Reciprocal System #579 "The Road to Permanent Prosperity" ch24 Stabilization Methods I B

Transcript

all right hello everyone and welcome to my channel uh this is an educational Channel we take a look at Great theories of everything ancient and modern and I try to parse them out figure out uh how to use these things in our own lives today is our uh 579th video on the reciprocal system of theory from Dewey B Larson if You' like any more information on Mr Larson's Theory watch any of my first 474 videos on the subject um we are reading from his book called The Road to permanent Prosperity today one of his two books on economics and uh we are in chapter 24 uh which is called uh stabilization methods and [Music] um H I think I lost my place here with this book but um we uh Mr Larson was one of the few uh one of the few scientists to propose a universe made out of motion not matter not energy but motion and for Larson motion was the relationship between space and time that uh is a reciprocal relationship and the reciprocal system of theory uh for the name of his um theory in 1959 Mr Larsson proposed his two fundamental postulates about how the universe operated the first and most important postulate is that the universe is composed entirely of one component motion existing in three dimensions in discrete units and with two reciprocal aspects space and time and and then uh the second postulate is just that the universe is uh conforms to the relations of ordinary communitive mathematics its primary magnitudes are absolute and its geometry is ukan Larsson plugs the first postulate into the second and arrives at a theoretical Universe about how he believes the universe is constructed uh and uh then he Compares his theoretical Universe with the measured empirical Universe of modern science Larson was able to practically recreate many of the scientific tables in including the periodic table from Theory and um does that in many of his books especially in his book on chemistry called basic properties of matter where he derives uh equations for many of the basic properties of matter such as the melting point and the specific heat and the compressibility and uh he also does uh similar things in his book on astronomy Universe of motion he's got a book uh a couple books on physics and uh two books on economics one book on metaphysics including philosophy religion and psychology uh I've gone through many of those books on this channel already uh read them from cover to cover and uh so you can go into the library and check those out usually I preface them with um a fairly detailed description of Larson's postulates and their ramifications and consequences and so on uh so you want to check those out if you want to get into larsson's work more uh if you want to start uh fresh in this book The Road to per permanent Prosperity go back about 7 weeks in the archives and start with 1 but right now we are in the middle of chapter 24 uh out of 26 so we're almost done with this book uh this is on stabilization methods one and this is where Larson really arrives at uh the Crux of his solutions to arrive at a road to permanent Prosperity by judiciously um you know um unobtrusively uh kind of regulating the reservoirs or the storage of money um that uh kind of um affects the Boom in bus cycle of uh our economic system an economic system in motion and um with the reciprocal aspects of production and consumption so we'll uh we'll let Larson speak here and uh get into um the second half of chapter 24 stabilization methods one uh while this plan um and he's referring to a um uh let's see what this plan is um uh you may may need to go back to the last video um um I think he'll probably explain what he's talking about here so let's uh just keep going into it while this plan gained some attention during the Depression of the 1930s when the authorities were desperate for some kind of an answer to the problem it was quickly dropped when the depression experience was subjected to more Critical examination after the emergency was over this was of course a reflection of the fact that the shortcomings of the plan had already become apparent to those who studied the situation carefully it has however become necessary or been necessary to give the subject some consideration here in order to complete the theoretical picture of the possible methods of control and also to lay the groundwork for the discussion of a different kind of manipulation of the goods reservoirs that we will take up in the next chapter the post depression review did include consideration of the following suggestion quote increase production to match the excessive supply of money the thought here is that since money inflation is due to the availability of too much money purchasing power relative to the volume of goods currently produced the remedy is to to increase the volume of goods to an equality with the amount of money purchasing power if the volume of goods could be increased independently of the purchasing power this idea might have some Merit but as has been emphasized repeatedly in the preceding Pages it is impossible to produce Goods without at the same time and by the same act producing an equal amount of purchasing power an unbalanced excess of money purchasing power therefore cannot be corrected by increasing production another variation of the production control idea is based on the over production theory of the business cycle which was widely accepted during the Depression era of the 1930s this theory contends that we are producing too much during the boom periods and that the depression or recession comes about because of the necessity for cutting down production to enable using up the accumulated surpluses the proposed control system therefore contemplates reducing the volume of production during the inflationary phase of the cycle and assumes that this reduction will automatically result in an increased amount of production during the low stages of the cycle the falsity of the assumptions on which the over production theory is based is now generally recognized and for present purposes it should be sufficient to say that the business cycle is a result of totally different causes whatever variation in production takes place during the successive phases of the cycle is an effect of the cyclical variation not the cause thereof thus all of the proposals that Envision economic stabilization by storage of goods or regulation of the volume of production are inherently unsatisfactory even those proposals that are theoretically feasible are unworkable in practice due to the physical limitations on the possibility of goods storage furthermore the method by which the control is supposed to be exercised is objectionable per se maintenance of a steady flow of goods to the consumers is one of the Prime objectives of economic policy and any measure which aims to achieve business stability by introducing arbitrary irregularities into the flow of goods is prescribing a cure which may be as bad as the disease the economic unbalance that causes the cyclical swings can be corrected only by attacking it where it originates in the money Purchasing Power Stream flowing to the markets some of the measures discussed in the preceding chapter were aimed in this correct direction but these measures fail to qualify as effective control devices primarily because they operate indirectly and hence do not have the positive and certain effect that is necessary for accurate control restriction of credit for example t to discourage withdrawals from the money reservoirs but there is no direct relationship we cannot say that an increase of x% in the rediscount rate will reduce the use of credit by y% what we need is a mechanism that does have this kind of a direct connection if our reports indicate that the reservoir withdrawals are currently exceeding inputs by a million per day then for positive control of the situation we need a direct mechanism whereby we can divert a million dollars per day from the swollen money Purchasing Power Stream until the excess withdrawals from the consumer reservoirs cease the most obvious means of accomplishing this objective is to utilize government fiscal policy the government is continually receiving a large inflow of money from Taxation and other sources and there is a corresponding outflow of similar proportions on the average these two streams are equal unless the government has deliberately embarked on an inflationary course but there is no requirement that A continuing equilibrium be maintained and at any particular time there is usually a net excess either of re seips or of expenditures such an excess constitutes an input into a or a withdrawal from a purchasing power Reservoir and these Reservoir transactions have exactly the same effect on economic equilibrium as transactions of equal magnitude in the private sector since the government transactions are sub subject to deliberate control if control seems advisable we have here the kind of a direct and positive mechanism that we need for the purpose of offsetting the fluctuations in the flow into and out of purchasing power reservoirs a general recognition of the potential of government financial dealings as a means of control of the level of business activity has been achieved in the last last few decades and compensatory fiscal policy currently receives widespread support at least in principle unfortunately however present day economic thought fails to distinguish between the problem of economic stability and the employment problem as a result fiscal policy is not primarily utilized or advocated for the purpose of maintaining a stable level of prices and business activity an objective to which it is well adapted but for the purpose of minimizing unemployment an objective toward which it can make no more than a temporary and uncertain contribution and this only at a rather high cost in the form of inflation this subject was given a great deal of attention in the era following the 1930 depression Arthur Smithy give gave this report as of 1948 quote the idea of a government commitment to maintain full employment through fiscal policy became widely accepted the Employment Act of 1946 in this country originated as a proposal to achieve full employment through fiscal policy alone end quote but a commitment to do something means nothing at all unless that something can be done and the fact that unemployment is still our most critical domestic problem emphasizes this point disappointing results are inevitable as long as fiscal policy is directed toward the wrong objective many of the economists who analyze the position of economic theory in the post-depression review mentioned earlier were uneasy about the relation between employment and inflation it is possible reported Thorp and Quant in 1959 that monetary policy May create a conflict between two ultimate objectives of society namely between full employment and price stability and smithies admitted that quote we have as yet no answer to our main question of fiscal policy is it possible to prevent inflation and Achieve maximum production at the same time end quote over the next few years KES and his disciples gave an authoritative negative answer to this question as indicated in the following statement quote with remarkable precence both KES and Mrs Robinson foresaw in the pre-war period The Dilemma facing most western Nations today the impossibility of achieving simultaneously and without price or wage controls the twin goals of Full Employment and price stability in the absence of any contradictory experience or new theoretical understanding the existence of this dilemma is accepted by modern economists of all schools of thought as noted in the discussion in Chapter 2 not withstanding the near unanimity of this [Music] opinion it is definitely wrong coexistence of Full Employment and zero inflation is not impossible what is impossible is to attain both goals by means of the same measure as the monetary authorities following the advice of the economists have been trying to do there is no common solution for both problems but as has been explained in the preceding Pages both goals can be reached if they are approached separately separately each by the methods appropriate for that problem uh I'll uh stop right here just to mention that uh Larson has two books on economics this one is called the road to permanent Prosperity the other one is called the road to Full Employment so Larson separates the two and he comes up with answers for both of them uh separately so um you know it may behoove us here in the uh future to also go through that other book um so that we have both prongs of the approach that's needed to um uh allay all of our economic woes what is necessary to recognize is that monetary and fiscal measures are stabilization tools not employment tools and they should be used when and as needed for stabilization purposes only leaving the employment situation for treatment by measures specifically adapted to employment in undertaking an an analysis of the Practical methods that are available for applying fiscal policy to the stabilization program it should be emphasized at the outset that the objective to be accomplished by a stabilization program as we have identified it in the forging pages is to counterbalance the net excess of money purchasing power Reservoir transactions whatever Direction and magnitude that net excess may take thus the effectiveness of any specific measure is determined by the extent to which it contributes toward this objective and any Merit that it may have from some other standpoint is irrelevant a measure that increases production for example may be quite helpful in relieving distress during a depression but production adds equally to the stream of goods and the stream of purchasing power and therefore accomplishes nothing toward correcting the purchasing power unbalance that causes the depression such a measure has no value for stabilization purposes however useful it may be in other respects the same is true in large part of most of the so-called built-in stabilizers which are so widely hailed as bulwarks of the present day economy unemployment insurance says Arthur F Burns is the nation's first line of defense against depressions when business activity falls off the payment of insurance benefits promptly Rises and this offsets in part the decline of income from productive employment galbreth views the situation in these terms quote unemployment insurance means that a man's purchasing power is protected when he loses his job it falls but no longer to zero thus a measure designed to reduce the insecurity associated with unemployment also acts to counteract the loss of output the economic in inefficiency associated with Depression end quote now let us analyze these transactions from the purchasing power standpoint and see whether these confid and expectations are Justified whether unemployment insurance actually makes any contribution toward correcting the purchasing power unbalance that is the root of the trouble this is not an inquiry as to whether or not such insurance is Justified as galbreth pointed out this measure is quote designed to reduce the insecurity associated with unemployment and the justifications for putting it into effect rest upon these grounds but both Burns and galra claim that it is also an anti-depression measure and it is this claim that we want to examine as matters now stand if a recession gets underway the volume of unemployment increases payment of unemployment benefits then Rises if the funds for making such payments are obtained by withdrawal of money from Storage the rising payments would swell the money Purchasing Power Stream and would actually have the kind of a comp com compensating effect that is necessary to offset the deflationary consumed Reservoir transactions but the unemployment funds are not normally held in cash by the state agencies that handle the payments they are either invested in Securities or are deposited in the banks in order to convert the Securities Into Cash they must be sold the amounts paid by the purchasers of these Securities then decrease the money purchasing power available for buying goods in general by exactly the same amount that the purchasing power is increased by the unemployment benefits the net effect on the economic imbalance is therefore zero where the money is withdrawn from the banks rather than from Investments the final result is the same if the banks find it necessary to reduce their loans or investments in order to meet the demand for cash no contribution towards stabilization is made unless one the banks happen to have excess reserves from which the funds can be obtained or two the need for cash is met by new currency issued through the Federal Reserve rediscount procedure the act of buil-in stabilizers is therefore very uncertain and there is no assurance that the stabilizing effect will materialize at all a better case can be made out for those programs such as the income tax which Rises and falls in Conformity with the general State of Affairs uh um I'm sorry with the general state of business here again however the ultimate effect is dependent entirely on the means which are employed to meet the varying Dem demands on the treasury if the loss in Revenue due to a decrease in e in income tax collections is offset by inflationary means by currency issues or by drawing upon Bank Reserves and the same mechanisms are employed in Reverse to dispose of excess collections during boom times the stabilizing effect is actually realized but if the losses in Revenue in the downswing are offset by the sale of bonds to the general public or by Bank borrowing that results in the sale of Securities or C curtailment of loans by the Banks or by a reduction in government expenditures the built-in stabilizers do not stabilize during an upswing there is little possibility that these so-called stabilizers will accomplish anything at all as higher tax receipts normally stimulate government expenditures and even if the excess tax collections are not spent they will have the required deflationary effect only if they add to Bank Reserves or are utilized to retire currency neither of which is at all likely during a period of expandion in business activity the same considerations apply even with even greater force to similar stabilizing efforts by private business economists usually look with favor on these efforts most of them would probably agree with this statement quote the practice of accumulating reserves by private Enterprises in prosperous times and dispersing them as dividends when current profits are low is all in the right direction end quote but such reserves contribute to stability only if they are maintained in the form of cash and business concerns cannot afford to accept the penalty of loss of earning power that would result from carrying unnecessary cash balances nor would they want to retain custody of such large amounts of cash if they did accumulate them any excess cash is deposited in the banks and in a period of rising business activity the banks promptly turn around and lend the money to someone else the mere fact that the business enterprises enter these amounts as reserves on their book means nothing from the standpoint of the economy in general the money that they do not disperse is spent by others and the end result is the same as if these firms had paid the dividends currently and thus permitted the stockholders to spend the money if the reserves are invested instead of being deposited in the banks the purchasing power is simply transferred to the sellers of the Securities when these Securities are sold during a recession to obtain funds with which to pay dividends this process is reversed the buyers of the Securities Transfer purchasing power to the transfer purchasing power to the business which then turns it over to the stockholders all of these transactions are exchanges at the same economic location hence in each case the total amount of purchasing power available for the buying of goods remains exactly the same as it was to begin with and that's principle 15 the factors which make the stabilization efforts of the individual firms fruitless are inescapable from a practical standpoint as the cost of maintaining large idle cash balances is prohibitive however the government is not limited in this manner and it would be entirely feasible to handle government fiscal operations in a counter cyclical manner so that the inputs into or withdrawals from the government money reservoirs counterbalance the net total of the transactions affecting the other consumer money reservoirs kan's deficit spending policy which has been the Cornerstone of us government's counter cyclical efforts since the depression days of the 1930s is aimed in this direction just how to appraise the results of this policy has been a matter of much controversy on the one hand it is clear that the problem has not been solved the admitted fact that the threat of recession and perhaps depression as well still hangs over us is positive proof proof of this but it is also clear that the policy that has been followed has on several occasions injected a certain amount of life or at least semblance of life into the economic picture as matters now stand therefore a continuation and extension of deficit spending is strongly advocated by one faction and bitterly opposed by another some of K's disciples have even gone so far as to contend that it is no longer possible for a private enterprise economy to operate on a self- sustaining basis and that a permanent deficit spending policy is essential to prevent utter collapse of the economic structure for some reason probably connected with their orientation towards sociological objectives spending seems to have a peculiar Fascination for The Economist as Viner put it quote it must not be forgotten that spending in itself is for the Spenders the Supreme pleasure end quote it is common practice among keynesians to extol the merits of government spending and to minimize its disadvantages deficit spending Burns and Watson explained is part and parcel of the growth of government initiative and Enterprise as a dynamic element in the economic system and lson uh puts in parentheses whatever that means uh so uh you can understand where he's coming from um now uh we have a couple more pages to get through to finish this chapter so we will uh uh tackle that tomorrow and uh then move on to the next chapter which is called stabilization methods number two um so thanks for tuning in today and have a wonderful