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The Great Recession: An Assail on Conventional Economics Theory

Updated on December 28, 2011

Theorems of conventional economics aren’t really that hard to grasp: things like intricate mathematical formulas and convoluted economic equations are both based on the premise of rational human intuition. What recessions say about the theorems of conventional economics is that human beings are both rational and irrational creatures; and that sometimes they tend to overdue things. And just like “bad things” can happen to “good people,” “bad things” can happen in a “good economy.” This is very important to understanding our current modern economic engine breakdown. Whenever economic “low points” become as bad as our recent one, conventional economics—and the theories within—becomes something that touches people on a very personal level.

The study of psychology or the study of astronomy doesn’t touch every human being. On the other hand, the study of economics—in some way shape or form—affects every living human being. The force that pulsates from a modern economic engine goes above and beyond what many think of economics as a disciple. As the theorems of conventional economics become more developed, basic needs metastasize into perverse greed. It’s that middle ground between “need and greed” that participants in a modern economic system have to contend with on a daily basis. The “need for greed” by way of corporations, individuals, causes economic “low points” like the one we’re in now. Of course, the desire for the Federal Reserve to supply this “need” is central to this very same theme: the situation we got ourselves into wasn’t the workings of conventional economic theory, but more a deviation from it. If left to very little influences, the market has proven that it has the capabilities to fixed itself, weed out corruption, thereby shielding itself from future occurrences.

As I write this hub, theories of conventional economics is being tested by these very same forces. The principles of macroeconomics aren’t at fault for neither economic “high points” nor economic “low points.” Adam Smith, the father of economics, postulated that through the invisible hand free markets—while appearing chaotic and unrestrained—could eventually be able to produce the right amount of variety of goods. According to Smith, this was accomplished through “individuals pursuing their own self-interest.” What does this means in a general sense? It means when an individual pursues his own self-interest, in an advanced modern economy, he/she indirectly promotes the good of society.

In conventional economic theory, when an individual looks out for his/her own self-interest, not only are they creating positive energy, they’re doing one of two things: 1) They’re trying to coordinate an uncoordinated situation, meaning someone is trying to meet another person’s “needs and wants”; and 2) A mutual exchange of benefits are being maintained, meaning, “I get what I want, you get what you want.” This notion, according to economist like Adam Smith, “set precedent for what an economic system was supposed to be like.”

The 20th century became a time of progressive economic thinking and with it different schools of thought that postulated economic theory from different vantage points: John Maynard Keynes, a British economist and arguably the most influential economist of our time, argued that private-sector decisions within the free market sometimes lead to inefficient outcomes and therefore the government should step in with active monetary policy actions by the central bank. “Shall I say, we have the makings for our troubles today.” I say this because, government isn’t guided by Adam’s Smith individual hand, the government doesn’t have self-interest as a motivation, the government isn’t searching for positive energy creation: what the government sets out to do is go above and beyond what the science of conventional economics has to offer—which always lead to mass misallocation of scarce resources (aka Great Recessions.)

The government cajoles people into believing that an “advanced” economic engine can’t run without its help, but the recent economic engine breakdown proves that this idea is a complete and utter fallacy. Its government policies that get economies into trouble in the first place; thus, Keynes way of thinking didn’t allow for erroneous decisions on the part of the government. Truth is, government should only be there as an overseer and protector of individual property rights. The basis for government intervention, to many economists, is a complete economic enigma: both fiscal and monetary policy, if enacted at the wrong time, can and has distorted the market process to the point of creating “Great Recessions” like the one we just had. The theorem of conventional economics says, “if you create bad economics today, tomorrow, it will become a living relic of past illogical policies.” And the only way to destroy these living relics is to not create the bad economics in the first place.


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