Hi Folks, My May 8, 2005 post "Kinsley, Gelles, Priest, Ashford, Hirschfeld, Olson, Hamerstrom, Samuelson, and Burt; on Social Security" evoked a flood of serious e-mails on my favorite lists. But they all failed to mention the fundamental questions raised in the following two year old post. ~~~~~~~~~~ Begin two year old post ~~~~~~~~~~ From: "Wesley S. Burt" To: wesburt@juno.com Date: Fri, 9 May 2003 11:23:40 -0400 Subject: The Optimum Policy (TOP), Lost Since The 1890s? To: My few friends lurking on my copy list. Hi folks, My post of Thu, 24 Apr 2003, and the four which followed, have been completely stonewalled by my readers. None of my favorite interlocutors, W. Curtiss Priest, Charley Musselman, ichinen1, nor Todd Boyle returned a comment. Perhaps, if I had revised my 24 April reply to Curtiss as follows, a serious discussion of "The Optimum Policy" might have started. ~~~~~~~~~~ Snip redundant text ~~~~~~~~~ Because the US economy presently dominates the global economy, any systemic defect in US public policy which unbalances the flow of money or goods across US boundaries cannot be corrected or compensated for by the combined policies of other nations in the global economy. To the contrary, if the US economy is properly balanced by applying "The Optimum Policy" to the public sector, as consistently as it has been applied to the private sector during the 20th century, every other nation's WHIPs (their wealthy, healthy, intelligent, and powerful folks) will find their own advantage in applying "The Optimum Policy" to their own economy. Do Afghanistan and Iraq deserve any less? "The Optimum Policy" has been a matter of standard operating practice (SOP) for our capital intensive industries since a founder of the AEA, Henry Carter Adams devoted 15 pages of his 1887 paper, "Relation Of The State To Industrial Action," to describing three classes of industry; those with increasing returns to scale, those with constant returns to scale, and those with decreasing returns to scale. Adams concluded that only industries with decreasing returns could be properly regulated by the competitive action of a free market, or automated by computer control which simulated a free market pricing mechanism. The reason why was as well understood by Paul A. Samuelson and electrical engineers in 1953 as by H. C. Adams in 1887. Both increasing returns and constant returns provide excessive gain in a closed loop regulating system and form a hysteresis loop which shifts violently between two physical states. So free market or automatic control of production requires each productive asset to exhibit decreasing returns to scale in order to achieve stable and efficient operation of a population of such assets. Sooner or later, the many diverse critics of the status quo on my copy list will have to find common ground and speak as one voice, if they expect to prevail over the DDotSQ ( Devious Defenders of the Status Quo). My work experience and research since 1969 indicates only two places in our history and literature where that common ground has been documented. One place is in the Pentateuch, or Five Books of Moses, which anticipated all of the diverse religious teachings that presently divide and conquer humanity. But Curtiss Priest, quite rightly, fears that I'll be taken for a religious fanatic if I continue to advocate that source of common ground. So let's move on. The second place for finding this common ground is in the fact that both the public sector and the private sector of every national economy are composed of reproducible productive assets, human and capital. Both types of assets require a sustained investment during their development period to realize their full potential during their productive period. The extent to which those two development expenses are "capitalized," and thereby assure "decreasing returns to scale" for either type of asset, is the primary determinant of stability and efficiency among corporations or nations. Visual-aids to bring that concept into sharp focus are provided by attached Fig4a.gif and file Fig8c.gif. Fig4a serves to integrate the data presented on the supporting charts which have been so bravely posted to the URL in the signature below, but not yet discussed seriously, by my mentor and favorite contemporary economist, W. Curtiss Priest. As you all know, the medium of exchange in any national economy flows through three closed loops, the GDP loop presently at $10 Trillion/year in US, the business to business transactions loop at 150% of GDP, and the speculative transactions loop at an order of magnitude larger than the GDP. As shown in Fig 2-3 at the web site, the US medium of exchange (M1) expanded from $250 Billion in 1965 to $1,200 billion in 1994 and has remained at that level to date, while the other debt instruments continued their upward trends. This indicates a remarkable improvement in the speed of payments by electronic means throughout the global economy. Fig4a, however, tell us nothing about growth, stability, or efficiency in a family farm, a corporation, an industry, a national economy, or a global economy. After we digest and reject all of the red herrings that are every day promulgated to the public on money, interest, taxes, banks, and globalization there remains only ONE significant systemic requirement for social development such as Germany and Japan exhibited in the three decades after World War II. That ONE is an adequate capitalization of both capital and human assets, sufficient to bring both types of assets to market with "decreasing returns to scale." That is to say, without pricing young and startup assets out of the market. Fig8c shows the $6,500/year expense of 1-12 education, which is adequately capitalized in the US, on the left side of the horizontal (Value added or consumed) scale. The $5,000/year expense of supporting dependent children and students, which is not adequately capitalized in the US, is shown by the dependent lines on the right side of the chart where this uncapitalized expense diminishes the purchasing power of the work force by $5,000/year per dependent. This is a total expense equal to the DOD budget, which is charged per dependent, to US households. For more than a century, the US business community has kept its employees and the public ignorant of this ONE systemic requirement for a growing, stable, and efficient national economy. To cure what has ailed the US economy since the 1890s, we have three options, but are discussing only two of them: 1, Tax cuts, as proposed by Congress and President Bush, which will produce future budget deficits, but does not address the systemic defect in US public policy. 2, A Keynesian expansion of the M1 money supply, as proposed by subscribers to list Post Keynesian Thought (PKT), which also does not address the systemic defect in US public policy. 3, Adequately capitalize the remaining fixed costs that presently dominate the budget of US parenting families, which will restore the rising trend in the value of the dollar that Americans enjoyed prior to the 1890s, except during time of war. Hi Folks, As Fig4a shows us, our human assets operate in tandem with our capital assets, so a maximum flow of real goods and services cannot be realized by optimizing only our capital plant, if our human assets are under capitalized and thereby burdened with fixed and unavoidable fixed costs as shown by the dependent lines (1 to 6) in Fig8c. ~~~~~~~~~~ End two year old post ~~~~~~~~~~ What can be more fundamental than doing justice to those who must depend on others for justice. Kind regards, Wes Burt The Optimum Policy (TOP) is shown on Dr. W. Curtiss Priest's web site at: If you can't refute it, then make it public knowledge.