Economics III

 

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Is Keynesian or Monetary economics correct?

John Maynard Keynes supported progressive income taxes, state provided health care, retirement pensions, and  government deficits, and opposed high tariffs and the gold standard. Friedrich von Hayek, one of the founders of the Chicago School of Economics, opposed progressive income taxes, state provided health care, retirement pensions, and government deficits and supported high tariffs and the gold standard.  So who is right? They both could be considered to be correct. Keynes was describing a System Optimal solution and Hayek, a major proponent of Monetarism  along with Milton Friedman, was describing a User Optimal solution.

Differences between User Optimal solutions and System Optimal solutions are common.  For example, absent any ban on this behavior, taking goods from others is a User Optimal solution, e.g."Might makes right".  However those who are stronger have no incentive to produce goods, if they can simply take goods that others produce.  And those who are weaker have no incentive to produce goods, if those goods will only be taken from them.  Society wants to maximize the production of goods, and society has banned any stealing goods from others as one means to ensure that the User Optimal solution will be closer to the System Optimal solution, e.g. "Might for right"

Commandments, laws, regulations, policies, programs, etc. are society’s way of imposing shadow prices such that User Optimal solutions are closer to  System Optimal solutions.  Knowing what the User Optimal solutions are, and what the System Optimal solutions are, is necessary in order for society to enact commandments, laws, regulations, policies, programs, etc. that can bridge any gaps between System Optimal solutions and the User Optimal solutions.

Labels such as capitalism/free markets or socialism/Marxism/communism/collectivism serve little purpose.  Neither system is fully adopted anyway.  Capitalism requires a level playing field and perfect knowledge by both the producers/sellers and consumers/buyers.  But the playing field is not level, and knowledge is not perfect, and this why what we have is more properly regulated capitalism.  Similarly collectivism presumes that the system can plan for the best solution.  But there is no perfect system or solution, just the plans from the individuals managing the system, and one plan cannot work for every individual. In practice, there are no purely capitalist, or purely communist, economic systems. At best what we observed is regulated capitalism or unplanned socialism.

In practice society can regulate sellers and buyers.  It regulates the investment/capital used by producers. It regulates the goods that are used by producers, including common unpriced goods, and regulates labor ( i.e. no slavery,  minimum wages, a 40-hour work week, etc.).  It can regulate the quantity and prices of goods.  But the ownership of capital, goods, and labor can vary.  In the United States, all capital is owned by individuals, labor is owned by individuals, common goods are protected, but private goods are owned by individuals.  In Scandinavian socialism, the capital in some industries is owned by society, but the labor and private goods are owned by individuals.  In state socialism, the state can let individuals own some capital, but labor and outputs might belong to the state. If those managing the system have a higher standard of living than those subject to the system, then those managing the system are themselves following a User Optimal solution for themselves instead of a System Optimal solution for all.

So the question may not be is a solution capitalist or socialist?  It may be is the solution User Optimal or System Optimal?