economic learning. There have been knowledge revolutions in all fields, but not in economics because academia has been a formidable obstacle to economic progress. The economics it teaches should pass the tests of realism, relevance, utility, and common sense; instead, it delights in redundant complexity and layered irrationality. It breeds conformity and tunnel vision. Despite harsh economic problems, it has not engaged in vigorous debates about the root causes of these crises; instead, it has settled for reiterating defunct solutions.
Academia teaches a long list of economics specialties, including the economics of industry, agriculture, fisheries, mining, petroleum, transportation, the environment, trade, finance, money and banking, and many more besides; strikingly absent is the economics of morality, although the link between the two is organic. Economics textbooks treat morality as a taboo, shunning discussion of its impact on economic activity.[126] They overlook that morality is an externality with wide economic spillover effects and that it is fundamental to understanding the causes of numerous economic problems such as chronic underconsumption, financial fragility, the debt burden, inefficient taxation, anemic growth, worsening income inequality, and waning democracy, among others.
Moreover, academia does not teach subjects that are essential for understanding the workings of macroeconomics like politics, economic history, morality, sociology, and psychology; without bridges of knowledge to these vital subjects, economics has been an isolated island, unable to explain, for example, what is driving irrational economic policies, which are seeding conditions that could spark revolutions. The present curriculum is about as adequate as teaching medicine without chemistry, physics, biology, or physiology.
Furthermore, the tone of the economics it teaches is without a moral stance regarding human problems, as though a natural science dealing with substances like hydrogen and nitrogen. The claim that morality renders economics unscientific is false because morality is the social compass of public policy; in its absence, special interests determine economic policy instead of societal-interest.
Poverty is the world’s foremost economic problem, yet economics textbooks hardly give it the attention it deserves. Eradicating it is a moral, as well as an economic, priority. To appreciate what it does to its victims, students of economics need to observe it at close range, in its natural surroundings. Academia’s aloofness towards the poor is not unlike Marie Antoinette’s, the French queen; when the royal courtiers explained to her that the peasants are revolting because they have no bread, she inquired why don’t they eat cakes instead. A good dose of social awareness of the suffering of the underclasses would improve future economists’ sense of public priorities. It can refocus their attention toward the economic challenges that really matter—like poverty, homelessness, education, health services, and the cost-effectiveness of public services—instead of wasting their lives and talent researching issues of marginal relevance.
Leading economics professors have championed neoclassical macroeconomics and the plutocratic agendas, spawning the present Western economic malaise. Would anyone consult a physician who gives wrong advice? Yet eminent universities keep their misguided professors to play the same old records for fresh students, year after year.
The West’s high-flying economics schools suffer from an ancient affliction; Plato described the merchants of knowledge as Sophists, selling their wares to wealthy students, insincerely repeating what is popular instead of what is reasoned and wise.[127] Despite their prestige, Sophists schools, as well as average for profit universities, deliver inferior education in economics and possibly other social sciences. The 2008 meltdown startled their economics professors and flagged their lack of expertise. Professors cannot teach what they do not know. It raises an interesting question: Does this imply that those Sophist universities do not know how to choose their professors or is it proof that they do? Either way, the Sophists’ systematic dissemination of redundant economics makes them wellsprings of economic crises, gravely damaging national economies. Paradoxically, the Consumer Protection Agency does not protect the consumers of economics education, the students, from the flawed economics products of the Sophists.
The other characteristic of Sophist schools is exorbitant fees, pushing students with limited means into the financial slavery of indebtedness. The irony is that those schools earn huge surpluses yet they are registered charities and, therefore, tax exempt. Where is the charity in the fees they charge? In Britain too, under the present conservative government, public universities, which used to be free before the Thatcher-Reagan counter-revolution, are now charging students nine thousand pounds a year. Education no longer caters for merit but money. Learning is rationed so the have-nots remain ignorant, which expedites the perpetuation of plutocracy and the deterioration of democracy. It also means that a major part of the Anglo-Saxon world is steadily falling behind countries with relatively generous education budgets like China, India, Japan, and Russia.
Sophists are also conformists of the first order, unable to withstand controversy. Does knowledge flourish in a culture of conformity or intellectual challenge? For example, communism failed decades ago and no longer poses a threat to capitalism, yet academia has not fostered an objective reevaluation of communism’s enduring impact. Thus, it does not recognize its effect on the West in propelling labor unions, the welfare state, economic and political democracy, improving income distribution, curbing parasitic capitalism, the defeat of imperialism, never mind the economic development and industrialization of the communist states. Granted, many of these were unintended consequences of communism, but its consequences, all the same.
Sophist conformity—and the intellectual fences protecting it—reflect an insecurity emanating from the inferior product it delivers. Academia implements conformity imperceptibly, through a regime of intellectual censorship. Its most effective tool is academic journals, using editorial committees populated by orthodox economists to weed out intellectually adventurous articles. For an economist to prosper in academia, he or she must publish frequently in those very journals and, with few exceptions, the price he or she must accept is conformity. In the words of Albert Einstein, “Great spirits have always encountered violent opposition from mediocre minds.”[128]
Enforcing present-day conformity on economics departments is in the tradition of the anxious and narrow-minded Inquisition that threatened and silenced a non-conforming Galileo Galilei (1564-1642) for declaring that the earth rotated around the sun and not the other way around.[129] By one measure, matters are worse today because silencing those of a different mind no longer requires threatening their lives when rejecting publication of their articles in academic journals suffices. Still, academia’s ultimate coercive tool is always there, in the background. It is not above dismissing non-conformists, as when Trinity College (Cambridge) dismissed the intellectually gifted Bertrand Russell in 1916, to its undying shame.[130]
Certain celebrated institutions, dedicated to promoting knowledge and excellence, are jointly responsible with universities for the present state of economic mediocrity. For example, the Nobel Foundation’s committees award the most prestigious prizes and have done a reasonably good job in assessing scientific contributions, but some of their economic and political awards are indefensible, showing the Nobel Foundation to be siding with extremist right-wing political agendas. The award of Nobel Peace Prize offers unfortunate demonstrations for this inclination. Let us cite three outrageous decisions from different periods. It considered Mahatma Gandhi (1869-1948) of India, the ultimate lover of peace, undeserving of their Nobel “Peace Prize,” presumably to indulge a waning and embittered British imperialist plutocracy. However, it found Henry Kissinger (b. 1923) deserving of a Peace Prize, despite his roles in prolonging the Vietnam War, initiating war on Laos and Cambodia, and the military coup against the democratically elected government of Chile, which resulted in the murder of President Salvador Allende and tens of thousands of Chileans? It also found President Barack Obama (b. 1961) deserving of the Peace Prize before he had time as a president to demonstrate his love for war, consenting to the aerial destruction of Libya by NATO members, the global terrorist war on Syria, and numerous mistaken drone killings. By these standards, one day a Stalin of the extreme right will be eligible for the Nobel Peace Prize too.
An independent review of Nobel Prizes in the social sciences would reveal a similarly misguided pattern. In recent decades, the Nobel committees have exhibited a distinct partiality for right-wing neoclassical economists, even though two centuries ago Jean Charles Léonard de Sismondi revealed the error and menace of classical macroeconomic theories, which continues to this day in the neoclassical format. Improving the standards that govern the Nobel Prize in economics will require excluding from the award committees those who presume that neoclassical macroeconomics is a valid branch of economics, because the massive damage it has inflicted on the world economy is testimony enough of its redundancy. By awarding the purveyors of bad economics, the Nobel Foundation has inflicted irreparable damage on the economies of the West. This must stop and until it does all earnest economists need to reject this debased prize. Similarly, the Swedish government and parliament have a moral obligation to demand that the Nobel Foundation reform itself or risk losing its status as a charity. It is far better for the world to end these awards altogether than to continue handing them to the undeserving.
Friedrich Nietzsche (1844-1900), the German philosopher, expressed the precariousness and vulnerability of the truth by observing, “All things are subject to interpretation [and] whichever interpretation prevails at a given time is a function of power and not truth.”[131] McCarthyism, long before McCarthy, has etched Pavlovian conditioning on economic minds, making economics a stagnant pond: infertile and dismal.[132] Academia’s servility to political masters and its subtle inquisition culture too often result in a trampling of the truth. It is time academia stopped churning out rationalizations in support of the defective economic policies of the establishment.
A repeat of 2008 with perplexed professors proposing Band-Aid solutions will exhaust any residual credibility of those eminent economics departments. Academia does not have infinite time to update its curricula; its window of opportunity is probably limited to the time available between now and the next crisis. Its role should change from a conformist implementer of political agendas (seeding economic disasters) to a defender of creativity that can only flourish by not penalizing originality and alternate ideas.
Academia cannot hold back the march of knowledge forever. Perhaps the Magnificent Dozen, who predicted the 2008 meltdown, can help academia transition to relevant economics.[133] Alternatively, new centers of learning will spring, perhaps in China, India, or elsewhere, to fill the knowledge void by teaching valid economics. The subservience of academia and its scholars to the plutocratic establishment is very similar to the communist economic theoreticians’ subservience to the Politburo in the Soviet Union, with predictably similar catastrophic results. Academia, by propagating parasitic economics, is unwittingly enfeebling the West, a weighty responsibility to bear before history.
In an ideal world, market participants are well informed and rational, markets are competitive and efficient, and supply expands or contracts to the point where marginal revenue (the revenue from the last unit sold) equals the marginal cost (the cost of the last unit produced). Furthermore, resource allocation is optimal and prices are fair, adjusting upward or downward quickly in response to changes in demand and supply. Such an idealized environment needs no government intervention.
Unfortunately, such stringent conditions are not satisfied in the real world; among other things, stealthy externalities block the efficient functioning of markets. Private and public (social) benefits often diverge, as do private and public costs; hence, market prices fail to internalize all public benefits and costs, resulting in sub-optimal prices and resource allocation, economic inefficiencies, and market failures.[134]
Since most markets are imperfect, suitable government intervention can improve their efficiency. This can take diverse forms: establishing quality standards, measures, labels, inspections, consumer protection, regulations to prevent predatory competition and monopolies, subsidies and excise taxes to encourage beneficial consumption or discourage harmful consumption, etc.
Public finance textbooks explain that when the public benefit from consuming a good exceeds its private benefit, it has positive spillover effects in the form of additional benefits accruing to third parties that are not party to the transaction, giving rise to a positive externality.[135] For example, education is a positive externality because besides benefiting the students concerned, also benefits society by improving the skills of the work force, resulting in better employment prospects with higher pay and, potentially, requiring less income support and contributing more tax revenue. Some educated individuals become successful entrepreneurs, develop new industries, provide employment opportunities for others, and spur economic growth. Moreover, an educated society tends to make better political and economic decisions and enjoys a better quality of life, higher living standards, and less crime. These additional benefits to society make education a merit good because its widespread public benefits exceed its private benefits; hence, pricing it based on its private benefits would result in less than optimal consumption from society’s perspective. Accordingly, society reaps more benefits from education than realized by the individual, necessitating its encouragement by reducing its cost to consumers through subsidies or by offering it free of charge.
On the other hand, a negative externality implies a negative spillover affecting third parties, who are not party to the transaction, thereby raising the public (social) cost of a good over and above its market price, giving rise to a negative externality.[136] Environmental pollution is the most frequently cited example of a negative externality; it carries a near-zero private cost to the polluter, but a large public (social) cost to society. Air and water pollution poison the air and drinking water, damage public health, increase medical bills, damage buildings, and harm forests, crops, fish, and animal herds.[137]
Thus, relevant laws, regulations, penalties, and taxes deter chemical companies from polluting the air, water and soil at prohibitive cost to society. Similarly, a petrol tax attempts to raise the private cost of petrol consumption closer to its social cost to curtail consumption and its associated air pollution—the negative externality. The additional tax revenue also helps pay for the health bills consequent to inhaling noxious gases.
Likewise, consuming demerit goods, such as cigarettes and alcohol, results in spillover costs not included in their price, such as health costs, car accidents, and social problems. Thus, responsible governments resort to excise taxes to raise the cost of consuming demerit goods, thereby helping to restrain their consumption.
More generally, the presence of externalities requires government intervention to improve market efficiency, resource allocation, income distribution, and economic stability, to name a few. This framework is helpful in identifying other nontraditional externalities, which economics and public finance have not classified as such. Categorizing these as part of an extended family of negative externalities contributes to a better understanding of their nature. It also assists in identifying suitable tools for tackling them to improve economic efficiency.
Intriguingly, all positive externalities entail positive morality and all negative externalities entail negative morality (immorality). Equally intriguing, morality is itself an externality and a public good and improving morality improves the general well-being of society and vice versa. Moreover, invariably moral policies are consistent with societal-interest, economically rational, and efficient while immoral policies are detrimental to societal-interest, economically irrational, and inefficient from the perspective of society.
The Unified Theory of Macroeconomic Failure
Early economists might have avoided tackling the economics of morality not just because the ruling plutocracies were practicing grossly immoral policies but also because it is intangible and elusive. Morality is not a tradeable good and lacks an explicit price; its economic influence is diffused and, unless treated as a market externality, immeasurable. This might partially explain why morality was a blind spot in classical theory, because the concept of externalities had not yet crystalized. Economists have since developed cost-benefit analysis, which can measure the economic impact of externalities, including that of morality and its nemesis, immorality. These concepts of externalities, cost-benefit analysis, and morality provide a fresh approach and a logical framework for identifying, investigating, and understanding economic problems, with the prospect of more efficient solutions.
One possible economic definition of morality is the positive spillover effect of a positive externality and immorality is the negative spillover effect of a negative externality. Thus, the economic contribution of morality is measurable as the excess of public benefits over private benefits associated with an activity. Similarly, the impact of immorality (negative morality) is measurable as the excess of public costs over private costs that is associated with a given activity.
Furthermore, positive and negative moralities constitute a common thread to all positive and negative externalities, respectively. Thus, theft is immoral and, therefore, a negative externality. On the other hand, vaccination is a moral act because it cuts the risk of infection to the public at large, giving rise to a positive externality. It would be laborious to go through every known positive and negative externality to identify its moral or immoral dimension.
Since negative externalities are a consequence of immorality, then the yardstick of morality can be utilized to identify and resolve economic problems. Furthermore, since what constitutes the essence of morality is unambiguous, this yardstick is a surprisingly incisive economic tool, a shortcut for spotting negative and positive externalities, followed by remedial action to curtail or encourage such activities.
Thus, moral policies are inevitably economically efficient and immoral ones inefficient; any counter indication is because a policy has been wrongly classified as to its morality or its efficiency and a thorough analysis would resolve any inconsistency. Much of the uncertainty surrounding the economic efficiency of morality is attributable to a complicating factor, which we might term the fog of decision-making, because of the opaqueness and uncertainty of the long-term consequences of economic decisions (where the fog of war is a special case that applies to military matters).[138] Sir Winston Churchill recognized the problem, generally, by saying, “…difficult to look further than you can see.”[139]
The fog arises because moral and immoral macroeconomic policies have visible and identifiable short-term results, but their distant outcomes are less discernable, although far larger and in the opposite direction to their short-term effects. Thus, education, a moral act and a positive externality, entails an immediate and visible cost in the form of school fees, but yields distant, though far larger, benefits (an educated population). Similarly, theft, an immoral act and a negative externality, provides an immediate and visible advantage to the thief at a prohibitive long-term cost to society and sometimes the thief (e.g., alarms, police, court cases, prisons).
This fog of economic decisions has plagued neoclassical macroeconomics, because it has stuck to static analysis and shunned dynamic analysis; hence, it has not properly recognized the dynamic benefits of Keynesian expansionary policies, which accrue over time. Specifically, it does not see through the fog of an economic chain reaction: a rise in government expenditure has a multiplier effect on aggregate consumption, leading to improving the economies of scale, increasing business profits, causing an increase in private investment and higher stock prices, which increase wealth and consumption, and so on. Perhaps the cause of this myopic neoclassical vision is that it focuses solely on the cost side of the economic equation and ignores the demand side. This would explain the tendency for making matters worse by resorting to austerity during economic contractions. However, this is not the only possible explanation. Deeper contractions expedite greater market concentrations, which serve oligopolistic interests. Prolonged contractions also aid the political marketing of war as an economic solution. Not understanding all the motives of all the economic players adds yet more layers to the fog of decision-making.
Incomplete information and complexity also add to the density of the fog of decision-making, making the full benefits of moral policies nearly impossible to foresee far in advance, with fascinating consequences. On the other hand, the fog of ill intentions and immorality is also the cause of terrible unintended consequences and, occasionally, devastating butterfly effects. Later in this chapter, several examples will illustrate some of the profound riddles of economic morality and immorality.
Chapter 2 alluded to instinct as a superior decision-making tool relative to rational deduction when there is a time constraint and limited information. It is also superior when the range of possible outcomes is too wide, making it beyond our mental capacity to assess the diverse effects of truly complex matters except perhaps in retrospect. Accordingly, adopting moral economic policies instinctively is the most efficient economic strategy because it avoids many of the long-term negative surprises associated with immoral policies due to the fog of decision-making. Hence, the instinctive moral choice is invariably the better choice.
The foregoing has important macroeconomic policy implications. For instance, since usury (interest) was banned on moral grounds, then we can expect, a priori, that interest-bearing debt to entail a significant negative externality and to cause macroeconomic failure. Similarly, we can expect the economy of a country to perform better during periods when it follows morally superior economic policies than when adopting morally inferior ones. The unified theory also suggests that the root cause of the ongoing Western economic decline is a moral decay.
The traditional tools of solving economic crises have been limited to tactical, short-term, measures. These typically consist of increasing public expenditure, reducing taxes and lowering interest rates to counter recessions, and the opposite measures to curtail inflation; occasionally they extend to tinkering with financial and other regulations. On their own, such responses are of transitory benefit because they act on the symptoms without curing the underlying causes of financial crises, exaggerated cyclicality, chronic underconsumption, high and persistent unemployment, and anemic growth. Hence, the economic malaise in the West has continued to advance from one cycle to the next.
In contrast, by viewing macroeconomic challenges as externalities, the unified theory provides a general framework for their effective handling. It seeks to pinpoint the structural causes of externalities followed by strategic solutions to permanently lessen their negative effects or enhance their positive effects, through government intervention.
Specifically, the unified theory of macroeconomic failure considers immoral macroeconomic policy inefficient and irrational because:
• It ignores or sacrifices societal-interest and therefore serves narrow self-interests to the detriment of the interest of society.
• It invariably entails negative externalities, and therefore is inefficient, irrational and unintelligent.
• Typically, its focus is short-term because of selfish motives and because the fog of decision-making obscures its long-term unintended consequences, which are opposite and significantly greater than its short-term effects.
• It views macroeconomic policy as a static zero-sum (win-lose) game instead of a dynamic win-win game. As a result, it tends to underestimate the dynamics of the macro economy such as the multiplier effect, economies of scale, and so on.
• The adoption of immoral macroeconomic policies puts a nation at a competitive disadvantage relative to competitor nations that purse moral economic policies.
More specifically, negative externalities provide a unified explanation of macroeconomic problems. The term “unified” also refers to the implicit union between morality and economic efficiency, rendering them synonymous, two sides of the same coin. Accordingly, a primary cause of the current macroeconomic problems facing the West is moral failure, which precipitates democratic failure and self-interest to overwhelm societal-interest in setting public policy, thus, triggering macroeconomic problems. On occasion, a natural factor causes a macroeconomic problem, as when excessive volcanic activity produces a drought and famine; nevertheless, not acting to mitigate its negative impact is a moral failure.
Macroeconomic efficiency requires maximizing the benefit from positive externalities and minimizing the damage from negative externalities through the balancing of self-interest and societal-interest, which is only achievable under an environment of high moral standards and a political system that promotes valid and efficient public choice, such as a genuinely representative democracy. Satisfying this condition gives rise to a moral capitalism that is economically superior to both parasitic capitalism and Marxist socialism.
Thus, we can summarize the unified theory of macroeconomic failure as:
A moral deficit, typically driven by irrational plutocratic greed for wealth gathering, causes a democratic deficit, inferior public choice, immoral policies, economic inefficiency, and negative externalities, culminating in macroeconomic failure. Immoral policies are necessarily inefficient and vice versa, and not just in economic matters; any counter indication is because a policy has been wrongly classified as to its morality, efficiency or both.
Chronic Negative Externalities
Negative macroeconomic externalities share three common ingredients: irrationality, inefficiency, and immorality. They become chronic because attempts to solve them, if any, only treat their symptoms, rather than their causes. The following are some of the most acute and chronic negative macroeconomic externalities plaguing Western economies today:
Immorality Eclipsing Morality
1. Failing Democratic Process: Plutocracy Dominates Democracy
a. Neoclassical Macroeconomics
b. Political Contributions
c. The Media
d. Corporate Democracy
e. Poverty
f. Crime
g. Wars of Aggression
h. Excessive Plutocratic Wealth
2. Self-Interest Eclipses Societal-Interest: Inefficient Public Expenditure
3. Self-Interest Eclipses Societal-Interest: Inefficient and Irrational Taxes
a. Indirect Taxes
b. Corporate Taxes
c. Personal Taxes
4. Banking Plutocracy: Usury Dominates the Economy
a. Banks
b. The Federal Reserve
c. Usurious Products
d. Usurious capitalism: Immoral, Contradictory, and Irreconcilable Economics
5. Amplified Business Cycles
6. Inefficient Markets: The Ascent of Monopolies
a. Monopolies in the Goods Markets
b. Monopsonies in the Labor Markets
c. Chronic Underconsumption
7. Inefficient Markets: Quality of Information
a. Government Reporting
b. Credit Rating Agencies
c. Corporate Reporting
d. Regulators and Supervisors
e. Economic Counseling
The above externalities are sources of pronounced economic inefficiencies and loss of economic potential. The above list does not purport to be comprehensive but rather a reasonable starting point. Purposely missing from the list are environmental pollution and climate change because the literature already provides a wealth of coverage of these topics. Climate change, caused by the continued rise in the level of carbon dioxide in the atmosphere, is a potential threat to human existence on planet earth; bad economic policies have played a major role in perpetuating its rise, which in turn is a consequence of deteriorating democratic standards. Other negative externalities, such as gambling, are missing due to time constraints.
The order of the above negative externalities attempts to reflect the typical direction of causation of one negative externality on another. Briefly, deteriorating morality is a prerequisite for a waning democracy and the rise of plutocracy. In turn, deteriorating democratic standards have led to self-interest progressively displacing societal-interest, resulting in inefficient and inappropriate public expenditure and tax policies. Furthermore, the rising power of the banking plutocracy has led to a variety of public policies favoring the big banks, including favorable tax treatment of usury, a privately owned central bank, banking deregulation, the facilitation of the dominance of usury and derivatives over the real economy, and colossal funds to save the big banks from failing. Furthermore, those influences resulted in extreme indebtedness in the economy, which amplified economic cycles and increased instability. The dominance of self-interest over societal-interest has also resulted in deteriorating market efficiency due to the rise of monopolies and a decline in the quality of information. These conditions contributed to a wide range of ills including anemic growth.
Overcoming these massive negative externalities requires working in the same sequence, starting with improving public morality followed by reforming the political process and then appropriate economic measures can follow. For instance, an effective democratic process is a prerequisite for enacting efficient tax legislation, which in turn is necessary for increasing equity financing and reducing indebtedness to achieve milder cyclicality.
In this regard, it is important to note that the presentation of the subject matter to follow deviates from the above sequence to ensure a smoother flow. Specifically, some major negative externalities appear first, followed by their proposed solutions. Thus, improving democratic standards, solving the problem of indebtedness, and adopting economically more rational and efficient public expenditure and tax policies appear later because they are the natural route for solving the rest of the negative externalities.
Unintended Spillover Effects of an Incomes Policy
This section and the one to follow illustrate the effects of the fog of decision-making, particularly the difficult-to-foresee unintended consequences of moral and immoral economic policies referred to in the section titled “The Unified Theory of Macroeconomic Failure.” In the absence of government intervention and regulations, parasitic economics capitalism relegates the economy to a zero-sum game, where labor gains become synonymous with business losses, and vice versa. Hence, wage minimization to subsistence level or lower becomes a business objective, whereas a public policy supporting a higher wage can benefit labor as well as business, at once changing the economic game from win-lose to win-win.
Most plutocracies have an immoral zero-sum game (win-lose) mentality ingrained in their egotistic psyche; hence, they tend to adopt policies that generate negative externalities and macroeconomic failure. Accordingly, plutocrats are inclined to shun policies that improve labor conditions, naively believing that doing so is detrimental to their business interests. Accordingly, they cannot grasp that the moral policies in the West in the aftermath of World War II, which materially increased the cost of labor and welfare, also launched an unprecedented economic boom that was very favorable to the growth of corporate profits, stock prices, and the economy.[140] Indeed, favorable economic results have been consistently associated with the implementation of moral economic policies before and since.
Present economic theory has no appreciation that morality is a necessary, if insufficient condition, for economic efficiency. This is perhaps part of a broader misconception—especially in politics, economics and business—that only the dull can afford to be moral, not the talented. Nothing is further from the truth. In fact, without implying that all those who are moral are gifted, there is an almost observable proportionality between intelligence and morality. Indeed, the immoral only tend to succeed against an otherwise matched adversary that is less moral and, inevitably, less shrewd. Let us illustrate.
Otto von Bismarck (1815-1898), the long-serving German chancellor who masterminded German unification—against the interests and desires of all major European powers—is a recognized political genius. A Machiavellian quote, might is right, has been attributed to Bismarck, which he never said. Moreover, few appreciate that his success drives from his superior morality, especially compared to his contemporaries.[141] Less obvious is that he used might sparingly, mainly to bring about German unification, which otherwise was impossible to achieve. Where might was clearly not right, he did not use it. Thus, he did not exercise his might where it was easiest to apply, in Africa and Asia, as the imperialist powers of his day did. He resisted pressures at home to expand the tiny overseas German empire and shunned spilling African and Asian blood in imperialist pursuits.[142] In stark contrast, between 1885 and 1908, the genocidal imperialism of King Leopold II of tiny neighboring Belgium applied limitless terror against the helpless civilians of the Congo, butchering half the population, an estimated 10 million victims, in pursuit of personal gains.[143] Equally obscure are Bismarck’s moral economic policies, which laid the foundations of German industrial might.
In the closing decades of the 19th century, Great Britain held a considerable industrial lead over Germany and, to a lesser degree, so did France. The British and French empires enjoyed seemingly insurmountable advantages over Germany; they were the largest empires, providing their industries with captive markets, and cheap natural resources, while their respective plutocracies enforced low wages, ostensibly ideal conditions for their continued industrial supremacy. Remarkably, Germany managed to overtake them both in a few short decades, by practicing higher moral standards.
Regardless of what we might think of Bismarck’s innate morality, his instinctive genius was so profound as to sense the economic brilliance of morality, cutting through the fog of the elaborate classical economic arguments of the time and beyond the grasp of most economists even today. At the same time, his deep self-confidence and immense courage empowered him to swim against the prevailing egotistic intellectual tide. His economic policies initiated a process that culminated in ending the age of economic barbarism in Germany, which would take the rest of the West another three quarters of a century to complete.
German plutocracy had a softer grip on the German economy and enjoyed fewer privileges than its British and French counterparts did. Bismarck used that to Germany’s economic advantage. Despite Germany’s inferior industry, he pursued a seemingly irrational industrial incomes policy that increased the cost of German labor relative to that of Britain and France. He not only offered German workers higher wages and better working conditions but also launched the German welfare state by passing a health insurance bill in 1883, an accident insurance bill in 1884, and an old age and disability insurance bill in 1889. The social contract he established was moral, humane, and treated German workers with dignity.
Despite the increased cost of German labor and contrary to the expectations of zero-sum gamers, German industrial production surpassed that of France, and shortly after the turn of the century, it outstripped that of Great Britain as well. To the unimaginative monopsony-minded, cost-and-wage minimizers, this outcome is inexplicable. Anglo-French economists simplistically attribute the German industrial miracle to the industriousness of German labor, unwilling to fathom all the complex effects of Bismarck’s superior moral incomes policy as the source of Germany’s industrial might.
No doubt, Bismarck’s policy improved German industrial relations and contributed to a more satisfied, loyal, and industrious work force. As a result, German industrial productivity increased, but that was hardly the only effect. More important, his measures increased the purchasing power of German labor and, with the multiplier effect, substantially expanded the German home market; in turn, that permitted German industry to realize economies of scale, which lowered the cost of German industrial products, making German exports competitive and feasible. By contrast, low wages in Great Britain and France caused chronic underconsumption, which limited the size of their home markets and prevented them from realizing similar economies of scale. Clearly, British and French plutocracies could not see through the fog of decision-making, whereas Otto von Bismarck did in some fashion.
It is safe to assume that Otto von Bismarck did not possess economic knowledge of the multiplier effect, economies of scale and the like, which only became generally recognized decades later. Yet these effects were critical to the success of his policy. Why would someone of his genius pursue a policy without understanding its intricate logic? This throws further light on the discussion in Chapter 2 concerning rationality versus instinct in economic decision-making. Bismarck understood what was at stake instinctively. He instinctively made the moral choice, which is consistently the better choice. On the other hand, the classical economists that guided Great Britain and France recognized neither instinct, nor morality, nor instinctively moral decisions that are superior even if we do not know why they are superior when we make them. Bismarck’s moral policies also demonstrated that right was might, not the other way around.
Decades later, Henry Ford achieved something similar in the United States. Paying his workers higher wages turned them into customers and helped create a mass car market, while his large-scale production techniques cut the production cost per car.
Strikingly, the traditions of moral economic policies and immoral economic policies have persisted for generations. Car manufacturing is the centerpiece of modern industry. Germany lost World War I and World War II while Great Britain was a victor. Yet today, Germany is the lead car manufacturer in Europe, while Great Britain, aside from some minor workshops, has lost all its indigenous car industry to foreign manufacturers. Other British industries have experienced serious decline too. British politicians and economists, generally, have persistently blamed the failure of British industry on the low productivity and the strife of British labor.
I found the demise of British industry puzzling, but I was skeptical about the customary British explanations. In the early 1980s, a Japanese investment bank kindly invited me to visit Japan. While there, I met with a senior executive of a leading Japanese car company that had large car manufacturing plants in Great Britain. I took the opportunity to ask him about the quality of British labor. His answer startled me. He said British labor was more productive than Japanese labor in their Tokyo plants. The implication was clear: British labor was not the cause of the demise of British Industry, but rather British management.
This raises a subsidiary question regarding the effect of differences in plutocratic perceptions on industrial performance. German and Japanese history during the first half of the 20th century does not suggest that their plutocracies were more benevolent than their British equivalent. There is also no reason to suspect that the German and Japanese people are more intelligent than the British are. This leaves one possible explanation: the difference in performance is attributable to a shortsighted and less intelligent British plutocratic establishment compared to its German and Japanese counterparts. All plutocracies are profit maximizers; however, some are long-term maximizers, while others focus on immediate, short-term gains. Clearly, Japanese and German plutocracies are of the former type, while the British plutocracy is of the latter. Moreover, the arrogance and snobbery of the British upper class and the managements it appoints are world-famous, looking down on labor as an inferior species. This lack of empathy for labor has been a longstanding British social problem; it permitted the passage of the Corn Laws that starved a million people.[144] These factors explain why today Great Britain is the only major Western economy without an indigenous car industry.
It seems that intelligent plutocracies maximize long-run profits and pursue benevolent policies, even if they are not innately benevolent. In contrast, the dullest plutocracies pursue very short-term profits without empathy, precipitating, for example, the French and Bolshevik revolutions and becoming extinct in the process. Between these extremes are politically clever but economically dull plutocracies, such as the British, that have survived, but their economies have suffered. Perhaps it is high time the West replaced it plutocracies with a wiser breed that sees the logic of pursuing benevolent policies to further their own interest, thereby changing the economic game to win-win. The currently powerful but shortsighted Western banking plutocracies do not fit the bill.
The Butterfly Effect of Reparations
The section titled the “The Unified Theory of Macroeconomic Failure” alluded to the butterfly effect of immoral policies. The following illustrates the severity of one such effect that has transpired in the sphere of political economy.
The mathematics of chaos theory demonstrates a phenomenon referred to as the butterfly effect, where a slight action precipitates a huge and unanticipated outcome. The metaphorical example is that of a butterfly flapping it wings in the African jungle, only to unleash a hurricane in the Caribbean a few weeks later.
It seems farfetched that the application of a seemingly minor economic policy could, among other things, change the world map and spell the end of empires. Yet, those were precisely the negative spillover effects of imposing immoral and exuberant reparations on a defeated Germany following World War I, which shortsighted politicians in Great Britain and France, the victors, demanded against the instinctive advice of John Maynard Keynes.
In 1923, the French occupied the Ruhr, the German industrial heartland, to enforce payment of the reparations, producing grave German economic hardship. The reparations pushed Germany into hyper-stagflation, an economically lethal combination of hyperinflation in the midst of depression and mass unemployment. Hard times swelled the ranks of the German Communist Party, making a communist takeover seem imminent. The one party with sufficient mass support to challenge the communists was the National Socialist Party (Nazi Party); hence, the German plutocracy decided to provide it with the financial backing it needed to check the communist threat. The ascent of the Nazis resulted in a German dictatorship and a world war followed by the redrawing of the map of Europe, the spread of communism, and the beginning of the end of the British and French empires.
British and French policymakers certainly did not imagine that an economic straw could have such profound effects, including breaking the backs of their empires. The desperate situation in Germany produced more than demonstrations, something to remember amid the current economic conditions in Europe. Indeed, harsh periods, often the consequence of immoral policies, have hatched revolutions, Napoleons, and endless wars across continents. The thing to remember is that the fog of decision-making blurs the vision of those who implement amoral economics; they cannot see the potentially devastating negative butterfly effects of their policies, or else they would not adopt them in the first place. Hence, moral economic policies are instinctively superior and safer bets.
***
A better understanding of the causes of economic and historic failures requires in-depth analysis of the contribution of immorality to such disasters; a moral interpretation of history is long overdue. A similar analysis is also required for current failures.
Parts III and IV to follow, use the framework of the unified theory of macroeconomic failure to diagnose the root causes of the current economic malaise.