Economic Middle Ground
It's the Economy, Stupid!
Yes it is, but what does that mean? What is the economy?
Basically it depends on who is viewing it. This is why Middle Ground is so
applicable; economy is a great amorphous mass that permeates our lives,
each often differently. It looks much different down in the bowels of it than it
does when standing above it looking down - or standing away from it
looking across at it - from a distance
It is jobs, individual and collective; it is budgets, individual and collective; it
is a feeling of security, or not; it is the future; it is hope, fear, frustration and
pure panic - individual and collective. It is comfort; it is expectation; in many
ways it is the center of each of our lives and our lives collectively. And that
is why the political tag line was so simply effective. We might not have
understood what it meant collectively, but each of us knew clearly enough
what it meant for us.
We all understand what economy means to ourselves. It is our job; the
security of it; what it pays now, and the benefits it offers - mainly for health
and retirement. But it is also how our job places us within our sphere of
expectation: what level of comfort and security does it buy for us? What
level of luxury does it afford? And how does it place us with respect to
others? Oh, yes, how we are placed with respect to others is a critical
ingredient for us, and an important criterion when considering whether the
economy - for us - is doing well or poorly. The house, the car, vacations -
all those things that are so important in our lives for which our jobs
ultimately provide for, either directly or through investment. Actually there is
more than that; call it infrastructure for want of a more friendly term: power
for heating, air conditioning, automobiles and running the appliances;
roads and highways that allow us to conveniently and comfortably go where
we want to and need to go; communications; sewage removal; running
water; indoor plumbing; shopping convenience; entertainment; and much
more of a similar nature. These are things we take for granted for the most
part, but they are important to us and add depth to our lives.
These last also comprise another level of the economy, any economy,
because someone must envision them, plan them, pay for them, and
maintain them. That someone is also us, but collectively, through our
representative governments and the taxes they assess and spend. The
circularity that entails should be obvious: governments have no money save
what they collect from us, and many of us depend in various ways on how it
is spent, particularly through the projects the governments fund that pay
salaries either directly or through contracts; and that generates more taxes
that go back through the cycle, on and on and on.
That much is fairly simple and generally understood. What is significantly
more complicated is expressed in another cliché: the devil is in the details,
and I do not propose to attempt to describe them. Credit, investment, risk,
velocity, rates and the like describe what happens, but the composite is far
more complex and far less understood. Furthermore much of it is built
upon trust, confidence, rumor and propaganda. Sometimes the economy
turns bad because that is our perception and we - or the financial
communities and government - react correspondingly. The details are
murky, but lead us into the Middle Ground.
First the extremes: theoretical communism and unrestricted capitalism.
In the former the government owns everything, decides everything and
everyone happily does what they are told. In unrestricted capitalism, as
was once illogically suggested, if all were divided equally among us, a very
small clever few would get it all back within - pick a time frame. As with all
extremes, neither is real and we are left with compromise, with which the
ideologues struggle with frustrating empathetic anger. An indisputable fact
is that when all people are compensated more or less equally despite the
energy they invest, those with energy see the futility in expending it. Or
more simply stated, if there is no incentive to work harder, people won't. On
the other hand if people are treated like animals they will work like animals
- essentially when driven and only when driven.
Much as the social scientists hate the term human nature, we are all
different: different skills, different backgrounds, different motivation, different
intelligence, different interests. Among some exist the drive and talent to
create, and it is upon those that we rely to put together the enterprises that
provide those less driven and talented jobs in which to work and survive.
Without the incentive to do so, those that can probably won't. On the other
hand, if unrestricted - human nature being what it is - the talented and
driven, feeling great pride in being so, will tend to take for themselves what
they feel they deserve, shorting the less talented and driven. Fair enough?
History and traditional liberal philosophy suggests otherwise - our modern
success has proven that a balance, rewarding constrained talent and drive,
but at the same time motivating workers through another level of
satisfaction and security, works far better. Ah, but how to achieve that?
That is where representative government steps in and attempts to
achieve balance through compromise. Simple. Nothing is ever simple,
except possibly the ultimate objective: reward for talent, effort and risk
taking; and adequate compensation and security, including proportional
incentive motivation, for everyone else. All very well and good in theory, but
devilishly difficult in practice - for many reasons: ignorance is one; most
people don't understand economics and how markets function. Another is
arrogance; too many have fixed ideas and stick with them, regardless. And
greed is a third; those charged with governing have their own interests in
mind and they often transcend the broader interest. There is yet another
and that is propaganda that is promulgated concerning actions, results,
unintended circumstances, and things the propagandists want you to
believe or don't want you to know, and from that derives the emotionalism
that often roil the economic scene.
One popular Middle Ground solution is to let government control
everything and decide how balance is to be accomplished, but that doesn't
work either. Why not? Because it guts motivation of the talented and
driven, watering down market potential, while putting often unqualified
government officials in the position of deciding who gets rewarded and how
much, with poor understanding of possible unintended circumstances.
And what is wrong with that? Elected or appointed government officials are
likely to lack the competence to do what they think they need to do fairly and
efficiently. And free markets do that? They do it far more fairly and efficiently
than government officials who are dependent upon voters to put them and
keep them in office - but only if constrained, placing us once more back in
the Middle Ground. What constraints? Those which provide a balance of
fairness and efficiency, but do not destroy incentive that comes from people
working for their own interests. But people working in their own interests
will strive for results - for themselves - and left to themselves will almost
always tend to go too far. Is the circularity not obvious? Back to government
But that is not the most egregious challenge for government officials; their
most egregious challenge is understanding how markets work - while they
are working. Not that they don't try, and don't solicit the advise of
experienced advisors; but the advisors often do not agree. Markets are
terribly complex, and do not always function in the same manner because
the variables are different - and they change. What works in one
environment at one time may not work in another at another time.
Furthermore the arrogance of elected officials often causes them to ignore
the advice of experienced advisors (not always economists by any means);
and their personal greed often causes them to move in a direction other
than "the common good," whatever that might be, or what they think it might
be.
This is not satisfying, but it's all we have. When we move beyond the
Middle Ground we tend toward either destroying worker incentives and
satisfaction, or strangling market engines. The government motivation is to
lean toward satisfying workers because there are more of them to vote, but
when they do so they tend to strangle the market engines. When you take
from the rich and give to the poor, it is likely that there will be less and less
to take, and that will make the poor just as unhappy as they were before
government started giving to them; people ruled by representative
government never tolerate giving up what they feel they have won.
Perhaps you thought I was working toward a proposed solution; if there
was such far wiser than I would have found it and implemented it long ago,
and that is exactly my point. There is no perfect solution and there never
will be, save an informed Middle Ground that appreciates a need for
balance and compromise, based on proven experience - and flexibility. Will
such a Middle Ground ever develop such that all are satisfied? Never. The
Middle Ground is no fulcrum, no mysterious point of balance; it is a rather
wide swath of ground over which people will forever fight back and forth for
advantage, and in a way it is that back and forth fighting that keeps the fires
of motivation burning, much like in a tug of war. But note the absolute
requirement for a tug of war: rules, and referees to ensure they are
followed. Our rules are rule of law; our referees are our elected officials.
It's all we have; we need to make it work.
Yes it is, but what does that mean? What is the economy?
Basically it depends on who is viewing it. This is why Middle Ground is so
applicable; economy is a great amorphous mass that permeates our lives,
each often differently. It looks much different down in the bowels of it than it
does when standing above it looking down - or standing away from it
looking across at it - from a distance
It is jobs, individual and collective; it is budgets, individual and collective; it
is a feeling of security, or not; it is the future; it is hope, fear, frustration and
pure panic - individual and collective. It is comfort; it is expectation; in many
ways it is the center of each of our lives and our lives collectively. And that
is why the political tag line was so simply effective. We might not have
understood what it meant collectively, but each of us knew clearly enough
what it meant for us.
We all understand what economy means to ourselves. It is our job; the
security of it; what it pays now, and the benefits it offers - mainly for health
and retirement. But it is also how our job places us within our sphere of
expectation: what level of comfort and security does it buy for us? What
level of luxury does it afford? And how does it place us with respect to
others? Oh, yes, how we are placed with respect to others is a critical
ingredient for us, and an important criterion when considering whether the
economy - for us - is doing well or poorly. The house, the car, vacations -
all those things that are so important in our lives for which our jobs
ultimately provide for, either directly or through investment. Actually there is
more than that; call it infrastructure for want of a more friendly term: power
for heating, air conditioning, automobiles and running the appliances;
roads and highways that allow us to conveniently and comfortably go where
we want to and need to go; communications; sewage removal; running
water; indoor plumbing; shopping convenience; entertainment; and much
more of a similar nature. These are things we take for granted for the most
part, but they are important to us and add depth to our lives.
These last also comprise another level of the economy, any economy,
because someone must envision them, plan them, pay for them, and
maintain them. That someone is also us, but collectively, through our
representative governments and the taxes they assess and spend. The
circularity that entails should be obvious: governments have no money save
what they collect from us, and many of us depend in various ways on how it
is spent, particularly through the projects the governments fund that pay
salaries either directly or through contracts; and that generates more taxes
that go back through the cycle, on and on and on.
That much is fairly simple and generally understood. What is significantly
more complicated is expressed in another cliché: the devil is in the details,
and I do not propose to attempt to describe them. Credit, investment, risk,
velocity, rates and the like describe what happens, but the composite is far
more complex and far less understood. Furthermore much of it is built
upon trust, confidence, rumor and propaganda. Sometimes the economy
turns bad because that is our perception and we - or the financial
communities and government - react correspondingly. The details are
murky, but lead us into the Middle Ground.
First the extremes: theoretical communism and unrestricted capitalism.
In the former the government owns everything, decides everything and
everyone happily does what they are told. In unrestricted capitalism, as
was once illogically suggested, if all were divided equally among us, a very
small clever few would get it all back within - pick a time frame. As with all
extremes, neither is real and we are left with compromise, with which the
ideologues struggle with frustrating empathetic anger. An indisputable fact
is that when all people are compensated more or less equally despite the
energy they invest, those with energy see the futility in expending it. Or
more simply stated, if there is no incentive to work harder, people won't. On
the other hand if people are treated like animals they will work like animals
- essentially when driven and only when driven.
Much as the social scientists hate the term human nature, we are all
different: different skills, different backgrounds, different motivation, different
intelligence, different interests. Among some exist the drive and talent to
create, and it is upon those that we rely to put together the enterprises that
provide those less driven and talented jobs in which to work and survive.
Without the incentive to do so, those that can probably won't. On the other
hand, if unrestricted - human nature being what it is - the talented and
driven, feeling great pride in being so, will tend to take for themselves what
they feel they deserve, shorting the less talented and driven. Fair enough?
History and traditional liberal philosophy suggests otherwise - our modern
success has proven that a balance, rewarding constrained talent and drive,
but at the same time motivating workers through another level of
satisfaction and security, works far better. Ah, but how to achieve that?
That is where representative government steps in and attempts to
achieve balance through compromise. Simple. Nothing is ever simple,
except possibly the ultimate objective: reward for talent, effort and risk
taking; and adequate compensation and security, including proportional
incentive motivation, for everyone else. All very well and good in theory, but
devilishly difficult in practice - for many reasons: ignorance is one; most
people don't understand economics and how markets function. Another is
arrogance; too many have fixed ideas and stick with them, regardless. And
greed is a third; those charged with governing have their own interests in
mind and they often transcend the broader interest. There is yet another
and that is propaganda that is promulgated concerning actions, results,
unintended circumstances, and things the propagandists want you to
believe or don't want you to know, and from that derives the emotionalism
that often roil the economic scene.
One popular Middle Ground solution is to let government control
everything and decide how balance is to be accomplished, but that doesn't
work either. Why not? Because it guts motivation of the talented and
driven, watering down market potential, while putting often unqualified
government officials in the position of deciding who gets rewarded and how
much, with poor understanding of possible unintended circumstances.
And what is wrong with that? Elected or appointed government officials are
likely to lack the competence to do what they think they need to do fairly and
efficiently. And free markets do that? They do it far more fairly and efficiently
than government officials who are dependent upon voters to put them and
keep them in office - but only if constrained, placing us once more back in
the Middle Ground. What constraints? Those which provide a balance of
fairness and efficiency, but do not destroy incentive that comes from people
working for their own interests. But people working in their own interests
will strive for results - for themselves - and left to themselves will almost
always tend to go too far. Is the circularity not obvious? Back to government
But that is not the most egregious challenge for government officials; their
most egregious challenge is understanding how markets work - while they
are working. Not that they don't try, and don't solicit the advise of
experienced advisors; but the advisors often do not agree. Markets are
terribly complex, and do not always function in the same manner because
the variables are different - and they change. What works in one
environment at one time may not work in another at another time.
Furthermore the arrogance of elected officials often causes them to ignore
the advice of experienced advisors (not always economists by any means);
and their personal greed often causes them to move in a direction other
than "the common good," whatever that might be, or what they think it might
be.
This is not satisfying, but it's all we have. When we move beyond the
Middle Ground we tend toward either destroying worker incentives and
satisfaction, or strangling market engines. The government motivation is to
lean toward satisfying workers because there are more of them to vote, but
when they do so they tend to strangle the market engines. When you take
from the rich and give to the poor, it is likely that there will be less and less
to take, and that will make the poor just as unhappy as they were before
government started giving to them; people ruled by representative
government never tolerate giving up what they feel they have won.
Perhaps you thought I was working toward a proposed solution; if there
was such far wiser than I would have found it and implemented it long ago,
and that is exactly my point. There is no perfect solution and there never
will be, save an informed Middle Ground that appreciates a need for
balance and compromise, based on proven experience - and flexibility. Will
such a Middle Ground ever develop such that all are satisfied? Never. The
Middle Ground is no fulcrum, no mysterious point of balance; it is a rather
wide swath of ground over which people will forever fight back and forth for
advantage, and in a way it is that back and forth fighting that keeps the fires
of motivation burning, much like in a tug of war. But note the absolute
requirement for a tug of war: rules, and referees to ensure they are
followed. Our rules are rule of law; our referees are our elected officials.
It's all we have; we need to make it work.
Supply and Demand
It is the mantra of capitalism. But it relies upon
a major element that is also critical for successful
democracy - a middle class. History is replete
with bipolar conflicts - rich versus poor;
successful democracy requires a more balanced
structure - a three legged stool, the third leg of
which is an educated middle class. To give it
color let's call it el sombrero de tres picos - the
three cornered hat. It is that third pico that makes
effective capitalism possible - not the brutal
extreme rawness of immature capitalism, but the
capitalism of modern democray.
The difference is the third corner. The middle
class is the lubricator of effective capitalism;
providing everything between capital and labor:
sales, marketing, distribution, refereeing through
rule of law. No modern democracy, no modern
capitalism can be effective without this third
balancing pico. In fact it is what moves capitalism
well along the spectrum toward Middle Ground.
Supply and demand constitute the framework
of market economy; the function is provided by the
creation of demand and translation of it to supply
through the matching of need and capability.
Modern economies are far too large and complex
to function effectively via the barter system; there
must be the third corner to make the connectivity -
to articulate the demand, even create it where it
doesn't exist, and translate it to supply.
It might be noted that supply and demand also
applies to capital and labor, and the same law
extends through the entire panoply of the pico of
the middle class, though needing the grease of
rule of law to lubricate it.
So why sombrero? It signifies not only binding
the thres picos, but the cover under which they
exist, together.
Isn't that sweet? We know it doesn't work quite
like that - there is struggle; there will always be
struggle, as man continually fights for what he
considers is his due, and rarely will there be
complete agreement upon the proper division of
the spoils or how they should be determined. So
the sombrero, instead of the place for siesta, is
the arena - not of fight to the death, but of struggle
for compromise - on the Middle Ground.
Dramatic as that might sound, it is the only way
to achieve balanced prosperity - and balance is
the key.
It is the mantra of capitalism. But it relies upon
a major element that is also critical for successful
democracy - a middle class. History is replete
with bipolar conflicts - rich versus poor;
successful democracy requires a more balanced
structure - a three legged stool, the third leg of
which is an educated middle class. To give it
color let's call it el sombrero de tres picos - the
three cornered hat. It is that third pico that makes
effective capitalism possible - not the brutal
extreme rawness of immature capitalism, but the
capitalism of modern democray.
The difference is the third corner. The middle
class is the lubricator of effective capitalism;
providing everything between capital and labor:
sales, marketing, distribution, refereeing through
rule of law. No modern democracy, no modern
capitalism can be effective without this third
balancing pico. In fact it is what moves capitalism
well along the spectrum toward Middle Ground.
Supply and demand constitute the framework
of market economy; the function is provided by the
creation of demand and translation of it to supply
through the matching of need and capability.
Modern economies are far too large and complex
to function effectively via the barter system; there
must be the third corner to make the connectivity -
to articulate the demand, even create it where it
doesn't exist, and translate it to supply.
It might be noted that supply and demand also
applies to capital and labor, and the same law
extends through the entire panoply of the pico of
the middle class, though needing the grease of
rule of law to lubricate it.
So why sombrero? It signifies not only binding
the thres picos, but the cover under which they
exist, together.
Isn't that sweet? We know it doesn't work quite
like that - there is struggle; there will always be
struggle, as man continually fights for what he
considers is his due, and rarely will there be
complete agreement upon the proper division of
the spoils or how they should be determined. So
the sombrero, instead of the place for siesta, is
the arena - not of fight to the death, but of struggle
for compromise - on the Middle Ground.
Dramatic as that might sound, it is the only way
to achieve balanced prosperity - and balance is
the key.
The Politics of Greed and Envy
All politics is tied to economics one way or
another, and never will greed or envy be
eliminated: envy is demand; greed is supply. Like
it or not that's the way it works, beyond
subsistence.
But when those elements are exploited outside
the limits of the viable Middle Ground the struggle
is likely to turn nasty. Demanders need suppliers
and suppliers need demanders; neither functions
without the other. Exploitation of greed destroys
demand and exploitation of demand destroys
what can be created through greed.
The political/economic extremes always seem
to be trying to exploit greed or envy for their own
personal benefit. If either ever wins the delicate
house of cards that is our economy fall like - well,
a house of cards.
That is something we must always keep in
mind - always. The only alternative is the Middle
Ground of compromise.
All politics is tied to economics one way or
another, and never will greed or envy be
eliminated: envy is demand; greed is supply. Like
it or not that's the way it works, beyond
subsistence.
But when those elements are exploited outside
the limits of the viable Middle Ground the struggle
is likely to turn nasty. Demanders need suppliers
and suppliers need demanders; neither functions
without the other. Exploitation of greed destroys
demand and exploitation of demand destroys
what can be created through greed.
The political/economic extremes always seem
to be trying to exploit greed or envy for their own
personal benefit. If either ever wins the delicate
house of cards that is our economy fall like - well,
a house of cards.
That is something we must always keep in
mind - always. The only alternative is the Middle
Ground of compromise.
Bubbles, Shortages and Value
What is something worth? What is it's value?
What someone is willing to pay for it: demand for
supply. When demand exceeds supply there will
be shortages and value will rise. When supply
exceeds demand value will fall. That is the
natural law of supply and demand.
The higher the value the greater the envy;
people want what has high value. And the higher
the value the more attractive it is to greed; people
want to provide what has high value.
Unless demand is inelastic, that is people
must have it regardless of cost (food, water?),
value will continue to rise with demand, and so
will supply. Ultimately what will form is what we
call a bubble. There have been all kinds of
demand bubbles: land, stocks, tulip bulbs and
housing come immediately to mind. They all end
the same way: supply finally outpaces demand
and value begins to drop, sometimes dramatically
and precipitously - the demand bubble turns into
a supply bubble. Few bubbles, maybe none, are
transparent; any conscious thinking person can
see demand bubbles growing, and supply
bubbles growing to satisfy them, and know the
demand will disappear, leaving only a bubble of
supply, though not necessarily when.
Ultimately, after the burst, when value has
fallen enough, demand will once more begin to
build, and supply will begin to rebuild. But the
period between bursting and rebuilding can be
extremely painful for those holding the remnants
of the bubble for which value has disappeared.
We all know well, let the buyer beware. But he
won't; greed will not let him, and he will suffer the
pain, over and over again.
For greed there is no Middle Ground, though
politicians will ever strive to find one.
What is something worth? What is it's value?
What someone is willing to pay for it: demand for
supply. When demand exceeds supply there will
be shortages and value will rise. When supply
exceeds demand value will fall. That is the
natural law of supply and demand.
The higher the value the greater the envy;
people want what has high value. And the higher
the value the more attractive it is to greed; people
want to provide what has high value.
Unless demand is inelastic, that is people
must have it regardless of cost (food, water?),
value will continue to rise with demand, and so
will supply. Ultimately what will form is what we
call a bubble. There have been all kinds of
demand bubbles: land, stocks, tulip bulbs and
housing come immediately to mind. They all end
the same way: supply finally outpaces demand
and value begins to drop, sometimes dramatically
and precipitously - the demand bubble turns into
a supply bubble. Few bubbles, maybe none, are
transparent; any conscious thinking person can
see demand bubbles growing, and supply
bubbles growing to satisfy them, and know the
demand will disappear, leaving only a bubble of
supply, though not necessarily when.
Ultimately, after the burst, when value has
fallen enough, demand will once more begin to
build, and supply will begin to rebuild. But the
period between bursting and rebuilding can be
extremely painful for those holding the remnants
of the bubble for which value has disappeared.
We all know well, let the buyer beware. But he
won't; greed will not let him, and he will suffer the
pain, over and over again.
For greed there is no Middle Ground, though
politicians will ever strive to find one.
"Samurai vs Stockholders". The Economist
Magazine, Feb 16-22, 2008:
Takeo Kitabata (Vice-Minister, Ministry of
Economics, Japan): "Shareholders in general do
not have the ability to run a company. They are
fickle and irresponsible. They only take on a
limited responsibility, but they greedily demand
high dividend payments."
"Japanese businessmen and politicians fear that
the activists are short-term investors keen to strip
firms of their cash...companies in Japan are
social institutions with a duty to provide stable
employment and consider the needs of
employees and the community at large, not just
shareholders."
A middle ground issue? Surely it would be in the
United States, but this one is exacerbated by a
cultural difference. Middle Ground is culturally
dependent; it would be nice if Americans could
learn to understand and appreciate that.
But consider further: could this observation not be
applied as well to the American political
environment? Shareholders (voters) in general
do not have the ability to run the government.
They only take limited responsibility, but they
greedily demand high entitlement payments.
My opinion: oh yeah! And populists feed the greed.
Magazine, Feb 16-22, 2008:
Takeo Kitabata (Vice-Minister, Ministry of
Economics, Japan): "Shareholders in general do
not have the ability to run a company. They are
fickle and irresponsible. They only take on a
limited responsibility, but they greedily demand
high dividend payments."
"Japanese businessmen and politicians fear that
the activists are short-term investors keen to strip
firms of their cash...companies in Japan are
social institutions with a duty to provide stable
employment and consider the needs of
employees and the community at large, not just
shareholders."
A middle ground issue? Surely it would be in the
United States, but this one is exacerbated by a
cultural difference. Middle Ground is culturally
dependent; it would be nice if Americans could
learn to understand and appreciate that.
But consider further: could this observation not be
applied as well to the American political
environment? Shareholders (voters) in general
do not have the ability to run the government.
They only take limited responsibility, but they
greedily demand high entitlement payments.
My opinion: oh yeah! And populists feed the greed.
Thomas Sowell, Introduction, Economic Facts
and Fallacies.
"Some things are believed because they are
demonstrably true. But many other things are
believed because they are consistent with a
widely held vision of the world - and this vision is
accepted as a substitute for facts. Subjecting
beliefs to the test of hard facts is especially
important when it comes to economic beliefs
because economic realities are inescapable
limitations on millions on millions of people's
lives, so that policies based on fallacies can be
devastating in their impacts. Conversely, seeing
through those fallacies can open up many
unsuspected opportunities for a better life for
millions of people."
and Fallacies.
"Some things are believed because they are
demonstrably true. But many other things are
believed because they are consistent with a
widely held vision of the world - and this vision is
accepted as a substitute for facts. Subjecting
beliefs to the test of hard facts is especially
important when it comes to economic beliefs
because economic realities are inescapable
limitations on millions on millions of people's
lives, so that policies based on fallacies can be
devastating in their impacts. Conversely, seeing
through those fallacies can open up many
unsuspected opportunities for a better life for
millions of people."
Henry Rosovsky:
"Never underestimate
the difficulty of changing
false beliefs by facts."
"Never underestimate
the difficulty of changing
false beliefs by facts."
Related Essays