Can You Manage an Economy?
Considering economic policies in the developed democratic countries it appears there is hardly an economic strategy; central banks juggle with the base interest-rates trying to keep the inflation in control and economy running and not doing a good job. That's it!
The inefficiencies in Western democratic economies are enormous. Shouldn't governments try to manage the economy and eliminate these inadequacies? I don't think anyone disagrees on this! Businesses must continuous stay sharp and reorganize repeatedly to stay competitive. Why is the economy of a country not optimized? To be able to manage the economy one has to understand how the economy works, and that is apparently, despite all our knowledge, still not the case.
History learned us the lesson that free markets are most efficient. Not totally free markets of course, because we also learned that with capitalism the blessings are restricted to a few, limits the wealth of the nation structurally, creates poverty, exploitation of employees etc. Free markets must therefore coincide with regulating laws to enforce fair play in the economic process.
The regulating laws can enforce fair play, but these laws do not eliminate macro-economic inefficiencies. Suppose that in an economy 90% of the workforce of the nation is employed by the financial industry, marketing and advertisement sector and 10% of the workers produce tangible goods and services, I think you can conclude that nationwide the production is not efficient; although all the individual companies are very competitive and efficient.
A financial industry, although limited, is necessary. Marketing and advertisement can be useful. When companies are competitive and efficient on micro-level this doesn't implicate that the whole economy is functioning efficiently; no guarantee maximum wealth is achieved. For example the expenses of marketing and advertising in the economy do not increase the standard of living; actually they are “production” costs. What would be the effect when marketing and advertising costs and efforts were doubled? The result would be that nationwide producers and consumers can produce resp. consume less tangible goods, because more production capacity and costs are spent on marketing and advertising without any additional material results.
We live in a free world where free choices can be made. Any company can decide to spent more on marketing and advertisement to increase sales and boost profits. The company is free to spend part of the profits to enlarge turnover. Being free is good. However being free and boost profits should not be at the cost of others. Marketing and advertising are not production costs, but the tax office considers them tax deductible. Why? If someone wants to earn more, then they should pay for it themselves and not partly at the cost of society. There is no general benefit for a nation to support these industries, so why are these expenses tax deductible?
I would prefer less phone calls at dinner time and less junk mail everyday in my postbox and less …. Why is marketing and advertising subsidized by the government when in macro-economic perspective nobody benefits. People and businesses should be free to do with their money what they want, but not at the cost of the tax payer. When the government would decide that the tax deduction of marketing and advertising costs, over a period of 5 years, is reduced to zero, because there is no macro-economic benefit, then people would be less bothered and the material production capacity of the nation would be enlarged.
In the Netherlands, and other countries, the age by which employees can retire is prolonged because society cannot afford too many non-productive citizens. If it is inescapable to increase the age at which employees retire then it must be, but should politicians not first find a way to decrease inefficiencies in the economy? At the same time that the retirement age is increased there is structural unemployment. Should a government not first manage the structural unemployment rate to a lower level? The wealth of a nation is only maximized when all productive citizens are at work! Politicians can create a diversity of fiscal stimulants to manage the economy.
Governments have, with regulating laws, fiscal stimulants and monetary policy tools vast possibilities to manage the economy much more efficiently.
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January 6th, 2012 - 08:33
if juggling interest rates was the only thing governments did, the western democracies would be in great shape.
nowadays companies first concern is not competition, but political risks, i.e. taxation and regulation, secondly: legal risk and thirdly: media and n.g.o. risk, all of which can screw up the best laid business plan and destroy the most well managed company, overnight.
example:…..recently a company in the usa had to contribute 150 million to the asbestos class-action lawsuit settlement , because in the 1920′s they published a healthy cooking book and one of the recipes recommended the use of of an (asbestos filled) flame suppressing cooking plate, widely used and manufactured by other companies ) over the stove’s gas burner.
all, just to avoid the cost of having to defend thousands of individual frivolous shakedown lawsuits.
the last thing we need is governments (i.e. bureaucrats and political demagogues, who have never run a business and pretend to know better than the wealth creators how to create wealth, but are really only interested in redistributing others peoples money and even manage to do that inefficiently.)
to micro-manage the economy.
government / politics prevent the free market from optimizing the economy.
boy, i just commented on the first 2 paragraphs of this post……… i guess i’ll have to write a book about the rest sometime……….
f.i. : ” free markets and capitalism create poverty and limit the wealth of the nation ” !?!? (please read “the wealth of nations” and if you take a close look at the poorest nations in the world… there are 2 things you won’t find…..free markets and capitalism !
or…. its bad that only 10% is actually involved in production……..i.e. : it is the great productivity of that 10% that makes the service sector and our standard of living possible …. if we can get to a point were just 1% can produce all we need and want, we’ll all be the richer for it.
it is in primitive societies where you find 100% engaged in production, i.e. hunting, gathering and bartering to survive.
“division of labor” mean anything to you,….. mr. economist ???
and… advertising and marketing are “production costs” ….. oh come on…without marketing and advertising there would be no demand for anything new… and therefore…” NO PRODUCTION” !!! supply side economics anyone ?!?
it is past my bedtime now, so i’ll comment on the last 3 paragraphs another time perhaps.
it must be past your bedtime too, didn’t i notice somewhere you are turning 70 in march ???
it must be an old photo of you on this blog, because you don’t look a day over 50.
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