Bill Werner is an Engineer in Missouri City, Texas. The following is his attempt to Encapsulate All of Modern Economic History (with a bonus push to the future) in one easy to swallow red pill. Turn away and think what you like. Or swallow this red pill leading down the rabbit hole to see another aspect of what I call “The Vast Matrix of Models of Mind-stuff” we abide in.


“‘I don’t know where to begin’ said the White Rabbit.

‘Begin at the beginning, continue to the end, and then stop’ the King sternly replied.”
-Lewis Carroll

Classical Economics: Year Zero

The year 1776 means one thing and one thing only to Americans: The birth of our nation. But when Adam Smith published his “Wealth of Nations” in 1776 he launched another revolution, an Economic Revolution, by codifying the best practices he found during extensive travels throughout Europe during the 18th century, the Age of Enlightenment. (“The Age of Enlightenment. What about Witches?” demanded the Queen. The White Rabbit had that worried look on his face as he nervously chose his words. “Almost all the Witches had been executed by that time, except in Poland and ah Switzerland. This story is about the world model that came after the model with witches in it.”)

The First Bubble: Shadow of the Future
Returning to our story it should be noted that by the time Adam Smith published his “Wealth of Nations” book the Dutch, who had the first modern economy, had already survived the world’s first insane Speculative Bubble, the Tulip Bulb Mania. At its height in 1635 forty tulip bulbs fetched a price equivalent to 166 years of wages for a skilled laborer according to Charles Mackay’s 1841 classic “Extraordinary Popular Delusions and the Madness of Crowds”. (“Tulip Bulbs?” exclaimed the King. “Yes but they were imported from Turkey.” The White Rabbit said suppressing a smile.)

Booms & Busts: the Classical Problem
During the 19th century America incorporated the Classical Economics of Adam Smith and his free trade disciple David Ricardo into the nation’s economic system. The result was a prosperous and growing nation but one plagued with Financial Panics in 1819, 1837, 1857, 1873, 1884, 1890, 1893, 1907 and of course the biggest of them all 1929 the leading indicator for the “Great Depression” of the entire decade of the 1930s. (“Financial Panics… Let them eat cake.” said the Queen as she admired her reflection in a mirror.)

Keynesian Economics and the New Deal
America limped through the 1930s with marginally successful Keynesian style New Deal spending programs until the Deficit Spending Boom of World War II. At the end of The War America found itself the only major economy left standing. With the opportunity at hand the US Dollar became the World’s Reserve Currency replacing the British Pound. (“Outrageous,” protested the Queen, “How can a Colony be the World’s Banker?”) However America continued the trend of adopting British Keynesian Economics. The economics of Lord Keynes had the government intervene in an attempt to smooth the boom and bust business cycles. Add the shrewdest market operator of them all, Joe Kennedy, to clean up Wall Street in exchange for political power. (“Yes that Kennedy family.” said the White Rabbit.) What followed were decades of prosperity with occasional Recessions but no more Panics. By 1971 Republican President Richard Nixon famously declared “We are all Keynesians now.”
(The White Rabbit stood perfectly still with a million mile gaze. Finally he broke his silence. “When everyone agrees, no one is thinking.”)

Stagflation: the Fall of Keynesian Economics
After World War II the Dollar was set at a Fixed Exchange Rate of 35 Dollars to an Ounce of Gold. And all other currencies were pegged to the dollar. But in the early 1970’s inflation started picking up just enough so that foreign governments started a run on America’s Gold Reserves in Fort Knox. President Nixon panicked, took the dollar off the Gold Standard and instituted Wage and Price Controls in an effort to stop the inflation. Simultaneously, during the Nixon and Carter administrations, the Fed was following an easy money policy in an attempt to reduce unemployment. At the time it was thought to be impossible for High Inflation and High Unemployment to exist at the same time. But High Inflation with High Unemployment is exactly what happened. In response economists created what they called the Misery Index. (“Yes, they actually called it the Misery Index.” The White Rabbit frowned. “It measured the amount of Stagflation in the system, a toxic
combination of wealth draining inflation and hope draining unemployment.”)

Reaganomics: the Classical Revival
President Carter appointed Paul Volcker Chairman of the Federal Reserve and Volcker like a Biblical Prophet told America it had to swallow some God-awful medicine in the form of jacking interest rates up to an eye popping 19 per cent. The nation plunged into the deepest recession since the Great Depression as Ronald Reagan assumed the Presidency. Over 25 years later it is hard to appreciate the howls as the nation went cold turkey. Volcker had the stones to put the nation in a straight jacket as Reagan went along with the program and reappointed Democrat Volcker to another term. The gamble that the economy would not flip into deflation, a real fear at the time, paid off big time. Add a tax cut and some deficit spending and Reaganomics was off to the races with unprecedented prosperity for many people. (The White Rabbit headed for the Mad Banker’s Mad Debt Party.)

Head in the Sand: Reaganomics Falls
Enter the new Federal Reserve Chairman Allen Greenspan who elicited mesmerizing music from a symphonic economy like the Maestro he was known as. No need to worry, if anything goes wrong we have the Greenspan put. Enjoy the lower interest rates and the Maestro’s magnificent music. And when corporations misbehave with massive accounting irregularities we rope them in with Sarbanes-Oxley. Problem solved. Best of all the really important people, the bankers and insurance companies are all acting in enlightened self interest. So we can cut them some slack, no need to monitor their lending practices. We can even give them a hand by bumping up the limit on their leverage. No need to keep track of all this debt we are accumulating. We are in the Golden Age of Consumerism where we actually borrow and consume our way to prosperity. No need to consider Credit Default Swaps as Insurance even if that is what they actually are. No need for cumbersome regulations. With new Fed chief Bernanke we can even cut back on monitoring the amount of money in the system by eliminating the broadest measure of money M3. After all, we are all on the same team. What can go wrong? (“Laissez les bons temps rouler, Let the Good times Roll!” exclaimed the Mad Banker.) But if no one is monitoring the size of the bubble of course it will be a great shock when it pops. (“What? I thought we were experiencing inflation, but now you tell me its deflation” demanded the Mad Banker. “Yes Demand Inflation flipped over to Debt Deflation with a vengeance.” The White Rabbit explained as the Mad Banker simply replied “Oops.”)

Macro-Cycles: Back to the Future
It is one of the great ironies of history that Capitalism derives its name not from the founding father, Adam Smith, but from its biggest critic Karl Marx in “Das Kapital”. The obvious problem with Marx is that although his critique of capitalism has some merit, his solution is far worse than the problem. (“You don’t put a bullet through your head because you have a headache” interjected the white Rabbit.) None the less the concentration of wealth and exploitation of workers (think some developing countries) are real problems in Capitalism. Adam Smith saw those problems first but his solution of relying on the “moral sentiments” is toothless. So with two useless solutions we tried a third solution Keynesian economics and when that blew up we went back to a modified Classical Economics (Reaganomics). Now we have a modified New Dealer Keynesian style President in Obama. (Obamanomics?). This looks like a cycle – a Hegelian cycle to be precise.
(“Forget that Marx was a student of Hegel.” The White rabbit continued “Hegel’s idea fits so use it.”)

Obama and Hegel: Cycles of the Mind
Hegel was a 19th century German idealist philosopher. He came up the idea of a Dialectic. (The white Rabbit could not resist adding: “The visual representation below is clearer than the following explanation.”). Hegel’s Dialectic starts with a Thesis that develops problems, then the effort to fix these problems in the Thesis generates an Antithesis, which has a new set of problems which is then attempted to be corrected with a Synthesis, a sort of combination of the two that is then considered a new Thesis.

So you end up with these mind cycles:
Thesis -> Antithesis -> Synthesis (new thesis) -> new Antithesis -> etc.
Applying this to modern economics we have:
Classical -> Keynesian -> Reaganomics -> Obamanomics
Where Reaganomics is a form of Post Keynesian Neo-Classical Economics and Obamanomics is here assumed to be some sort Post Reagan Neo-Keynesian Economics.
(“Look, this is just a way of looking at how economics develops over time. It’s just another model in the Vast Matrix of Models we use to try to understand the world” explained the White Rabbit.)

If You Don’t Have Crystal Balls at Least Ask the Right Questions
No body knows where the present crisis leads.
Are we in some kind of American-World version of a Japanese style lost decade?
Or are we in a 21st century Great Depression? The similarities between our present situation and the previous two are sobering. Still there are many differences.
What is the way out of this mess?
Can we get out of it by throwing Trillions of Keynesian Dollars at it?
If we continue throwing money at it, will it flip again this time to rampant inflation as Classical Economics (Monetarism) predicts? Sorry but I can not believe Money no longer matters.
Are there only versions of Classical and Keynesian Economics or is there really a new and different economic model we can use? Would we even recognize a new model for organizing economic activity if we saw it?
(“My crystal ball is cloudy” complained the White Rabbit. “And I am afraid to make predictions, especially about the future.”)

More Questions for the Dream Team

We will have to wait and see what the Obama Economic Dream Team comes up with. But I have a few more questions that I can not resist.

Can we really afford to have entities too big to fail? That seems like the Japanese style problem to me.
Can we have reporting requirements and regulations without stifling creativity? Too many regulations would end American dominance – we thrive on creativity.

Or can we forgo heavy handed regulations and simply have reporting and transparency and let the market sort it out?

That sounds great but does transparency stifle competition?

And what about all that time spent writing the damn reports and what if they reveal trade secrets? And what about debts and deficits; deflation and inflation; the underclass and income disparity; consumerism and manufacturing or is it service and manufacturing?

(“On the other hand with all these choices and decisions you can see why I am looking for a one armed economist.” said President Harry Truman. “Yes,” replied the White Rabbit, “but I sir am looking for a Lord of the Economic Dance, a Many Armed Economist.”)

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