A More Stable Economy

With the Invisible Hand Adam Smith left us with a quaint metaphor to describe prices in most situations. Were he writing today, he would probably use the term “negative feedback loop” as that is what he described. This is not the same thing as equilibrium; if the inputs are changing then the output changes even with negative feedback. But it does imply a system more stable than what we observe. In the real world, the Invisible Hand is often unsteady. Karl Marx had this much correct.

But Marx’ prescriptions were worse than the disease, killing millions and harming billions. The Western World’s remedies have been less drastic and disastrous, but they did help make the Great Depression great, and to this day burden us with unproductive busy work offsetting many of the benefits of technology. And while the powers that be have learned from past mistakes, we still have government-enhanced recessions. The Visible Hand can also be unstable.

Here, we will investigate an assortment of instabilities – positive feedback loops – in a modern mixed economy, and explore multiple remedies. Unlike Keynes, I will attempt no grand unified model of the economy. Instead I will point out instabilities in various pieces of the economy: stocks, commodities, labor, real estate, international trade, banking, etc. Some of these areas are broad enough to trigger a full on recession by themselves.

My remedies will involve some regulation, but for the most part the regulation required will be simple, and won’t require a bureaucrat-god to successfully implement. There will be laws, but we can have Rule of Law and a more stable economy.

While I will criticize central and fractional reserve banking, I will not lay the blame for all economic instabilities on these institutions. An economy which cannot withstand the shock of a bit of currency manipulation is not a stable economy. At times I will echo the Austrian School gold bugs, but at other times I might sound a bit like a Marxist. You have been warned. Stable, yet growing, economies are rare in history. Ergo, some creativity is required.