Tuesday, June 19, 2012

Supply-led vs Demand-led Transactions

Lavoie & Godley nail a fundamental, ideological error still undermining orthodox economics.

"Reversed causation also affected the link between investment and saving: ... Neoclassical macroeconomics is essentially supply-led; this to us is its fundamental weakness: [In reality] capitalist economies, most of the time, are demand-led. They generally suffer from a lack of effective demand, not from a lack of capacity or a lack of labour resources."

This fits fundamental biology. All reactions pursue sensed potentials. They do not follow predetermined intent. The world is, after all, completely unpredictable. Classic economics seems worse than overly anthropomorphic when it comes to what are rank assumptions about aggregate behavior patterns. Orthodox economics actually makes incredibly autocratic presumptions.

For example, mountain men & trappers didn't save up their currency and then go out to acquire beaver pelts.

Rather, they borrowed & underwent tremendous privations to acquire pelts, in order to sell at a profit.

A carrot is more compelling than a stick, brick or stale bread.  Ever seen McDonald's successfully selling dry toast, regardless of how much supply they have?

There seems to be an age-old confusion about dual use of currency as a commodity to be saved and as a virtual unit denominating expanding credit.

Credit clearly precedes currency in all social species, denominated via affinity bonds. Once created, actual commodity currency is always both at least a brief store of value and also a unit of account. Yet as populations grow, the role of currency as a unit of fiat credit constantly grows while the utility of money as a commodity becomes negligible.

Any tribal or family member is inherently familiar with limitless credit extensions, most of which are written off. In a social species, interpersonal credit is always a minor cost of pursuing aggregate return on coordination. Scalable social affinity pursues net margins. Ideological intent is just system noise. Teamwork simply works.

We're back to a conundrum. How does a modern, supposedly educated, population so thoroughly divert itself with ideologies which are so obviously self-defeating? The object of our aggregate is survival & growth of our coordinated nation state, NOT hoarding of whatever unit of account we utilize in order to coordinate some, notable transaction chains.

Our problem is entirely one of ideology. There is, by definition, no problem with fiat currency. Our class ideology is misusing our aggregate fiat. That situation only occurs when aggregate communication falters, leading to a declining rather than a more perfect union. Misused aggregate fiat - aka maladaptive policy - can only occur with poor situational awareness by an aggregate.

We're always in this together. We're just not acting like it.

1 comment:

Tom Hickey said...

Excellent post, Roger. This is exactly the kind of thinking that needs to inform mainstream economics before the clueless advice coming out of the hallowed halls of the academy, especially endowed chairs at the top universities, blows up the world.