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I) Context in Mechanisms in Civics

The easiest way to understand civics is to think of it in terms of Mechanisms. Within the field of Civics itself, the most fundamental mechanism is Game Theory/Prisoner’s Dilemma – that theory is the basis upon which most of the social sciences reside. You can find an explanation of that in later postings in this thread -or- at the beginning of the “Mechanisms in Civics” thread. That explanation is reliant upon a simple book “The Evolution of Cooperation” by Robert Axelrod. In fact you only need to read the first 13 pages of the first chapter. I will do it in 1 or 2 paragraphs. It’s  important & easy.

However, in practical terms of  ruling your country, the most important mechanism involves the mechanisms of Supply & Demand (economics) upon policy. So I present it here first.

II) Context of Anglo-Saxon Civics.

In Anglo-Saxon civics, the primary purpose of politics is to impact economics.

Anglo-Saxon civics would be defined as those countries that use Common Law legal tradition for their legal system; descending from or affiliated with the English system of Common Law. As a member of this society, whether you realize it or not, for reasons discussed in a subsequent post on Common Law, much of the ideological issues in society were, and are, dealt with in the Judiciary branch of governance. That means  the primary purpose of politics in societies that practice Anglo-Saxon civics is to affect economics.

In turn, economics is dominated by the law of supply and demand. That’s it!

There are only two basic dimensions to all of economics: supply and demand. This explains why a two party system can be efficacious in a (quasi) democratic system – if we are talking about a country that uses the Common Law system, i.e. Anglo-Saxon civics. Supply and demand are basically the opposite of each other: as up is to down, right is to left, backwards is to forwards, supply is to demand in economics.

Think about that for a moment. In a highly complex society, with lots of people with lots of different ethnicities, beliefs, orientations, and interest – that society can still function effectively, and highly effective at that, as if it were a democracy (of sorts) with only two political parties. The reason is, most of the ideological decisions are resolved pragmatically in the judiciary. Like it or not, relative to all other systems, this is a highly effective system despite only having the two choices in most elections.

III) The mechanics of Supply & Demand on policy (this is where the essay really begins)

Economics is dominated by the law of supply and demand. That’s it. There is nothing else. Only these two dimensions. Despite having only two dimensions, things can still get complicated enough. But already, from your own practical experience you know all about supply and demand, and it’s intuitive enough.

If there are 6 people who want an apple, and only 3 apples, the price of the apple is dear. If there are 3 people who want an apple and there are 6 apples, the price of an apple will be cheap (low). Note, the price has nothing to do with the cost to make the apple. Note also that wanting an apple is not enough, you must also have the money, that is, the means, to buy the apple. Wanting, even needing, without means is not real demand. Anyway, I think you already knew all of that.

The mechanism, then, is bit like a see-saw: if one is increased, the other is decreased.

So when the supply of a something goes up RELATIVE to demand, the price goes down – this is called deflation. When the demand for something goes up RELATIVE to supply, the price goes up – this is called inflation. This is something else you already know, intuitively.

Because there are only two dimensions to economics, Governments only have two basic choices to influence the economy. It can manipulate supply or it can manipulate demand.

  • The Rub – the Dichotomy of Economic Policy:

The economy is based largely on demand side basis but people occur on a supply side basis.  Squaring that circle becomes a trick that should be engaged by governmental policy. 

What do a I mean when I say humans occur on a supply side basis? Well, people are born with natural aptitudes. They are a bit like dogs: a sled dog is good and enjoys the seemingly impossible, running in intensely cold environments, pulling sleds over long distance. To the casual observer it looks like torture – but to the dogs, its the opposite. They love it. Beagles, on the other hand, are great at hunting rabbits – almost ingenious at it. So, if you need to pull a sled across Alaska in wintertime, a beagle won’t work, but a sled dog is just the ticket. If you need to hunt rabbits, a beagle is the perfect solution, whereas the sled dog is not much better than Elmer Fudd. So most of the time, both sled dogs and beagles are engaged in a secondary job, being companions and pets to humans. We don’t eliminate them, we house and feed them and accept them as pets.  There’s a similar problem with people.

So people are provided on a supply side basis. They are born with natural aptitudes and capabilities (See Gardner’s Multiple Intellegence Theory). Image you are born a natural born programming guru, say around 1970 – and that is about all you are good for.  For the next 50 years, at least, the demand for programmers is going to be huge. You are going to be able to make a living and probably a comfortable middle class lifestyle. Probably you know or are aware of lots of people who meet this description. Now Imagine, you are this same person, accept you are born in the time of, say, the Napoleonic Wars, which took place from 1789-1815 in Europe. You may end up working in some activity which you are marginally good at. The demand and the supply for your skills could leave you destitute.

We don’t want people to be destitute or live that kind of life. So, squaring the circle between supply and demand as it comes to people is an important job of governmental policy. Fortunately people normally do have multiple intelligences (areas where they are above average in skills) and are somewhat flexible and governments are usually willing to manipulate both supply and demand to reduce the distress this dichotomy creates.

In post World War II Japan, for instance, the government policy basically created to different economic systems. Firms engaged in tradeable jobs, like manufacturing, had to operate in a cut throat competitive environment so Japan could succeed in exporting manufactured goods, which was necessary for them to pay for importing raw materials. Firms that engaged in non-tradeable jobs, like retail and much of the service sector was notorious inefficient. In the United States there traditionally has been three stages of product flow to the customer: manufacturing, warehouse, retailer. In Japan there could be as many as seven. If your dish washing machine needed servicing, instead of sending one person to fix it as fast as they can, in Japan, you might get three technicians that spend an entire day determining all that’s wrong with your machine, then comeback late the next day with the part needed to fix the machine and spend the rest of the day to fix it. You may have had to wait several days to get someone to show up. By allowing non-tradeable sectors to be massively  inefficient, they could soak up a lot of employees, while the efficient tradeable jobs create the wealth that impells the overall economy.  Essentially post World War II Japan opperated on the theory that idle hands are the devil’s playground, and that high level of employment created social and economic stability to help society over all thrive.  Western countries, especially the United States, have not been so wise. The economy is efficient, but there’s lots of social hardship. This is a function of the impact of politics on economics in Anglo-Saxon civics – which is what this section concentrates on.

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Generally speaking, most of the time, the Economy is dominated  by demand. First world nations, especially those practicing Anglo-Saxon common law tradition, but usually, also those using Civil Code tradition, have embraced free-contract. Free contract, means Free Market. Market is a euphemism for consumption which is a euphemism for demand. In the United States, 70% of economic activity is related to consumption.

Generally speaking, the bigger the economy, the more wiggle room for government policy: they don’t have to be spot on accurate. The bigger the economy the less precise policy has to be. And most of the time, if the economy is churning along, the government doesn’t have to do much manipulating. However during economic recessions and depressions, that is when government action becomes important.

One other thing – economic growth is a basic necessity for stability in society. A lot of people assume a lot of things about growth that maybe aren’t necessarily so, but if you are concerned the issue of the ethics & efficacy of growth are talked about in a a later discussion on capitalism as a system (also some more on that below).

IV) Basics of Policy.

As stated above, Supply and Demand are dimensionally the opposite of each other in economics. In the passing of time, the relative relationship between the two swings like a pendulum from right to left and back, from supply to demand and back. More appropriately the efficacy of policy biases is more like a see-saw. You can only go so far up on one side, then you hit the maximum point and can go up no further because the other side, which has been going down in proportion, can go no further down. In short there is a limitation to the efficacy of policy bias of both demand and supply and when that occurs they have reached a saturation point. At the saturation point, a policy bias can go no further: it has lost its efficacy to positively affect the economy. And so, at a saturation point a reversal of direction will be necessary. I’ll show you how this works in regard to economic policy..

A) Demand Saturation:

If there is too much demand RELATIVE to supply you get inflationary recessions (so called stagflation).  This means that government policy that attempts to increase demand has lost its efficacy. If policy tries to increase demand further, it gets little or no growth but still gets more inflation.

This means that the economy has arrived at the saturation point for demand side bias policy. The economy then has arrived at the DEMAND SIDE SATURATION point – it can absorb no more demand and have a positive effect on economic growth. Therefore we can say at demand saturation point, demand side bias policies have lost there efficacy.  In truth this is quite rare as I’ll explain below. However, if you are experiencing inflationary recessions (stagflation see 1979) the remedy is simple and obvious: implement a supply side bias policy regime. The implementation of policy regime is where politics intersects with economics and is explained below.

The source of demand is wages in the aggregate across all of society. In the short term, increased credit can substitute for wages in propping up demand, but that’s really borrowing from future wages to impact demand in the present. Without high long term growth, demand borrowed from the future will mean depressed demand in that future. The real way to increase demand is to increase wages, which means giving employees of companies more bargaining power to increase their wages. Other ways to increase demand is for government to increase spending/purchases which will increase demand for employees, which causes employment to go up – more people getting wages. While employers like increased business, they generally don’t like increased wages. Wages are sticky things, so that if and when demand goes down, they are stuck with the higher wages.

Market economy, …. see the paragraph just above

B) Supply Saturation:

If there is too much supply RELATIVE to demand you get deflationary (or nearly the same “lowflationary”) recessions. This means that government policy that attemps to increase supply has lost its efficacy. If policy tries to increase supply further, it gets little or no growth but prices either go down or at best, increase only very slowly.

If you have deflationary or even “low-flation” recessions it means that the economy has arrived at the saturation point for supply side bias policy. The economy then has arrived at the SUPPLY SIDE SATURATION point – it cannot absorb any more supply and have a positive effect on economic growth. Therefore, we can say at supply side saturation point, supply side bias policies have lost there efficacy. If you are experiencing deflationary recessions (1929-1941, 1998-Present) the remedy is simple and obvious: implementation of a demand side bias policy regime. The implementation of a policy regime is where politics intersects with economics as explained below.

The source of supply is investment in production capacity. People invest in hopes of getting a return on their investment (ROI). A successful investor is someone who no longer has to work for a living, but instead can live, if he chooses to (or has to), off the return of his investments. In general an economically  rich person is someone who no longer has to work because he can live off his investments. Once one becomes rich, one hates the prospect of returning to the status of having to work for a living. As a result obtaining a reasonable or even high ROI is very important to rich people. The long term historical rate for investment is around 4%.  But the golden ring is an ROI of 7% because at that rate one’s holdings double every ten years.

i) Other Aspects of Supply Saturation – Investment Bubbles. 

Most humans have hope for rising expectations in general, and because of that, are susceptible to greed. In proper moderation this is normal and healthy. Commercial law exist to channel human desire for advancement into socially constructive activity: i.e. “orthodox” activity.

In supply side saturation, it becomes harder and harder for investors to get good ROI by doing orthodox investing. There’s no point in investing in building additional factories if there is already too little demand for the current capacity to supply. This creates stress for investors: they need decent ROI to remain rich. When some small sector of the economy does offer good ROI, such as new technology – which brings with it its own latent demand (there’s always demand for a better mouse trap) – investors flood into that sector creating an investment bubble.

So, the emergence of investment bubbles is an indication that the economy is in supply side saturation. It is time, then to switch back to demand side bias economic policy regime.

ii) Other Aspects of Supply Saturation – Deregulation.

Commercial law exist to channel the human instinctual pursuit of personal progress (personal enrichment – and in its extreme it is called greed) into socially constructive behavior. Investors can build all the new factories and businesses that they want if it is viewed socially constructive, that is to say, orthodox investing. Commercial law then prohibits pursuit of things that are socially destructive, that is to say, unorthodox investing. We rope off the areas and means of activity that are viewed as socially destructive through regulation. When it becomes increasingly difficult for investors to find good ROI from orthodox investing, they begin to demand access to unorthodox investing, things like: payday loans, subprime mortgages, high interest credit for high risk borrowers. This is called a push for deregulation. Because investors are usually rich and because they are insistent, the government usually relents. Also, because credit can cause demand to go up in the short term (because it borrows demand from future wages), it can create artificial  short term increase in demand, and that can make an economy look like it has healthy demand, when in fact it does not.

V) Asymetry between Demand and Supply. 

Supply and Demand are not symmetrical. The United States essentially has a (mixed) market based economic system (more on what “mixed” means later). The term “market” is a euphemism for “consumption” which is also a euphamism for “demand”  (When they say there is no ‘market for buggy whips’ it means there is little demand). So, a market based economic system, the system, itself, has a market based bias. In the United States, 70% of all economic activity is related to consumption, that is to say, demand. Only 30% of all economic activity is related to production, that is to say supply. As a result, the efficacy of supply side bias policies, versus demand side bias policies is not symetrical, that is to say, the efficacy of the respective policies is not 50/50, but roughly demand side 2/3rds to 1/3rd supply side, or more directly 2 to 1 in favor of demand. Various real world measurements bare this out.

So, the efficacy of supply side bias policy regime is less than the efficacy of a demand side bias policy regime by about a 2:1 ratio. This holds up in other comparisons.

In 1941, World War II began an era of strong demand side bias policies. 1945 began the post war demand side bias policy regime – this phenomena was true, not just in the United States, but everywhere in the free world. By 1973 both global and (American) national economic output had more than doubled: in 30 years the economic output of the world increased more than it had the entire 11,000 year history of humanity (since the neolithic/agricultural revolution). Beginning in the early 1970s however, an era of strong inflationary pressure ensued, helped along by petroleum price shocks in 1973 and 1977 which pushed prices higher. By the end of the 1970s the United States was experiencing stagflation: demand side saturation. 1979-1980 was time for a switch to supply side bias policy regime era.

In 1981,  a steep recession began with the Reagan administration, inaugurating an era of supply side bias policy regime. The recession was steep and long, but cleared by 1984. Another recession occurred in 1991. The 1980s saw one financial scandal occurr, the Savings and Loan crisis and one stock market correction, Black Monday in the fall of 1987. 1992 began a period of strong economic growth that lasted until 1998. However, in 1998 a massive investment bubble, the dot com bubble, occurred. The late 1990s saw a growing chorus for financial deregulation that ultimately succeeded in some deregulation passing. A recession followed the dot com bubble in 2000 that had deflationary/lowflationary pressure. By the 2000 recession, with its investment bubbles, its deregulation movement, and its deflationary pressure,  it was clear that the economy had arrived at supply side saturation in the very late 1990s.

In round numbers, the demand side bias regime inaugurated by Roosevelt lasted about 36 years (1945-1981), while the supply side bias regime inaugurated by Reagan last 18 years (1981-1999). The ratio in duration is 2 to 1. The production increases during the demand side era were more robust as well. To a certain extent, in a market (i.e. demand) based system, supply side policies are a bit of pushing on a string. You can’t expect supply side policy eras to be as effective, even in the short run, nor to last as long, as demand side bias policy eras in a market based system.

VI) Squaring the Circle – the need for a mixed economic system. 

Though the United States essentially has a market based economic system, technically it is a mixed economic system with a strong free market based bias.

VII Recent Economic History

A) Pre World War II to the Immediate post war era. 

i) Supply-side era: World War I to the start of the Great Depression

The narrative of history goes like this: some time during the 1920s, and maybe for the entire decade (because of global imbalances caused by World War I and its aftermath), the economy hit supply side saturation.

Near the end of this era came the increase in reliance on credit to sustain demand – in part done by consumers who borrowed money in an attempt to maintain their life styles while under negative pressure, and to help investors -in the role of lenders- who were finding it increasingly hard to get decent ROI from more orthodox investing. Some of this investing was credit supplied to purchases of stock shares. Eventually the credit market ran out and that triggered a catastrophic collapse in demand and in the financial markets in late 1929.

A variety of policy mistakes after the initial collapse made things worse (central bank policy, government fiscal policy, general trade and tariff policy [the latter a bit dubious as to conventional claims because the tariff was essentially returned to where it had approximately been only two years before – but perhaps in context to all other events it was consequential]).

Employment and economic output dropped by one third. Ultimately, the total number of people employed in the United States in 1929 was not reached again until the autumn of 1941.

ii) Recovery from Depression – The dawn of, and baby steps towards, Demand Side bias policy era 

Between 1929 and 1941 there was a series of government attempts to create employment that helped to alleviate the depression somewhat. Despite increasingly larger  efforts and programs, the results were still only of limited success. In 1937, the government cut back on the programs and high unemployment immediately came roaring back. 1938 resulted in new and larger government programs restoring employment to where it had been in 1936 though still far below 1929 (in absolute and percentage terms).

In 1935 the passage of the Wagner act  gave immense bargaining power to employees – a significant demand side policy shift. Also in 1938 the European states were in an armaments race between Germany and England and France – creating immense new demand there through government spending on arms. Because England and France were two years behind Germany, some of that demand resulted in armaments contracts in the United States.

Finally, in the late 1930s, the United States itself began to rearm as reaction to Germany and Japan’s increases in armaments. So by autumn of 1941, employment levels in the United States was back to where it was in 1929. One problem with that, though, in those 12 years the labor force had increased by over 12 million people, so that the labor market was still soft, as were wages. Then in December 1941, Japan bombed Pearl Harbor, triggering the United States entry into World War II. From 1942 to 1945 the GNP of the United States doubled but production was focused on war material. Wages of workers went into savings, especially many of the women workers. There was a general fear that after the war the economy would see a return to depressions as had happened after World War I. However the accumulation of policy changes, such as the Wagner act, plus the accumulation of personal worker’s savings during the war became a source of demand once the war was over.  The United States, using a mixed economic system, along with the rest of the world, entered an age of demand side policy bias regime.

iv) Lessons (that should have been) Learned

Sometime into the late 1920s, perhaps earlier, (perhaps tied into global arrangements, perhaps as a result of the resettlement of peace at the end of World War I) the United States failed to perceive it had reached supply side saturation. The Great Depression occurred as a result. The Great Depression was an intense deflationary recession. Halting steps at demand side economics occurred. The Hoover administration made far too narrow, far too little, far to late attempts at enhancing demand – but the Republican party was far too steeped in ideology to go the full measure. The first Roosevelt administration was far more pragmatic when it came to ideology, and so made significantly greater attempts at demand side bias policies. These went a long way towards remedying the problem but still proved insufficient. When, at the beginning of Roosevelt’s second term, some of the demand side measures were curbed back to balance the budget, unemployment collapsed back to the intense levels of the Hoover administration. It was only with the massive government spending for armaments during World War II, did the economy shed its deflationary, recessionary bias. The level of government spending during World War II swamped anything that had come before.

The lesson learned, for anyone paying attention, is that deflationary recessions are frighteningly difficult conditions to remedy, and so should be avoided at all cost.

Deflationary recessions, for an economy, is similar to a airplane stalling out. (An airplane stalls when it hasn’t the thrust, power, or momentum to continue moving forward when attempting a steep climb – it is similar to entering a hill climb on a bicycle with too little momentum, and too little power, to reach the top of the hill climb). Planes are held aloft by air passing over their wings creating lift – if there is not enough speed, there is no lift, so the plane begins to fall spinning tumbling, pivoting out of control. For a conventional single engine propeller airplane the remedy to regain control of the airplane is drastic, radical, and counter intuitive. To regain control of the plane, the pilot attempts to point the plane’s nose downword, an attempt to cause a dive towards the ground even while the plane is still tumbling out of control. The hope is that as the plane speeds up as it is falling, seemingly crashing towards the ground, enough speed will pass over the wings and tails to permit their surfaces to resume control. If there is not enough space the plane crashes to the ground. So the fright and anxiety is exagerated for the passengers while they wait to see if control is returned before the plane smashes into the ground.

Likewise, the remedy for deflationary recessions caused by supply side saturation requires more than proportional counter measures. The government’s make work and other demand side measures did not end the Great Depression’s era. It was the over the top, to what in normal times would be ridiculous proportions, that ended the deflationary era that was caused by supply side saturation in the 1920s.

But unnecessary economic suffering wasn’t the only result of the 1920s supply side saturation. The artificial austerity that economic concentration of wealth that is characteristic of supply side saturation also can trigger the ascent of identity politics. The basic logic of identity politics works a lot like musical chairs: because of austerity induced by concentration of wealth, there are not enough chairs to go around, so the issue becomes “who will go without a chair?”  Identity politics triggers majorities to coalesce so they can use the power of their majority to ensure that they are not the ones to go without a chair: if anyone is going to go chairless (i.e. starve for lack of resources), it is going to be those that identify as minorities. This is certainly what happened in Germany especially, but also but to lessor extent, in Japan, Italy and Spain, as a result of the Great Depression.

For most of the rest of the 20th century, in most of the ‘free’ world, because of fear over the degree of harm that results from supply side saturation, policy makers throughout the “free world” had a decidedly bias towards, and tolerance of, higher targets of inflation, which is to say, they had a policy bias towards demand side economics.

B) The Post-War Demand Side policy bias era: 1945-1980

1945 (- 1980) began a demand side policy bias regime created the greatest golden age in history, and it had global proportions. Governments had high tax rates for high income earners (to ensure that wealth did not concentrate at the top) and invested heavily in infrastructure. To assist circulation of resources from the top back to the bottom, unions became widespread giving workers more bargaining power. Wellfare arrangements were provided for the poor. Education was subsidized at every level. Gains in productivity were spread evenly across all sectors of society: poor, working, middle, and upper classes. In the United States, GNP had doubled during the war, it doubled again by 1973 for the United States and for the world as a whole – meaning the world grew more in less than 30 years than it had the prior 11,000 years of human history (since the neolithic/agricultural revolution). Every area of human endeavor hit new heights (except painting, unless you like Jackson Pollock): engineering, medicine, technology, architecture, music, film, literature, musicals, culminating in the landing of a man on the moon, the jumbo jet, and microcircutry by 1969.

By the mid 1970s, aided by petroleum price shocks, the economy began bumping into stagflation. The 1970s held multiple recessions, which were all characterized by stagflation. It was time for a policy switch back to supply-side policy bias era.

C) The Reagan Revolution Supply Side Policy Bias Era: 1981-1998

1981 then began a supply side policy policy bias regime era. That era saw large growth .