of

WILSON OGG

Biograpohical Data

An Unifying Approach to Consciousness and Matter

ECONOMICS AND THE UNIFIED THEORY

Introductory Remarks

In a free market, each person uses what Hayek termed "knowledge of the particular circumstances of time and place." Hayekian economists often refer to this type of particular information as "local knowledge." Under the Soviet Union, buyers could not communicate what they wanted through a market system for the simple reason that there was no markets. Production was based upon decisions made by central planners in ignorance of the need and wants of the Soviet people. The result was chaos and widespread poverty.

Proper economic analyses require the balancing of insights obtain from (1)micro-economics and macro-economices, from (2) the harmonous working together of capital, labor, and raw materials and resources, from (3) a thorough understanding of the operation of the Federal Reserve System, from (4) the effective utilization of both entrepreneural and managerial skills, from (5) relating general economic and societal forces to particular localized conditions, from (6) montary and fiscal policies, and from (7) recognizing the impact of centrifugal and centripetal forces upon the general economic welfare of a nation and of the community of nations. Centrifugal forces are usually studied under the fabric of macro-economics and centripetal forces under the fabric of micro-economics.

Entrepreneural skills are centrifugal,positive, yang, outgoing, and highly imaginative but not necessarily intuitive. The entrepreneur can create a new enterprize from scratch but lack the aptitude and motivation to manager his entrepreneural achievement on a daily basis. For this he needs a person with managerial skills that are centripetal, negative, practical, yin, and often intuitive. Thus, both approaches are required in a sound economy. Balancing these approaches are difficult, and societal pressures often encourage managerial skills over entrepreneural skills. In nineteenth century America, entrepreneural skills were encouraged and rewarded, but in twenty-first century America mangerial skills are encouraged and rewarded over entrepreneural skills.

In order for a society to achieve the efficiency of a free market economy, it needs to develop incentives encouraging the exercise of both entrepreneural and managerial skills. Small businesses are often started by entrepreneurs, and such businesses are essential for a healthy economy. In other areas of the economy, large corporate enterprizes are also essential for a healthy economy. Schools of business administration have as their major focus the training of business managers, and these schools need to develop educational methods furthering greater imaginatiive and innovative skills in their training of future business managers. It is clearly less difficult to encourage a limited number of entrepreneural skills among future managers than to encourage managerial skills among future entrepreneurs. Moreover, few entrepreneurs seek higher education in business administration but many managers seek higher education and thus make themselves available to the exercise of creative educational techniques firthering greater openness in thought leading to more productive exercise of managerial skills.

A free market economy depends upon the effective and harmonious working together of capital, labor, and raw materilas and natural resources as contributory factors. Of the three, capital is probably the most significant. Without sufficient capital, natural resources of a society cannot be effectively utilized and labor productivity is dependent upon a capital investment per worker that enhances worker productivity. However, capital cannot serve as innovative and dynamic without able entrepreneurs and managers. Natural resources, moreover, enhance greatly the capability of labor and capital to serve as the foundations of a sound economy. However, with effective utilization of labor and captal, a country, such as Japan, can compensate for the lack of raw materials and natural resources.

Many economist fail to understand clearly the differences between static or dead capital and dynamic or live captal. Static capital is the savings of persons from labor and is not effectively utilized in such a manner that its expenditures increase the capital resources of a society. Dynamic or live capital, originally derived from savings, operates within a legal system and market place that allows the expenditure of capital to create more capital and to increase the underlyong capital value of a society. The development of a legal system that recognizes the property ownership rights of the citizens of a country is an essential ingedient of dynamic capital. In many countires, such as Egypt or Peru, possessory interests of their citizens, although recognized by records in their local community and by their neighbors, are not recognized by the legal system of these countries and may be extra-legal or illegal under the recognized legal systems. As a result their market places become black markets, and captal accummulation leads to static or dead capital. Only after possessory interests receive recognition by the broader legal system can property interest be readily transferred and serve as collateral for loans, allowing these possessory interests to serve as the foundation of caital creation.

Static labor is so-called work that does not further productivity. In many situations, such as contra-productive affects of government bureaucracy, static labor may be a major contributory to the low productivity of an economic system. Low productivity is often a feature of a society that lacks dynamic capital but this is not necessarily always the situation. A society with significant dynamic capital, such as the United States, may become bogged down by excessive bureaucracy in both its private and public sectors partly as a result that it has sufficient capital to waste in non-productive uses. In some undeveloped countries, lacking in dynamic capital, the lack of dynamic capital encourages labor to become more dynamic and productive. The relationship between labor productivity and capital is a complex one, with regions of some countries having greater dynamic capital than other regions and, at the same time, some regions of a country having more dynamic labor than other regions.

Ordinarily a person would not view raw materials and natural resources as static or dynamic. However, such materials and resources may operate in an economy in a static or dynamic manner, depending upon how they interact with capital and labor. Unions of coal miners may encourage both low productivity of coal miners and the use of obsolete coal mining procedures and discourage more productive sources of energy. What constitutes dynamic resources, moreover, is dependent upon the level of technology and sophistication in production processes possessed by an economic system, with same resources in one economy being static and in another economy being dynamic. At the same time, resources are not necessarily utilized most effectively in the country with these resources, which may be exported and effectively utilized by an economy with sufficient dynamic capital and labor to recognize how these resources can be effectively utilized and with societal and cultural values encouraging the dynamic utilization of these resources.

Before World War II, both capital and labor in Japan would be described as static. It was partly a result of the static nature of capital and labor, that the Japanese felt that they needed to expand their borders to gain the natural resources that their country needed as a result of the low productivity of their labor and capital. With high productivity in the capital and labor sectors of their society, there would be no reason why Japan could not import the natural resources and manufacture goods at a profit, probably at a lesser cost than the cost of incorporating other regions as a part of the Japaness empire.

Japan was controlled by feudal lords who restricted greatly the effective untilization of real property and resources in Japan. MacArthur recognized that the feudal lords controlled the Japanese military and were the major segment of Japanese society that caused the war in the Pacific. After World War II, he recognized that to assure a peaceful Japan the power of the feudal lords had to be destroyed. For this reason, General MacArthur as commander of occupied Japan changed drastically the rights of ownership of the Japanese people. Instead of basing the redistribution of wealth from a powerful central government from above, he based it upon the locally recognized possessory interests of Japanese persons in their homes and businesses, possessory interests that were not previously recognized by the legal institutions of feudal Japan. This approach allowed for the establishment of dyanamic capital as a feature of Japanese society.

Once the product of the labor of the Japanese workers no longer served mostly the interest of feudal lords, workers become much more dynamic and imaginative in their labors: The increase in wealth went to them as well as to the greatly disempowered feudal lords. It took European society and American society many generations before the possessory interest of their citizens become fully recognized by their legal systems but Japan accomplished this in a generation, thanks to the wisdom of MacArthur, who was probably a better statesman than a military leader.

Japan has not achieved a free market economy as a result of unwise and counter-productive policies of its central bankers, who are often unduely influenced by the remnants of the Japanese feudal class. Even though an economy may have a large degree of dynamic capital and labor, the affect of misguided managerial bureaucrats in control of the central banking system can often throw a wet blanket over an otherwise dynamic economy. The central banking system in the United States has also often played a counter-productive role, with its negative role being completely ignored by the financial press and government elected and appointed officials.

Many professional economists are ignorant of the powers and immense influence that the banking industry and its effective control of the daily operations of the Federal Reserve System has upon the American economy. These economists also often ignore the immense government assets not set forth in the government budgets on revenues and expenditures. The actual resources of the Federal government, for example, is many times the national debt. These assets are set forth in comprehensive annual reports of the Federal government, the states, and municipalities but are unmentioned by the politicians, news media, and nearly all economists. Income from these resources are generally not treated as spendable income and is added to the capital value of the resources.

Most people do not realize that under the American banking system private banks are allowed to create money on the credit rating of America without the payment of any interest on these funds. These funds are in a real sense borrowed from the government of the American people. Thereafter, the government is forced under the American banking system to enter into indebtedness and pay interest on moneys the government allows the banks to create. The Federal Reserve System, ignoring the convoluted lanaguage often used by bankers to obscure what is really going on, is the mechanism by which this result is achieved.

There is considerable confusion among members of the general public, and even in economic textbooks, between the reserve requirements for banks and those for savings and loan associations and credit unions. Savings and loan associations and credit unions hold a percentage of their deposits as reserve but banks, if the reserve ratio is ten to one, can lend out ten dollar for every dollar on deposit. The so-called reserve requirement for banks is really not a reserve requirement at all but a means by which banks are given the privilege of money creation. It is a privilege that even the United States Government does not exerise. The government can obtain funds only by taxes, income on government assets, and by bonded indebtedness. Bankers are notorious in using words that are misleading as to what is really going on. A privilege should not be called a requirement. "Excess reserves" mean entirely different things for banks and for savings and loan association. For banks it is not a percentage of its deposit but the unused portion of the amount of money that a bank has the privilege of creating.

Completely ignored by economists and the financial press is that the American government has the power to purchase all government bonds owned by the banking industry and thereafter cancel the national debt. But this procedure will never be done, with any politician suggesting it committing political suicide. In practice, when the government retires existing bonds, it enters into new bonded indebtedness to pay off the bonds being retired, leaving the national debt in the same amount. If the government retires existing bonds, and cancels the national debt, it would cancel the national debt by not issuing new bonded indebtedness to replace the bonded indebtedness that is being retired. The reason why this would not be done is political and not economic. The banking industry and the press would accuse any politician suggesting the retirement of the national debt of irresponsibility, impracticality, and wanting to damage the American economic system. The elimination of billions of dollars of subsidies to the banking industry is not political feasible, even though from the economic viewpoint it is the thing to do.

The Fed may purchase bonds from the government or from the so-called member banks. If bonds purchased from the member banks are retired, and the government does not issue new bonds to replace the retired bonds, the mere purchase of these bonds is not necessarily inflationary. The Fed can regulate the reserve ratio or the extent of the privilege that banks have to create money, thereby reducing the amount of money banks can lend to borrowers. The buying of newly issued bonds by the government would not necessarily be inflationary even though the issuance of the bonds by the government could be inflationary. The buying of previously issued bonds from the member banks would ordinarily be inflationary since the funds received by the member banks could be used to multiply the money supply. The government may sell bonds to the Fed, with the issuance of the bonds being inflationary, and the Fed, in turn could sell the bonds to the member banks if it decides to limit the money supply by reducing the funds available to the banks for lending purposes.

When the government sells bonds and other evidences of indebtedness to the Fed or to financial institutions or to private indiduals, the government is entering into indebtedness because it is forced under existing practice to spend money not derived from government sources of income by going into debt. This type of money creation is somewhat different from the money banks create under the reserve ratio privilege in extending loans to businesses and private individuals. The issued bonds might not be sold to the member banks, and these banks would not necessarily have an extended privilege of money creation. In effect, the government borrows money that is created by its own credit rating. If the Fed holds the bonds itself, the interest paid on these bond, after deduction of Fed expenses, would go back into the U.S. Treasury. If the bonds are sold by the government directly to the member banks, and the bonds are thereafter purchased by the Fed, the banking industry would then have the privilege of creating money under the credit rating of the United States of America, even though the government does not use its own credit rating to create the required funds. When the banks purchase bonds directly from the government, it could necessarily use money that it is privileged to create. Thus, its ownership of government bonds is a subsidized one.

The government could create money without indebtedness. President Lincoln did when the government issued greeback notes. If the creation of money is controlled and regulated, the effect on the economy would be similar to that when the government enters into bonded indebtedness. The main difference would be that billions of dollars would no longer be used to subsidize the banking industry. At a time when politicians of both parties treated the United States as having a budget surplus, this treatment was contrary to fact. The alleged surplus when used to retire existing loans would be a required expenditure that should not be treated as a budget surplus. Both Republicans and Democrats assumed that new bonded indebtedness would be used to pay off the retiring debt, with no effect on the amount of the national debt, thereby treating the amount used to pay off the retired bonds as a surplus.

The subsidy to the banking interest may take many forms seldom diccussed by the financial press and editorial writers. Many economist are not even aware of these subsidies. For example, the Fed can lend reserves to banks that can then use these reserves to multiply the money supply ten fold, if the reserrve ratio is ten to one. Then banks can then use the money they created by the use of these reserves to repay the Fed for the borrowed reserves. It is as if you are allowed to borrow a million dollars, and thereafter have the privilege of creating ten millions dollars, and then use one million of the ten million to pay off your debt. This privilege is clearly not a liability requirement. The inflationary effect of borrowwed reserves is ignored by the financial press. The inflationary effect of borrowed reserves during the late 1990s and the year 2000 was ignored by the financial press and by professional economists and much of the money created went into the Dow Jones Industrial Averages. The press put way too much emphasis on interest rates set by the Fed and ignore the effect of borrowed reserves on inflation.

During the year 2000, Greenspane even had the Fed make interest free loans to market makers, allowing them to have much greater spreads between their purchasde price of stocks and the amount at which they could sell the stock. Very inflationary as to stock prices. The public is kept mostly in ignorance as to what is really going on. If the public really understood what is happening, it would be outraged.

It is generally not understood that bonds owned by the Fed are for money that the American people owe to themselves. When these bonds are sold to member banks, the amount of these bonds become indebtednesses that the American people owe to the banks. Thus, when the Fed buys previously issued government bonds, it is reducing the indebtedness of the American people to the banks. The interest paid on these bonds, after deduction of expenses, does not go to the member banks or to the banking industry but, by a bookkeeping transaction, goes back to the U. S. Treasury. Many economic textbooks improperly treat the member banks as stockholders in Federal Reserve Banks owned by the member banks. Even the use of the phrase "member banks" imply that this could be true. The treatment in these books on economics is legally incorrect, with the government assuming all risks of the Federal Reserve System, with immense subsidies going to so-called member banks. Since the bonds owned by the Federal Reserve banks are for money the government owes to itself, the interest it pays on these bonds is for interest it pays to itself. If the Federal Reserve was really an associatiopn owned by the member banks as stockholders, the interest paid, after deduction for expenses, would go to the member banks. The banks want the government and not themselves as banks to assume the requirement to pay for the expenses of the system. For this reason, it would be difficult for the banks to claim that the income of the Federal Reserve System should go to them. There are limits on the greed of the banking industry.

The Unified Theory recognizes that is is essential to base economic decisions on the sound operation of a free market economy and that all decisions should be based upon factual circumstances and not upon presuppositions devoid of substance. Both physical scientists and economist often base decisions upon presuupositions not derived from supporting particulars.

It is a generally recognized that cars only a few months old sell well below their price as new cars. This fact was explained in a 1970 aricle by George Akerlof of the University of California, Berkeley, a co-winner of the 2001 Nobel Prize, as an example of asymmetric information: Although only a limited percentage of new cars are lemons, owners are more likely to sell lemons than they are of cars that are not lemons. Buyers of used cars, in recognition of this fact, pay substabtially less for a used car as a result of the higher probability that it will be a lemon.

The effect of this substantial reduction in selling price is that owners often keep their cars even when potential buyers might have paid a highter price if they knew that the cars were not lemons. The problem here, however, is not really created by presuppositions as to general principles but is more created by presupposing a car to be a lemon when it is not. The problem is best resolved by the free market place and by warranties and reputations. A driving test of sufficient length and a thorough inspection by a mechanic can often determine that a car is a lemon.

It has been generally recognized by economists that buyers of life insurance have superior information about their health than do insurance companies that sell them insurance. The companies often lack suffucient facts upon which to base accurate determinations of life expectancies and of disabling illnesses. This lack often leads to "adverse selection." To the extent that insurance companies cannot distinguish the sick from the healthy, insurance policies will be set at the same price for both. Thus, sick oersons will find the cost of insurance reasonable while healthy persons will find the cost excessuve. In response to this fact, insurance companies increase all the more the cost of insurance, with healthy persons deciding not to be insured at all because of the high cost. Joseph Stiglitz, of Columbia University, co-winner of the 2001 Nobel Prize, in a 1976 article co-authored with Michael Rothchild of Princton, showed that in theory the insurance market could break down completely. This result might seem a reasonable conclusion. However, those who pereceive themselves as sick may be healthier than they believe and those who perceive themselves as healthy may be sicker than they believe. Thus, in practice, the market would not break down completely and the need for insurance coverage would continue to exist, with the market place setting the cost in the most efficient way possible.

Employers want to determine the expected productivity of workers. The determination of productivity is extremely costly, very difficult, and often impossible to determine in a meaningfully practicable manner. For this reason, employers often make unfounded presuppositions as to the bases of worker productivity. One presupposition is that college graduates would be more productive than non-college graduates. Thus, even though most people may fail to learn in college effective and significant knowledge, a college degree is usually a wise investment and leads to better and higher paid positions, even though college graduates may be no nore productive than non-college graduates. Michael Spence of Standford University, co-winner of the 2001 Nobel Prize, reached this conclusion in an 1973 article on job-market signalung.

Nobel Laureate Akerlof apparently does not feel that the problem of asymmetric information necessarily requires government intervention and that free-market solutions to the "lemon problem" are available, such as warranties and reputations. Nobel Laureate Joseph Stiglitz, when Chairman of the Council of Economic Advisors under President Clinton, appeared to have greater acceptance and confidence in government action as a solution. The Unified Theory looks upon the so-called problem of asymmetric information as a bogus problem. Information necessarily comes in bits and pieces and never is really symmetrical. The apparent complexity of asymmetrical information in the economy requires all the more the operation of a free masrket system for our society to enjoy a sound economy.

©Wilson Ogg