E-M8 Entrepreneurial Management for Eternal Mission

For a few years now I have been teaching my students in Macroeconomics that FED’s responsibility is to balance between inflation and unemployment. Yet, the more I consider the subject, the more I come to realization that this dicotomy is a falacy. According to Keynes and many other economists economy goes in to recession when the monetary supply contracts, so by gradually increasing money supply one can stave off recessions. Obviously, if money supply is increased too fast we would experience hyperinflation that would cause lots of problems of its own.

My argument is that we have confused the cause and effect. It is when people want to engage in lots of trade that the money supply increases (higher velocity of money equals more money). What really causes people to trade a lot are such factors as low transaction costs (limited and transparent regulation), predictable (stable) markets, low information costs, innovations that cause market shifts (move from tapes to CDs) and most importantly, purpose.  What I mean by purpose is that we as a society have some reason to trade beyond just satisfying our wants.

The best way to stimulate the economy then is to be very careful to not change the rules of the game too rapidly (one reason common law countries and countries with deadlocked governments tend to do very well economically). If the government really wants to help the market, it can create standards that would add to market transarency without increasing other transaction costs. For example, standardized categories that make comparing insurance or medical practicioners easy would do tremendously more for the market than all of the efforts to control healthcare outright. Microcredit and entrepreneurial education would do more for the market than all of the FED’s current efforts.

More importantly, if I am right, the FED’s efforts are counterproductifve, since the markets are too busy responding to the changes that FED causes. Changing rates makes the market less predictable and therefore causes a drag on the economy.

If people have no hope, no purpose, no ammount of cash injections is going to change the way they live their lives. As much as war is a horrible purpose, historically economy has done well during wars and that in spite of wars destroying the wealth of all those involved.  This in my mind is due to the unifying of purpose that the war brings. It’s a sad state of affairs, if we as a country cannot be unified around anothing other than resisiting a common enemy (real or perceived). How about being united around the concepts of service and making a difference? That is the world I want to live in…

What are your thoughts?

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