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Economics and Demographics : Continued
Exogenous Variables: The Five Horsemen
Horseman Number Four: Economic Dogma
Government action depends on how rulers perceive the world and what goals they set based on these beliefs.
The Egyptian Pharaohs understood that the purpose of society was to ensure their own rule and their journey through the after life by building great temples and tombs.
Government actions depend upon how rulers perceive the world and the goals they set
The monarchs of medieval Europe perceived the importance of armies and cathedrals in keeping God on their side and their enemies away.
Nineteenth century Americans, guided by the Protestant Ethic, saw 'manifest destiny' and the need to occupy the West and contrive inventions that would bring material well-being to all.
Government in that century was concerned with the metallic content of money, tariffs, and the power of corporations and banks.
Today's High Priests
In the late twentieth century, American government defined its goals in terms invented and monitored by the orthodox economic priesthood that ruled from the Federal Reserve, the Treasury Department, the Great Universities, and the economic arms of the State Department: the World Bank and the IMF.
Goals are now set in economic terms that most of the population can not really understand.
We strive for increased GDP, steady but low inflation, productivity, and near-full employment, without fully grasping the significance of these numbers. [See Essay: 'The Truth About the GDP']
Karl Marx Was An Economist
The teachings of Karl Marx, distorted and simplified, provided an economic theory to support the Soviet Union.
Lenin arrived in St. Petersburg and installed a communist state, shutting down Russian stock exchanges for seventy years.
Lenin shut down the Russian stock exchanges for 70 years
When the Soviet dictatorship collapsed and Communist China moved towards a market economy, it appeared for a brief moment that orthodox economics of Western democracies would triumph as the revealed truth.
However, the repeated failure of economic nostrums applied by the International Monetary Fund to dozens of developing countries cast doubt as to the reliability of these beliefs.
The Death of Economics
A British professor of economics, Paul Omerod, has described the short-comings of orthodox Western economic theory in an easily understood book, 'The Death of Economics.'
The following quotes from the Preface to the North American edition set the theme of this most useful work:
' … Orthodox economics is in many ways an empty box.
Its understanding of the world is similar to that of the physical sciences in the Middle Ages.
A few insights have been obtained which will stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed. …
Conventional economics offers a very misleading view of how the world operates. …
The most devastating critiques have come from within economics itself, from those equipped with the formal modeling and mathematical skills to expose the limitations of orthodoxy on its own terms. '
Professor Omerod goes on to acknowledge that his book was criticized by many orthodox economists:
'The reception by conventional economists was in many cases hostile, some to the point of abuse. …
Taking the reaction to the book of economists as a whole, I cannot help but notice with amusement the clear correlation between the degree of hostility shown and the amount of taxpayers’ money which the economist concerned and his or her institution receive to carry out conventional economic research. …
Too much of economics has deteriorated into intellectual games subsidized at the expense of the taxpayer.
The best economists are fully aware of the limitations of their discipline.'
Without the useful political counterfoil of communist doctrine, orthodox economics now stands naked before the world and is unlikely to survive many more national economic disasters.
The mystical mathematical cloud of phony science that some economists use to intimidate the laity is already discredited by those who hold firm to commonsense.
Saving LTCM
The rush of functionaries of the Federal Reserve to shore up the failing hedge fund, Long Term Capital Management, may have had a legitimate justification, but also may have been an effort to save the reputation of Nobel laureates whose practical application of economic theory had gone so badly awry.
It is not yet clear what economic dogma will guide governments in the 21st century
The infamous Efficient Market Hypothesis that had narcotized the brains of so many professional investors during the Great Bubble of the 1990s has already been discussed in Lesson 7.
The spurious use of productivity statistics and the Gross Domestic Product are described in two essays on this site.
It is not clear what doctrines will replace today’s economic dogma and guide government policy in the twenty-first century.
We might hope that commonsense and the future of mankind will be ingredients, but there is no assurance that this will be so.
Politics and the interests of the establishment play a dominant role in economic theory.
In any case, the evolution of these doctrines will be among the random elements that jiggle and shake capital markets in coming decades.
Horseman Number Five: Demographics
There is nothing that influences governments and capital markets more than demographics.
As American Baby Boomers move into retirement and assisted living facilities, there will be a need for them to sell investments to pay escalating health costs and living expenses.
Since succeeding generations are smaller, these asset sales will put pressure on investment prices.
However, the demographic imbalance caused by Baby Boomers may be over-come by immigration.
Tomorrow's Americans Will Be Different
High minimum wages in the United States draw millions of workers from Mexico and Latin America, eager to participate in the American Dream.
The family and conservative religious values of Latin immigrants would normally swell the ranks of the Republican Party, but as usual, the Republicans dropped the ball, yielding the advantage among Latinos (except Cubans) to the Democrats.
The flood of Muslim immigrants into Europe is likely to weaken America’s influence in NATO.
Equity values are spurred as much by demographics as by technological advances
In the United States, Muslims almost equal the number of Jews, which, considering the fast-growing cohorts of Black Muslims, may shake up the Democrat party and long-standing U.S. support for Israel, especially with increasing costs of the War on Terror.
American Jews, for their part, are inter-marrying with Christians, moving away from traditional outlooks and customs.
Orientals are also arriving in the United States in large numbers, bringing valuable entrepreneurial skills, capital, and family values.
The growth in equity values over the last one hundred years has been spurred as much by changing demographics as by technological advances.
The United States still has empty space and immigration could provide the stimulus that reinforces the capital market.
However, restrictions on immigration stemming from the War on Terror, as well as antipathy towards inflows from people both from the labor wing of the Democrats and anti-welfare elements of the Republicans, may hold down immigration and slow economic growth.
Five Horsemen That Will Confound Economists
It is not so much interest rates that drive the economic machine as the exogenous forces of war, leadership, demographics, and technology.
These great random levers of the economic machine are beyond the reach of the Chairman of the Federal Reserve Bank.
Before proceeding, check your progress:
Self-Test
According to Paul Omerod, economic theory and economists are:
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The factor that influences capital markets more than any other is:
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An economic theory that had a devastating effect on at least one flourishing capital market was:
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Themes Learning Module : Completed
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