Friday, August 13, 2010

Questioning the rationality of Current Economic systems

Term Limits for elected officials was meant to work as a self-regulating mechanism - to keep them on track and to address important issues quickly. Instead they seem to have paralyzed them with fear, unable to act. These days, our politicians and economists are faced with making huge decisions to get us out of this financial quagmire - instead they are bickering over small stuff and procrastinating over the big calls. Do we watch or do we act?
How do world economies dive into recessions and crises - time and again? How can the people of any country, large or small, relinquish all control of their lives and livelihoods to dictators, authoritarian governments or even corrupt politicians? Pundits tell us its just Economic and Power Cycles? Yeah, right! Does that explanation really help millions of livelihoods that get tossed into a tailspin during each of those cycles? If you are like me, then you say, don't give me excuses - just don't let it happen, ever again.

Well, that is easier said than done and convenient to blame it all on greed. How about really, seriously finding a way out? Chances are that the solution will not look like anything close to what we have now. Far from it, it will probably be completely new, out of the box and even more surprisingly might actually work. Just think, once we invented ways to get machines do our work for us and computers to do our calculations for us - things that were not even conceivable became possible and accessible to us - the moon, for example - and proceeded to change our lives - for good.

Sounds rational? Or more like a fantasy? Maybe you prefer rational over fantasy? Maybe rationality or the presumption of rational behavior, is the root of all our problems. For example, every one of our institutions and market systems are set up for self regulation - by that I mean, we leave very little to be controlled by chance or vagaries of nature, at least in theory. Then why do they fail us so often? Or why is it that there are only explanations for failures but never a lasting solution? Could it be because it is a fact of life or maybe because we can't effectively self-regulate? Could it be that the inherent weaknesses or flaws in the current systems encourage delegation of that responsibility instead of empowering us with it? Could it be that establishing and maintaining even the basic standards of life is so overwhelming to us that we have in essence reneged on the most fundamental commitments, the very foundation on which all our systems are built upon?

The question to ask ourselves is this: Why is it that we have allowed ourselves, as a society, to be placed in such a compromised position that we are unable to satisfactorily fulfill even the very basic, most urgent, most fundamental commitments to ourselves and the society we live in? Take parenting, for example. Good parenting could be one of the most effective regulating measures in any society, to ensure that every new generation grows up to be productive and progressive, nurtured with social, civic and cultural responsibilities. What forces then, are preventing us from being the best parents to our own children that we rely more on the government and other institutions to take care of them? Similarly, capitalism works best when individual entities and consumers conscientiously enforce the free market rules and participate rationally in their own self-interest. What forces are in play then, that is preventing us from exercising our roles as free market regulators through rational thinking rather than letting it be influenced by our animal spirits? Ask once again, what forces are at play that time and again we have allowed ourselves to be ruled by corrupt politicians and leaders rather than using the power of enfranchisement to maintain law and order and to sustain effective governments?

The answer for all this, in my opinion, is that our economic systems are missing a key balancing mechanism. It is skewed in one direction and propped in place by a flawed and inefficient mechanism to conduct commerce, namely money or it's many derivatives.  Let me clarify, no - there is nothing wrong with money in itself. In fact, money reflects the most rational part of any commercial transaction. Just think about it - money can be measured, it can be compared, it can be completely accounted for, it can be multiplied, it can be distributed and it can be exchanged. It does not grow on trees - in other words, every dollar bill in circulation can be traced to its origins and accounted for. But by that very definition it is physical and is also limited - meaning you just cant pull it out of thin air. So what is the problem?

The problem is that while money is so rational, everything we do with money turns out to be irrational. Just think about it for a minute. Where we choose to live, how we live, what we buy, how much we pay for things we buy, why we buy things, why we work - are all driven by passion, emotion, fear, egos and desires - each of those by that very nature - contextual and ephemeral. In other words, the value we place on things that money can buy is driven completely by our animal spirits. How then can we use such a rational mechanism as money as a currency for exchange in an otherwise irrational transaction? Our animal spirits, are limitless and are subjective, whereas money is severely limited and objective. And yet everything we buy with money is priced and marketed to our emotions and feelings - how is that possible? There are of course many different economic, psychological and political explanations for this - but lets focus our attention on the forces and rules that govern the value of goods and services in a free market.

The best products and services sold in the market are produced with passion - maybe built with hard work and conceived with rational ideas - but only passion injects quality and life into a product or service. We all know that if you do not have passion for what you do, you are not going to do a good job. How can you set a rational price for something that you produced with a lot of feeling and passion? Rationally speaking, you can always set the price of any product or service to be a certain percentage more than what it costs you to produce and sell it - right? Why then can the price of Apple products defy market conditions? How can a retailer charge $50 for an infant's dress while an adult sized Levi Jeans costs you only $20? (Assuming that all other costs are the same)  Of course, we do understand why, but surely someone is always losing in those transactions? Why will it never be economically feasible to produce alternate sources of energy until we have depleted all forms of fossil fuels - even when we know that by doing so, we may be causing irreparable damage to ourselves and our environment? Because it is irrational for businesses and consumers to produce and consume alternative energy when the "monetary" costs far outweighs the environmental, social or health benefits - in the short run. Why is it more sustainable for businesses and governments to work towards producing short term values instead for the long run?

Maybe it is too simplistic to price the goods and services we provide only in terms of money. Maybe we need to acknowledge and quantify the animal spirits involved in the production, sale, distribution and consumption of every goods and service. Maybe we acknowledge that the factors which contribute to changes in demand and supply are more subjective and irrational than objective and rational. One is limited and fixed and the other is unlimited and relative.  Maybe if commerce supports this distinction, it will sort out everything - even the economic cycles.

The solution could be in the form an alternate supplementary currency - catering only to the animal spirits. It should be voluntary, it should be relative, it should be contextual and personal and thereby unlimited. Such a system will empower every individual to maintain and sustain the self-regulatory mechanism in the free markets and political systems. To make capitalism truly self-regulating,  money will be used to maintain a rational balance in the demand and supply cycle of goods and services while this alternate currency will maintain the balance in the animal spirits influencing those demands and supplies. While money with its limited supply, can reflect the computable value of goods and services, this alternate currency unbounded and contextual can reflect the subjective value of animal spirits.

If all this makes sense, then please continue to read about Goodwill Capitalism.

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