Money Flow paradigm

The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.

Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.

We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of neoclassical, monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.

Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.

The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.

The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important.  Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.

For additional details see 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS

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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Money Flow Paradigm Reverses Say’s Law

Economics became widely known as what Thomas Carlyle called “the dismal science” when Thomas Malthus predicted that the population growth rate will always exceed the food supply growth rate. Therefore, there could never be too much food because the population growth would at least keep up with (subsistence) and at worst exceed (starvation) the available food supply.  Demand would always increase to consume whatever could be supplied.  This led to what has become known as Say’s Law: “Supply creates its own demand” and the basis for supply-side economics. Economic growth, according to the dismal science, was always a supply-side phenomenon. You could take demand for granted and just focus on trying to increase supply.

From population explosion to population implosion

For centuries humanity spread out across the continents and populated the far corners of the world. It seemed like humans would eventually overpopulate the planet. Eventually, we would need to find another planet to colonize to keep on growing. Population growth was a given, until it wasn’t. Almost out of the blue, the unexpected happened. As countries reached higher levels of economic development, their population growth rates dropped. You might call this a Darwinian Natural Selection Paradox where when a species becomes more dominant and powerful, instead of increasing birth rates, its has falling birth rates.

Early on a Monday morning, I was about to begin my lecture about the international income distribution to my economics class at Notre Dame. But my students were all excited. They were all talking with one another about the great football game on Saturday where Notre Dame won at the last minute with an amazing play.  I couldn’t get their attention. Finally, I said: “Today we are going to talk about birth control.” My students were shocked. “Birth control?” they exclaimed. “The professor is going to talk about birth control. This is a Catholic university. He can’t talk about birth control.” But I persisted. “What is the most effective birth control method in the world?”, I asked. The students continued murmuring in apprehension and concern. Finally, I said: “The most effective birth control method in the world is per capita income. When per capita income rises above $6,000 per capita, birth rates drop like a rock.”[1]

With rising per capita income, birth rates drop. In rich countries, they have dropped below the replacement rate of an average of 2.1 children for each woman in her reproductive years. According to data from the US Census Bureau, the population growth rate in the United States in 2021 was just one tenth of one percent, which was the slowest population growth rate since the nation’s founding in the eighteenth century. Without immigration our population would be declining.

World population declines

Japan is ahead of many other countries in the transition to an economy where an aging population is dramatically increasing the ratio of non-working elderly relative to a shrinking active workforce.   In the absence of much immigration, Japan must increase its productivity in terms of output per worker to make up for its shrinking number of workers. Japan’s population was at its maximum in 2010 with 128 million people, but shrunk to 125 million by 2021, and is expected to fall below 100 million before long. In 2022 Japan’s birth rate fell to its lowest level ever and its marriage rate fell to the lowest since World War II. Consequently, with older people living longer than ever, the elderly’s share of Japan’s population has grown substantially. The elderly generally demand fewer products and services except for health services than young families, but eventually need more personal medical services. Health costs rise while government revenues fall, and aggregate demand is sustained through massive deficit spending necessary to keep the workforce fully employed. 

Over 90 percent of the world’s countries currently have a birth rate below the population replacement rate with at least 20 countries expected to cut their native populations in half by 2100 including Japan, Italy, Spain, Portugal, Germany, Thailand, and South Korea, among others. Russia’s population peaked at around 147 million and is currently heading down toward 142 million because of an aging population, falling birth rates, relatively higher death rates including military deaths and suicides, and emigration (especially young people) exceeding immigration. China’s economy has recently reached a level of per capita income over $10,000 with its population reaching a peak and then declining significantly thereafter. Populations are increasing primarily in poor regions of Africa such as Nigeria and Ghana, where the natural resource curse[2] keeps most of the population in poverty with just over $2,000 income per capita. 

Around the turn of the millennium, millions of people in China were moving out of poverty into what for many would become what we would call a lower-middle-class lifestyle. This improvement in their economic well-being was quickly changing “the dismal science” into something not quite so dismal. As noted above, Japan had already gone through this transition and had a birth rate well below the 2.1 child per woman of child-bearing age known to be the replacement rate for maintaining a constant population. Japan, Germany, Italy, Russia, South Korea and many other developed economies already have shrinking populations. As a result of China’s historic one-child policy (which it dropped in 2016) and its rising per capita income, China’s population is reaching a peak and will start declining.

If it weren’t for immigration, the United States would have a falling population as well. To some extent American immigration has enabled the United States to offset its declining birth rate. For a given level of technology and, therefore, productivity, a declining workforce means a decline in gross domestic product (GDP) and less money from the earnings tax which funds the Social Security system. Consequently, elderly people who depend on Social Security have a vested interest in encouraging immigration, especially because they are retired and, therefore, no longer in the workforce to compete for jobs with immigrants. The elderly have a special interest in encouraging immigration or at least a guest worker program in farming such as in picking fruits and vegetables in California farms to keep the cost of food low, where food and medicine constitute a greater portion of the budgets of elderly people relative to younger people who have expanding families needing lots of basic products such as home furnishings, clothing, and cars and trucks. Of course, immigration could tend to keep wage rates low to the extent that they substitute for instead of complementing the current workforce. However, there is not a fixed number of jobs in this world to be fought over (what economists refer to as the “Lump of Labor Fallacy”). Rather, through infrastructure spending and other expenditures, governments can increase the demand for workers and, thereby, increase wage rates in addition to maintaining full employment as long as it is not so much as to cause excessive inflation.

Distorted money flow reverses Say’s Law to read: “Demand creates its own supply.”

Despite the rising deficit and health costs, and in the absence of sustained government stimulus spending over the long run, deflation with falling prices and wages threatens to dominate, rather than the widely feared and reviled inflation, as measured by the typical market basket of goods and services used to calculate the consumer price index (CPI), or, alternatively, measured as the personal consumption expenditures (PCE) index. As baby boomers die and the population declines, consumer demand shrinks, while technology expands and speeds up the global supply chain. More can be produced and moved through ever increasing automation and driverless vehicle technology. Say’s Law may have worked back in the day when populations were exploding and every crumb of supply was snatched up, but today the problem is a distorted money flow diverting money primarily to those with the lowest marginal propensities to consume (the wealthy) while leaving the poor and middle class up to their eyeballs in debt. In the United States to counter high levels of unemployment the Federal Reserve uses quantitative easing (QE) to pump money into the New York financial markets which drives up stock and bond prices to benefit the wealthy. But when inflation threatens, the Federal Reserve punishes the poor and middle class by raising the cost of borrowing, while the wealthy get a higher rate of return on their bonds and certificates of deposit. In either situation, one requiring economic expansion, or one requiring economic contraction, the Federal Reserve inadvertently acts to reward the rich and punish the poor. (See Karen Petrou’s book “The Engine of Inequality” and Christopher Leonard’s book “The Lords of Easy Money.”) The Federal Reserve is implicitly following Say’s Law and supply-side economics while ignoring the fundamental changes in globalization, productivity and population that have taken place to reverse Say’s Law to invoke demand-side economics as revealed by the money flow paradigm. Note that this is not the Federal Reserve’s fault. They have just not been given the correct set of tools by Congress to properly control the economy (as explained in my forthcoming book “Distorted Money Flow” and in earlier commentary at https://sites.nd.edu/lawrence-c-marsh/home/ ).

Workers are no longer paid the value of their marginal products

In the United States before 1976 worker compensation kept up with worker productivity, but after 1976 productivity continued increasing, but worker compensation flattened out in real terms. In other words, workers are no longer paid the value of their marginal products. Consequently, over the long run, in the face of an increasing money flow distortion where a larger and larger proportion of the quantity of money flows to the wealthiest people who have the lowest marginal propensities to consume, aggregate demand threatens to fall short of aggregate supply, because the bottom 90 percent of the population can no longer buy back the value of the goods and services they are producing unless government maintains and expands its flow of stimulus money to them, paid for through deficit spending or the pre-distribution (more money to Main Street before taxes) and/or redistribution (more money to Main Street and less to Wall Street after taxes).

Money flow paradigm reveals distorted money flow that has reversed Say’s Law

In conclusion, by following the flow of money and its effects on economies everywhere, the money flow paradigm has revealed the fundamental problem of the distorted money flow that has greatly restricted demand while providing excessive amounts of money for supply. This has reversed Say’s Law which said: “Supply creates its own demand” and replaced it in facing a reality very much the opposite where “Demand creates its own supply.” The money flow paradigm has shown that where supply-side economics made sense back in the day, it no longer applies to the world as we know it which is today better represented with demand-side economics.


[1] Historically, having a child was viewed by some people as an investment, especially after the advent of agriculture, and during the industrial revolution with the use of child labor in manufacturing. Eventually, this developed into a slave trade where the costs of raising a child were bypassed with the capture of fully grown slaves from Africa. Entrepreneurs in London could invest in the slave trade where the hard work of others provided a good return on investment. Hard work paid off, but not for the slaves. Their hard work paid off for the investors. This natural product of capitalism and free enterprise was abolished through government intervention when laws and regulations were passed banning child labor and slavery. Even today companies that follow the “I-win-you-lose” mindset treat their employees as just another factor input such as coal or fuel oil and not as team members. On the other hand, most successful companies follow the “win-win” strategy and recognize the dynamic creative potential (the agency) of their employees.

[2] Ironically, countries with large deposits of natural resources, which can cause an excessive demand for their currencies, are unable to produce and sell other products at competitive prices given the high value of their currency. This has been labeled the “Dutch disease” by The Economist magazine in reference to the high price of the Dutch guilder when Dutch natural gas and oil were in great demand before the Netherlands adopted the Euro as its official currency.

Shareholders vs. Customers: Who’s Winning?

The foundation of free enterprise is Adam Smith’s invisible hand, which asserts that competition drives prices down and quality up as profit-seeking behavior results in minimal profits for the profit-seekers and maximal benefits for society as a whole. This world of free enterprise where “greed is good” is said to benefit us all because the greedy don’t end up with that much because the money is diverted into making great products that sell at low prices. This tug-of-war between shareholders and consumers in the end is a zero-sum game once the workers in the aggregate are also recognized as the consumers. In a truly competitive free market system, the consumers win and the company just gets the standard run-of-the mill profits in spite of their enormous efforts to bring about a more profitable outcome. The workers are the consumers who must earn at least enough to buy back the value of the goods and services that they are creating (as explained by the money flow paradigm). Henry Ford recognized this in the early 1900s when he doubled his workers’ pay to retain his skilled workforce and to enable his workers to buy cars that they were making. This also motivated his workers to focus on producing high-quality cars. Ford defied the common property resource problem and free rider problem where employers would like other employers to pay workers more to generate more customers for their products, but not pay their own workers more. Nevertheless, some employers complained about the “bad” example Ford was making in raising his workers’ pay.

The absence of competition leads to the opposite result. Monopoly power results in maximum profits, high prices, reduced quantity and minimal quality. Barriers to entry can result from economies of scale, network effects, first-mover advantage, economies from experience, and natural monopolies. Even industries with many firms may maintain a follow-the-leader discipline as a large dominant firm sets prices for all to follow. Adam Smith’s first invisible hand of competition is often defeated by Adam Smith’s implicit second invisible hand of market power and collusion as Smith noted when he said: “People of the same trade seldom meet together, either for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Ultimately, this translates into a conflict between the short-term interests of shareholders, who are focused on maximizing short-term profit margins and share price, and the long-term interests of the customers and the long-term viability of the company as a whole. This is especially true in modern times as technology constantly produces new products and services and improves economic efficiency and productivity. Money going into dividends and share buybacks is not going into product development and customer satisfaction. Cutting costs to improve profit margins often means cutting quality and restricting quantity. We have all seen inflation not only raise the price of our favorite treats but also shrink the quantity in the bag or box.

Asking whether the free enterprise system will correct these diversions and distortions is asking who is in charge and what are the effects of their decisions? In a true free enterprise economy where Adam Smith invisible hand of competition dominates, it is the customer who ultimately is in charge. But in the real world of imperfect competition, the CEOs and corporate boards call the shots. They can focus on the customer and constantly improve quality, quantity and productivity, while seeing prices fall in a truly competitive environment, or they can skip all that and focus on short-term share price with an expense minimization strategy that cuts costs often by sacrificing quality.

But what about Joseph Schumpeter’s creative destruction? Won’t the noncompetitive firms lose out in the long run and be replaced by truly competitive ones? As usual, we want the world to be simple and provide us with a story where we all live happily ever after. In reality, large companies can accumulate or draw upon large amounts of cash. When an economic slowdown comes about, the small, efficient, family-owned restaurant may go belly-up, while the somewhat inefficient, but well-financed, larger firm may have enough cash to ride it out and even buy up those competitors with less access to cash. Perhaps Schumpeter would have been more realistic by calling it competition destruction when firms go under in an economic downturn. Rather than strengthening Adam Smith’s first invisible hand of competition, recessions work to shift market power to Adam Smith’s second invisible hand of collusion.

But so far we have only been looking at industry level effects. What about the economy as a whole? Is money automatically flowing in a manner to maintain a well-balanced economy with maximum productivity and economic growth? Prices may be somewhat rigid when set by dominant firms, but don’t wages adjust automatically to move us back toward an economic equilibrium of full employment? This requires a great deal of mobility and substitutability. Perhaps you lost your job in New York, but your former college roommate tips you off to a great job fit for you in San Francisco. Oh, wait a minute. I forgot. Two-thirds of Americans don’t have a college degree. They don’t have a former college roommate or anyone else on the inside track elsewhere. Or what if you have a partner who has a job and needs to stay in the area? Perhaps you own a house or have relatives you want to keep close to. Labor mobility sounds nice in theory, but can be a lot harder to achieve in reality.

People want to get the best wage they can. But they have to compete with other people who may be willing to take the same job for a bit less pay. Competition among workers is alive and well in most venues. But what about jobs? In theory, jobs compete with one another for workers. If a worker gets a job offer, but finds a comparable job for a bit more, he or she is inclined to take the better paying job. The problem is that jobs often conspire with one another to form job blocks, just as workers can conspire with one another to form unions. Think of the coal mining town. There is only one major employer in town — the coal mine. The coal mining company forms job blocks where workers are all hired at a fixed wage. Take it or leave it. The resulting wage rate can be considerably less than the free market equilibrium wage. This can be corrected. Workers can form a union and demand the free market equilibrium wage. John Kenneth Galbraith in his 1952 book: “American Capitalism” refers to this as countervailing power. Economists understand this under their Theory of the Second Best, which says that when one factor is out of whack (e.g., monopsony) and cannot be fixed, the best solution is to have another out of whack factor (e.g., union) to counter it.

Workers often confront blocks of jobs that cheat the workers out of the free market wage. Almost every employer controls more than one job and fixes the compensation for the jobs under their control. In the decades after World War II, unions controlled as much as 35 percent of the workforce and this caused even nonunionized firms to pay the union wage to their workers. Today, unionization has dropped below 10 percent and, if you don’t count government employment, unionization has dropped to below 6 percent of the private workforce. Without a union, workers are unable to counter those ubiquitous blocks of jobs. For the economy as a whole, this means that significantly less money is flowing to workers than would be the case under a truly free market economy.

The fundamental problem is that the people on Main Street can no longer afford to buy back the value of the goods and services that they are producing. Oligopolies ( just a few sellers ) and oligopsonies ( job blocks ) dominate many of our major industries. Moreover, about 60 percent of Americans are living paycheck to paycheck. Private debt has skyrocketed. But even that is not enough to maintain full employment. Politicians love to complain about the national debt and how they intend to get rid of it or at least balance the budget. But Republicans pass unpaid for tax cuts and Democrats pass unpaid for expenditures increasing public debt in order to avoid having the economy slip into a recession and end up losing votes at election time.

Why wasn’t this problem fixed after the 2007-2009 Great Recession? Yes, the Federal Reserve did pour huge amounts of money into the New York financial markets. But very little of that money tricked down to the average Joe or Jane on Main Street. With 84 percent of the stock market owned by the 10 percent richest people, quantitative easing (QE) just drove up stock prices to make the wealthy people wealthier and drove down interest rates to facilitate the private debt of most everyday Americans while the government increased its public debt. This distorted money flow was a result of too much money flowing to passive investors (shareholders) and too little money going to workers (the consumers) and to creative entrepreneurs who produce new and better products and improve productivity.

To solve these problems we need to focus on the money flow paradigm which reveals the need for a more balanced money flow that does not require huge amounts of private and public debt and does not divert enormous amounts of money to passive investors (shareholders). We need to direct more money flow to creative entrepreneurs to create new and better products and services and to all our workers who are the consumers of those goods and services. Correcting our money flow involves a variety of fundamental governmental and corporate changes, but we must first more fully appreciate our money flow problem as revealed by the money flow paradigm.

MAGA Rebellion Against Elite’s Control of the American Economy

Sherwin Rosen, a former chair of the Economics Department at the University of Chicago, wrote an article in the American Economic Review in 1981 titled “Superstars.” It revealed the natural tendency for a few individuals to do extremely well in each recognized field as in entertainment, sports or other areas of social, financial or intellectual interest, and for all others to be left on the sidelines as “also-rans.” Economics involves more than money. Economic decisions can often require time, money, and mental energy. How many superstars can you keep in mind and constantly compare in each and every area of importance?

The top star gets an inordinate financial reward compared to the almost-as-good person in second place. Our limited time and mental energy may cause us to reward Taylor Swift with enormous compensation when a less well know but equally proficient singer and dancer may get little or no attention or compensation. This limitation plays an important role in inappropriately and inefficiently directing a large portions of economic rewards to the “winners” in what inevitably boils down to a “winner-take-all” economy and a severely distorted money flow away from Main Street (the losers), where most of the work is performed, and into Wall Street (the winners), where most of the rewards accumulate.

It is very important to recognize that the financial economy and the real economy are quite separate and very different from one another. The vast majority of the money in the financial economy is owned by institutions and wealthy people (the “winners”), which include most bankers, doctors, lawyers, and the upper management of America’s largest companies. Yes, there was that Vermont janitor, Robert Read, that died at age 93 with $8 million, demonstrating the enormous power of compound interest. However, he was the rare exception that defies the overwhelming statistical evidence that proves the rule: “In America, if you start poor, you stay poor.”

When financial media commentators refer to “the people,” they are usually not talking about the sixty-two percent of people who are living paycheck-to-paycheck or the two-thirds of Americans with no college degree. They are not talking about the MAGA crowd. They are talking about themselves and other wealthy people. The net worth of Treasury Secretary Janet Yellen is estimated to be $20 million while that of Federal Reserve chair Jerome Powell is around $55 million. Much of the stock in the New York stock exchange is owned by millionaires and billionaires. This can lead to a complete lack of understanding of the real day-to-day concerns of most Americans.

While the original land allocations made by King George for the American colonies held up for several centuries, the memory of the French Revolution gave the elite a strong sense of noblesse oblige and motivated them to avoid accumulating enormous wealth. Consequently, in the 1800s the elite encouraged westward expansion with phrases such as “forty acres and a mule” for frontier farmers and the government’s payoff of modest mortgages for widows of union soldiers in the Civil War who “bought the farm” in dying for their country.

This was in sharp contrast to Argentina, which allocated the land in its western expansion into its Pampas grasslands to the elite. The elite in Argentina employed the peasants to work the land but not gain ownership of that land. This severely suppressed the motivation of the peasants in Argentina to work hard and creatively. Consequently, productivity and economic growth in the United States far exceeded that of Argentina. This was further enhanced by government support in creating agricultural experiment stations in the United States.

In the United States, the Land of Opportunity paid off for those willing to work hard on the frontier until the late 1890s and the early 1900s when a distorted money flow set in to over-reward the wealthy elite such as Andrew Carnegie and John D. Rockefeller to bring about financial instability. Fortunately, our democratic institutions allowed the rebellion brought about by the Great Depression that began in 1929 to bring Franklin D. Roosevelt into the presidency to oversee a transition to a somewhat more equitable economy with better money flow for the 1930s MAGA crowd, which enabled America to avoid its own version of the French Revolution.

Beginning around 1960 and reaching a turning point in 1980, America made a transition from our old aristocracy based primarily on legacy to a new meritocracy. In recent years the decline of America’s aristocracy and its replacement with the new meritocracy made the superstar effect and the distorted money flow much worse. The new superstars felt no sense of noblesse oblige and no reason to hold back in accumulating huge amounts of wealth for themselves and their prodigy. While earlier generations of Americans recognized the importance of providing free and mandatory elementary and secondary education for each and every one of our children as essential to the overall growth of our wealth as a nation, in recent years vocational and college educational attainment has been restricted to those who can come up with enough money to cover the ever increasing cost of higher education, leaving behind two-thirds of Americans (the core of Trump’s MAGA crowd).

This distorted money flow, which moved money away from the real economy and into the financial economy, has been further aggravated by the Federal Reserve Bank due to its limited policy tools that are designed primarily to affect the financial markets on Wall Street, with only a rather limited and lagged effect on the real economy on Main Street. As early as the mid to late 1990s and then after the Great Recession of 2007-2009, the Federal Reserve exacerbated the distorted money flow by pumping too much money into America’s financial markets, which aggravated income and wealth inequality while encouraging an enormous increase in both private and public debt.

Just as Marie Antoinette was confused and caught off guard making her “let them eat cake” remark, many wealthy Americans have not caught on to the real significance of the “hang Mike Pence” and the attempt to kill Nancy Pelosi’s husband as the tip of the spear in a rebellion where the election of Donald Trump to serve as America’s first dictator may be just the beginning of our problems. Controlling and mitigating our distorted money flow and its resulting economic and political instability is essential if we are to avoid a catastrophe and potential blood bath. In spite of all of the warnings of the danger to our democracy of electing Donald Trump to a second term as president, the MAGA crowd continues to press for what boils down to essentially a Trump dictatorship as described in detail by his re-election team. Their willingness to throw away almost 250 years of democracy suggests an anger against the American elite that cannot and must not be ignored. Let’s hope that there are no guillotines set up on the steps of our nation’s capitol.

It is not just about money. Respect, or the lack thereof, is as important, or even more important, than the money. The big mistake of the Democrats occurred in the late 1970s when they started transitioning from a pre-distribution strategy to a redistribution strategy. Under pre-distribution, the Democrats followed the countervailing power approach promoted by Kenneth J. Galbraith in his book: “American Capitalism” in 1952. Where a few companies dominated an industry enabling abnormally high profits, Democrats supported unions to match and control the power of those companies. This mitigated and minimized the distorted money flow that would have otherwise gone almost entirely to the elite. Democrats also got strong minimum wage laws enacted during the 1950s and 1960s.

Unfortunately, the Democrats changed to a redistribution strategy by 1980 where they emphasized higher income and estate/inheritance taxes for the wealthy instead of continuing to support strong unions and higher minimum wages. This not only gave conservatives the opportunity to criticize the Democrats for reversing the “free market” economy’s allocation of rewards, but made working people get more money from welfare and other need-based programs that left them with less dignity and self-respect. Recently Democrats including President Biden are beginning to realize their mistake and return to a pre-distribution strategy with stronger support for unions, higher minimum wages and earned income tax credits. But this change in strategy may be too late for the 2024 election.

Will the MAGA crowd be satisfied with a Trump presidency that simply focuses on replacing the deep state’s commitment to the constitution with a commitment to Trump and arresting Trump’s opponents? What will be done to suppress CNN, MSNBC, The New York Times, The Washington Post and the rest of the “fake news” media? Would that be enough to satisfy the MAGA crowd? Will they want more and will they become disillusioned with Trump if he does not provide better jobs with better pay and more respect for their work? The revolution has begun. The key question is how far will it go?

Dr. Martin Luther King, Jr. emphasized that his civil rights movement was strictly nonviolent. He repeated this to his followers again and again. Otherwise, the 1960s might have been as bloody as the 1860s. Of course, Dr. King was murdered as well as President John F. Kennedy and presidential candidate Robert Kennedy. Hopefully, Donald Trump will emphasize the importance of nonviolence if he loses the 2024 presidential election. Trump will need to make it clear that he does not condone violence, and if he wins the 2024 presidential election, he will not pardon anyone who has committed violence.

Our Winner-Take-All Economy Distorts Money Flow

The money flow paradigm explains key aspects of the American economy. Why does deficit spending prevail even though almost every politician complains about it? Why has our economy grown a glacial rate of less than 3 percent a year while the stock market has been growing for many decades at an average rate of 10 percent a year? How has the perverse incentive structure of our “free enterprise economy” been undermining and suppressing productivity and economic growth? Why have corporate boards become so focused on CEO pay and the maximization of shareholder value at the expense of innovation and creativity, and incentives for rank-and-file employees? And, finally, what does the money flow paradigm tell us to do to correct all of these problems?

(1) WHY DEFICIT SPENDING PREVAILS:
The American people haven’t been receiving enough money to be able to buy back the value of the goods and services they produce. The wealthy can only wear one pair of shoes at a time, drive one car at a time, and eat out at just a few fancy restaurants each day. Rich people can bid up the price of Picasso paintings and exclusive properties, but that isn’t enough to maintain full employment. Many Americans are deep in debt. Yet, without government help, they are unable to create enough demand to avoid recession. Politicians love to complain about our national public debt, but Republicans pass unpaid for tax cuts to stimulate demand and Democrats pass unpaid for expenditures, because, otherwise, we would be in a permanent recession, and those politicians would lose votes at election time. 

(2) WHY PRODUCTIVITY AND ECONOMIC GROWTH ARE SO LOW:
The financial economy exists to provide money to invest in the real economy. For many decades the Federal Reserve has pumped so much money into the New York financial markets that stock prices have risen at an average annual rate of 10 percent. Under these circumstances even non-financial companies have come to realize that they can make more money in the New York financial markets than in investing in their own businesses. This has caused a reverse money flow with money flowing out of the real economy and into the financial economy. Consequently the real economy has been growing at an average of less than 3 percent.  This reverse money flow has suppressed productivity and economic growth in the real economy with big increases in stock share buybacks and dividends. The Federal Reserve needs to stop pumping up the financial economy every time the money flow into the real economy is weak and instead inject money directly into the real economy via “FedAccounts” for everyone with a social security number.  Again, the fundamental problem (as explained by the money flow paradigm) is that so much money is being diverted to the top ten percent of wealthiest people (who own 84 percent of the stock market) that the American people cannot afford to buy back the value of the goods and services that they are producing.

(3) MANY CORPORATE BOARDS HAVE NO IDEA OF WHAT IS REALLY GOING ON IN THEIR COMPANIES:
CEOs often get fellow CEOs and other corporate leaders (their golf buddies) to serve on their corporate boards. The CEO provides reports revealing what a great job that CEO is doing. This helps maximize CEO compensation and motivates short-term stock price manipulation and maximization, which is rationalized under the maximization of shareholder value mantra but does not incentivize long-term innovative physical and intellectual investments in the long-term health and profitability of the company.

 SOLUTION: Follow Germany’s example and require that 40 percent of corporate boards be elected directly by the company employees in product development, production, marketing, sales, and product distribution.  ALSO: Require that all stock buybacks be immediately given to the company’s rank and file employees and not set aside. Company stock ownership will motivate employees both individually and as a team to work hard and do the very best for their company. Redistributing stock buybacks to a company’s employees will help make the transition from companies owned by outsiders (passive investors) to companies owned by insiders (company workers).

Efficiency: Business vs. Government

I love the imaginary world of free enterprise where there is intense competition among businesses to provide the best quality products at the lowest possible prices, where consumers are always rational (at least on average) with infinite amounts of time and mental energy to compare all prices and qualities in that perfectly competitive world. It is a very democratic world. In that world, everyone is a consumer who can purchase anything without regard to race, creed, color, gender, sexual orientation, transgender status, national origin, or ethnicity. True believers in this imaginary world love to refer to this as Adam Smith’s invisible hand of competition in a free enterprise economy.

Unfortunately, that perfectly rational and perfectly competitive free enterprise economy does not exist.  

Even something as simple and easily observed as gasoline prices are all over the place.  People are often too busy and have too little time to get the best price for gasoline.  GasBuddy tries to help us, but people often just go to the nearest or most convenient gasoline station regardless of the price.  We are too often greatly constrained by a shortage of time and mental energy.

Certificates of deposit are another example of inherent disequilibrium where interest rates are all over the place. Many banks realize that most people do not have the time to compare rates, so they let their CDs roll over at whatever rate their bank has set, which is often very low and noncompetitive. Such people often have CDs for a standard fixed period such as 12 months.  The banks realize this, and when they need more money to loan out, they offer higher interest rate “specials” for 11 months or 13 months.  Some require that you also have a checking account with the bank to get the best rate on CDs.  Instead of generally offering and widely advertising their best rates on CDs to all their customers, they offer their loyal customers “relationship banking.”

The idea that people operate rationally and independently as required (at least on average) for free enterprise to work efficiently and effectively has been refuted by Dan Ariely in his book: Predictably Irrational. New York: HarperCollins, 2008.  Not only are people irrational, but they are  predictably  irrational. It is disappointing that the economics profession has taken so long to figure this out when the people in marketing have understood this and exploited this for hundreds of years.

More recently, the development of behavioral economics has greatly enhanced economics in making it much more realistic. Economics Nobel prize winner Richard Thaler (and others) have offered careful analysis of human behavior and discovered that people don’t always act in a rational manner but have inherent biases that produce inefficient and ineffective behavior from a strictly free market theory point of view. See Thaler’s books:   Thaler, Richard H. and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness. New York: Penguin Books, 2009. Thaler, Richard H. Misbehaving: The Making of Behavioral Economics. New York: W. W. Norton and Company, 2016.

Schumpeter’s “creative destruction” should really be called “competition destruction” when a small, efficient family-owned restaurant gets wiped out during a pandemic or a recession because it doesn’t have and can’t get the cash to ride out an economic downturn.  With sufficient cash on hand, a large corporation (e.g., Amazon, Facebook, Google, etc.) can buy up or crush its competitors, especially when there are barriers to entry such as economies of scale or network effects.

But Adam Smith revealed a second invisible hand when he said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith’s second invisible hand is the invisible hand of collusion or market power.

The concentration of American industry into oligopolies, duopolies, and monopolies is well documented in the book by Jonathan Tepper with Denise Hearn called The Myth of Capitalism: Monopolies and the Death of Competition, (Hoboken, NJ: John Wiley & Sons, 2019), which I think they should have called “The Myth of Competition” since it reveals the extensive existence of industrial concentration in industry after industry in the United States

For example, a pair of reading glasses can be purchased for just a few dollars, but as soon as a “prescription” is involved, the price jumps up to over one hundred dollars, because there are primarily just two companies that have been authorized to provide prescription glasses.

Patents, licenses and other restrictions are often effectively controlled by those who already are in the restricted enterprise, so they have a vested interest in not letting competitors into the business.  

Patents were created to encourage innovation by giving businesses time to recoup their investments, but they have been extended way beyond that to the point where they are actually being used to restrict competition.  We would have more innovation if we got rid of patents altogether.  Government funding through the National Science Foundation (NSF) and Centers for Disease Control (CDC) can produce lots of new and innovative products by people who are more interested in promoting their professional reputations than in restricting competition and maximizing profits.  NSF and CDC data, methods, and research techniques are made readily available to the public. Making lots of money is just one way of feeling good about yourself. Some people such as teachers and daycare attendants feel good about helping children even though they are often paid very little for their work. Creative entrepreneurs such as Steve Jobs and Elon Musk are frequently more focused on changing the world with new and innovative products than in making money per se.

The amazing creativity of government funded projects that have resulted in a broad range of creative innovations from interstate highways to rockets to the moon and the Internet is well documented in these three books by Mariana Mazzucato:   Mazzucato, Mariana. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. New York: PublicAffairs, 2015.    Mazzucato, Mariana. The Value of Everything: Making & Taking in the Global Economy. New York: Hachette Book Group, Inc., 2018.    Mazzucato, Mariana. Mission Economy: A Moonshot Guide to Changing Capitalism. New York: HarperCollins Publishers, 2021.

Doctors, lawyers, hairdressers, and a large number of other professions restrict entry.  The boards that regulate the restricted professions are themselves made up of the people already in those professions, so they have a natural desire to avoid competition and restrict entry to keep their wages high. The interesting thing is that these restrictions vary enormously by city and state so not all of the professional restrictions are really necessary to protect the public. 

The idea that businesses are efficient and government agencies are inefficient may be the opposite of the truth. Government agencies by law must be largely transparent.  The federal government has to follow the federal open meetings law ( U.S. Code § 552b – Open meetings ). Government is often dismissed as inefficient, partly because it may have goals other than profit maximization, and also because, unlike private businesses, the government’s operations are subject to close public scrutiny such as under the Freedom of Information Act and the Open Meetings Act. State governments may impose additional restrictions requiring transparency in government. 

Ironically, many of the most conservative states have the strongest government transparency requirements.  Not trusting the government and requiring openness makes the government more efficient and effective.  Revealing any government inefficiencies has two effects: (1) It puts immediate pressure on the government to clean up its act and get its house in order to be more efficient and more effective, and (2) It gives the general public the idea that government is inefficient, especially relative to business where inefficiencies are mostly hidden.  In theory, inefficient businesses should be driven out of business by competitors, but many industries are dominated by a few firms that retain dominance through a wide variety of barriers to entry.

Businesses are not subject to transparency for the most part. They often impose non-compete clauses in their employee contracts that forbid passing along or in any way revealing company “secrets.”   The idea that a business could not exist for long if it was inefficient is far from reality. Large corporations are prone to a range of efficient and inefficient departments. Excessive monopolistic profits can cover up a great deal of inefficiency. Natural monopolies such as local water, sewage and electric providers can get by without having to worry about being run off the road and replaced by competitors. Large businesses can be and often are more inefficient than government.

For example, Saluto Pizza started as a small pizza place in St. Joseph, Michigan. Its pizzas were so popular it started freezing them to sell to people to take home to reheat for consumption later. The frozen Saluto Pizzas were in such great demand that a frozen pizza manufacturing plant was created to produce them to sell to grocery chains around the nearby region. Their popularity was such that another factory for making the frozen Saluto Pizzas was created in Birmingham, Alabama. Then General Mills bought out Saluto Pizza. But following the financialization strategy of cutting costs, the Saluto Pizzas were then made with cheaper ingredients, which made them unpopular. Before long the Saluto Pizza brand was discontinued. Such cost cutting and removal of the resulting unpopular products is then described as enforcing efficiency in private business, in contrast to alleged government waste and inefficiency. The executives who cut costs and cut out unprofitable products were probably rewarded and promoted. By contrast, so-called government “bureaucrats” who serve the public are seen as unproductive and wasting the taxpayer’s money. 

Some politicians like to discredit government employees who they refer to as “career bureaucrats” or collectively as “the deep state.” What such politicians really want is to replace these civil servants who have taken an oath to obey and defend the constitution of the United States with sycophants who will readily violate the constitution in pursuit of their political master’s political agenda. In Russia Vladimir Putin has learned that replacing “the deep state” with political sycophants in the Russian justice system has enabled him to charge and convict any political opponent with all sorts of invented and imaginary crimes. Removal of “the deep state” here in the United States could lead to a similar outcome. An autocratic leader’s political slogan of “Lock her up” “Lock her up” could become a reality for anyone opposing that autocratic leader once that politician is elected president and after the removal of the government employees referred to as “the deep state.”