Tags: Economic Doctrine | Demand | Supply Side | Investors

New Economic Doctrine Needed as Demand and Supply Side Theories Fail

Wednesday, 25 February 2015 06:59 AM

I am still in Europe this week. Towards the end of last week I got an opportunity to meet with the head of Research of the largest fund manager in Europe.

It was fascinating to watch and listen to him and get an understanding of how the modern day traders think and why the world is in so much trouble.

As you can imagine, he is a die-hard Keynesian fan and believer. For all those who want to learn, John Maynard Keynes (1883-1946) was the propounded the theory that the aggregate demand created by households, businesses and the government and not the dynamics of free markets is the most important driving force in an economy.

That is the current theory that grips this world where Central Banks are printing money with the hope that the money will lead to growth in the world as more money in the hands of the people will lead to them demanding more goods leading to more production.

In my view this theory has been broken decades ago. What this theory does not account for is the fact than a human psyche is scarred and shaped by their experiences.

What the people suffered through during the Great Depression stayed with them for a very long time.

It did not matter that the Central Banks tried to stimulate demand assuming people are like cattle, herds that can be moved in a certain path, and that they will follow mindlessly. People remember and act instinctively. Instincts yearned savings and for decades they saved.

Fast forward to 2008 and we suffered (I believe we are still in the throes of) the next depression. People have once again been jolted into becoming savers. A direct proof of that is with the drop in gas prices in the US, the assumption made by Keynesians was that all the additional savings will drive up demand for goods.

Instead the statistics is proving that while demand is up, it is nowhere near the additional dollars in the consumer hands. A lot more is being used to pay down debt than ever before. As a result, the underlying principles of Keynesian theory is now more broken than ever.

Well, then is Supply side economics true? Supply side economics advocates large scale tax cuts for individuals and corporation, deregulation of businesses, and strong incentives for investment. Based on Say's Law, and supported by classical and monetarist economists, this theory is also known as trickle-down economics.

The theory is that if you give the money to the rich, they will start businesses and employ more people which in turn will lead to overall economic benefits for all.

Favored by the Republicans, we have seen a somewhat diluted effect of this already without actually applying the economic theory. The trillions that have been printed so far have essentially landed in the hands of the rich. What did they do? Did they start or expand businesses? Did the money reach the hands of the ordinary folks?

Instead we see asset bubbles everywhere. The stock markets are up, real estate (in pockets) is soaring again. For Pete’s sake, even the price or ludicrous art is up and wines are selling at high premiums. Is that the signs of the supply side economics working?

If the two major theories are ineffective, where does one turn?

What this world needs is a bucketful or fresh ideas. We need some original thinkers and a bunch of leaders who are not interested in getting re-elected, but actually making life better for the people. We need consensus rather than derisive and divisive political bickering.

While I do not condone many of the human rights violations of China, I do believe their economic doctrine has somewhat worked for past 20 years. Before all the China naysayers come out in droves, hear me out.

I am not advocating Communism as I hate anything that takes away human rights and liberties. But that can also be said about some of the policies in today’s world we live in.

Basic human nature desires freedom and opportunity to grow. While China cracks down on some fundamental human rights, it has given its masses the opportunity to grow even under the communist doctrine. China has the second highest number of Billionaires only behind America. If communism was rampant in China, this would not have happened.

We should study the model and find the good parts that it enshrines to adopt it in to our Western world thinking. I am sure we are smart enough to do that.

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I am still in Europe this week. Towards the end of last week I got an opportunity to meet with the head of Research of the largest fund manager in Europe.
Economic Doctrine, Demand, Supply Side, Investors
Wednesday, 25 February 2015 06:59 AM
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