Lawrence Capron Marsh - Optimal Money Flow : a New Vision of How a Dynamic-Growth Economy Can Work for Everyone

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Copyright 2020 Lawrence C. Marsh

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First Edition

I would especially like to thank Janet K. Marsh, Erik Tyler, Elizabeth Brown, and Jeffrey Curry for their perspective, insights, and guidance in the writing, editing, and publishing of this book.

M y wife and I had just gotten back from the bank. As we pulled into the garage, I saw some papers blowing around the front yard and told my wife I would go and get them. We left the garage door open as she swept the walk and I chased the papers.

We had seen the stranger in the alley behind our home earlier that day. But we didnt see him sneak into the garage, grab my wifes purse, and steal her cash.

The next day I saw him again. This time I followed him down the alley. When I caught up with him, I explained that anyone stealing small amounts of money here and there was making a mistake. I told him what he really needed was not money but money flow. These neighborhood families were making six-figure salaries, but he was just getting occasional crumbs. Fighting over the crumbs is no way to get rich, neither for an individual, nor for a country. I never saw him again. Perhaps he was afraid of getting caught or wanted to avoid another boring lecture.

Money flow is important in the international economy, in the domestic economy, and in state, city, and local economies, just as it is in our own familys economy. Too often we think of money as a static concept. We fight over the economic pie. But, in reality, money is a dynamic flow. Money flows through our economy just as blood flows through our body. Our economic well-being and that of our fellow citizens is more closely defined by our money flow than by the amount of money we have at any particular time. Just as getting money flow right is important for us as individuals, it is also important for us at the local, state, national, and international levels.

Market efficiency requires that marginal benefits match marginal costs. College courses in introductory economics focus on the purest form of market equilibrium, where there are no externalities; no common property resources; no public goods; no fallacies of composition; no deviations from transparent, full-information, competitive markets; and where, at least on average, consumers behave as rational, independent decision makers. Traditional economic theory treats government as exogenous to the system with, at least in theory, no essential role to play other than to maintain the peace and enforce contracts.

Of all these sins of commission or omission, one of the worst is the fallacy of composition that confuses microeconomics with macroeconomics. Too often people make the mistake of assuming that individual-level microeconomic incentives can simply be aggregated to determine economy-wide macroeconomic effects. A simple example is what economists call the paradox of thrift, where everyone trying to save more during a recession (an example of microeconomic activity) leads to a reduction in total savings as the economy shrinks (a macroeconomic effect). In other words, more people trying to save more during a recession leads to a fall, rather than a rise, in total savings. Understanding microeconomic incentives does not automatically inform us about which macroeconomic policies will lead to efficient resource allocation.

Money flow dynamics are subject to the laws of mathematics. This is especially important for achieving economic stability and equilibrium. When you square a number between zero and one, it gets smaller. But and other such analyses that the parameters that control our economy do not always stay between zero and one and, therefore, do not always move us toward convergent stability and equilibrium. Instead, our economy can be driven by contagion effects and other automatic processes toward divergent instability in the face of either irrational exuberance or a downward recessionary spiral.

George Cooper has proposed a wealth flowor money flowparadigm with government at the center of capitalism and the free enterprise system. Cooper points out that before 1628, the medical profession mistakenly followed a blood flow paradigm (framework for thinking) that assumed that our blood originated in the liver and flowed outward where it evaporated at our extremities (fingers and toes). Previous economic paradigms have followed a similar path in assuming that government is, or at least should be, just an outside observer with no essential role to play in economic activity, when in reality, government is the heart of the free enterprise system, with money flowing in a circular loop.

The new money flow paradigm replaces the classical, neoclassical, Austrian, monetarist, and Keynesian schools of economic thought, which are all based on the old exogenous government paradigm and assume that government generally detracts from the efficient allocation of resources. In contrast, the money flow paradigm sees government as playing a key role in bringing about economic efficiency. There are many circumstances where government corrects free market allocations and brings marginal benefits in line with marginal costs.

In an earlier book, Cooper rejected the efficient market hypothesis that is explicitly or implicitly endorsed by most of the previous paradigms. Under his financial instability hypothesis, Cooper notes that while markets for goods and services generally operate efficiently, with negative feedback loops slowing demand as prices rise and increasing demand as prices fall, financial markets tend to do the opposite using positive feedback loops: rising prices increase demand, and falling prices drive investors to sell their shares and leave the market.