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Hyperwage Part 27
Chapter 27: The Greatest Social Theory
Before I start, I received many messages congratulating me on the following developments. First, there is now a strong consciousness in society and the government regarding the domestic helpers. There are seminars, forums, and studies on their plight. Second, the unthinkable has happened, that is, previously only the leftists shouted for a high minimum wage increase but this year, even the majority congressmen are joining the chorus. Third, many overseas workers are convinced of the theory at the same time many economists call it hogwash. Fourth, most businessmen are in favor of Hyperwage than against it, some even asking me how they could implement the same in their firms. Fifth, the brain drain in the medical profession has become a huge nightmare and the government and our economic policymakers have no real solution at all unlike the hope offered by the Hyperwage Theory.
Overall, my correspondents congratulated me for raising the consciousness of the stakeholders, that giving true value to labor need not be alien to our economy. But I’ll reserve these correspondence for some other edition.
Street theory
I conjured up the idea of Hyperwage out of street experience. In attempting to formalize this theory with solid economic principles I conducted my own research because I did not know many PhDs in economics and those whom I know would rather stick to the status quo theory that has perpetuated Third World poverty than entertain ideas that lie beyond their normal horizons.
And still there are others I know whose knowledge on economics is limited to the word “economics” in their college diplomas.
That’s an unfair statement but I tell you there are many economics graduates that come close to such unfair generalization.
Greatest social theory
I only learned to appreciate Keynesian economics recently when I was groping in the darkness of my economics background hoping to find some Keynesian candle in the dark. I was extremely surprised at what I rediscovered. Not only did I find that Hyperwage could stand on the shoulders of Classical economics but also on Keynesian economics.
But my greatest rediscovery was that Keynesian economics is a huge bolt of lightning, a magnificent economic revolution, and probably the greatest social theory we have seen in the millennium.
The intellectual jump from a hundred years of Classical economics, built up by a hundred economists on one side, to Keynesian economics, conjured up singularly by a gay mathematician on the other side, was more than a leap of faith. It was a flash of genius. It was Keynes vs. the world of economics.
Among the revolutionary ideas of Keynes was that he abandoned the ceteris paribus assumption (everything else unchanged) and adopted the “everything at once” principle.
And don’t forget, Keynes was a true blooded monetarist before he became a Keynesian. After all, he wrote a book A Treatise on Money.
I must warn you though, that while Keynesian economics is the greatest socioeconomic idea of the millennium, it would soon be eclipsed in a decade by the Hyperwage Theory. You have been forewarned.
Keynesian Macro
Keynes probably invented the subject of macroeconomics, or helped define it separately from microeconomics. Before Keynes, our macroeconomics was an imbroglio of amateur attempts at extending microeconomics to macroeconomics, which is susceptible to intellectual errors because macro is not a simple as a big micro.
If there’s only one equation that you should know about macroeconomics, it should be the Keynesian equation:
Y = C + I + G + (X-M)
national income = consumption spending + business investments + govt spending + exports – imports
Multipliers and accelerators
The Keynesian equation has appertaining equations which are called the multipliers. These are:
1. income multiplier
2. employment multiplier
3. investment accelerator
4. other similar multipliers
Income multiplier
This is the multiplier that we have been discussing all along.
Y=kC
This shows that national income is proportional to the consumption spending by the consumers.
Investment accelerator
Y=I
This shows that national income is proportional to the investment spending by the businesses. This tendency for changes in consumption to induce changes in investment spending by businesses is called the accelerator effect. The accelerator, symbolized by the Greek letter alpha, , is less than or equal to one.
Multiplier vs. Accelerator
New autonomous spending causes investment to accelerate (that’s why it’s called accelerator), so that aggregate spending is both multiplied by induced consumption and accelerated by induced investment.
What is happening?
Until this time, I have only focused on the multiplier and hinted only on the accelerator. I deliberately focused on the multiplier alone so as not to lose your attention. Yet, the economy is not benefited by the multiplier alone. There is also the so-called accelerator. The derivation of the accelerator above is similar to the derivation of the multiplier but unlike the multiplier, the accelerator can be derived using graphical methods without severe loss of intuitive content.
So is consumer spending good? Yes, in two ways. An increase in autonomous spending may increase national income via the accelerator more than the multiplier effect alone.
Employment multipliers
N1=kN2
This shows that total national employment is proportional to employment in the industries. This appears logical enough. If the helpers have high purchasing power, then they will consume more products. More products sold means more factory activities, therefore more employment for the factory and then more employment for the economy as a whole.
This is why I cannot understand why economists are vitriolic when it comes to Hyperwage. Maybe they have a hard time escaping from their old ideas and maybe the problem is not with the new idea.
Other multipliers
Many local governments in Europe and in the US are now focusing on the multipliers. Leontief started the so-called Input-Output Analysis. For example, in Australia, there is an input-output multiplier analysis of effect of establishing a local university. In China, you have the multiplier effect of establishing Coca Cola factories.
Warning: Don’t be enamored by the multiplier alone. Just because the call centers give our economy the much needed multipliers does not mean that offering ourselves as the dirty kitchen of US tele-support is a correct economic policy. That would be the strategy of poverty that I attacked with all this Hyperwage Theory in the first place.
Keynesian prophet
So far, I have approached Keynesian economics from the multiplier effect. And yet this effect is not exclusive to Keynesian theory. It is a real physical process, and being such, any theory including the Hyperwage Theory can adopt it without resorting to Keynesian economics.
Does Keynes make sense? Many do not agree with him, but the the US and many European governments now adopt his policies. Richard Nixon once said: “We are all Keynesians now.”
Recently, I found my old copy of the memoirs of John Kenneth Galbraith, the famous American economist. Although the book was written in 1981, I bought my copy in 1988. I still can’t remember why I bought that book. I didn’t know Galbraith and I didn’t know economics and why I bought that book with my hard earned salary, I don’t know.
The only thing useful I got from that memoir is a technique on how to recruit employees, which I obtained from Galbraith’s technique chosing his students.
Anyway, reading it again this time, gave me insights which I didn’t get the first time around. Remember that it was Ken Galbraith who brought Keynesian economics to America from England. He was the Mohammed of Keynes in America.
Teaching millionaires
Allow me to relate an episode from that book.
Henry Dennison, then about 60, was a multimillionaire in 1936 having one of the biggest companies in the US. He was an inventor, lover of the arts, and interested in intellectual pursuits. Of course, he advised American presidents - being a millionaire qualifies him so.
Due to his position as government adviser, an idea was hatched that Dennison write a book that supports Franklin Roosevelt and Galbraith was tasked to tutor the millionaire some economics. Dennison provided the latter with a lovely house, and his huge personal library as working space. It was some kind of a vacation paid for by the multimillionaire.
What was wrong with the economy? Remember the Depression started in 1929 and by 1936 there were still suffering. Galbraith, the Harvard professor, like many economists in Harvard and in the US believed that the problem was this: Big companies that control the economy as monopolies, oligopolies, or monopolistic competition.
Solution: More competition, more anti-trust laws. This line of thinking was due to the famous Alfred
Marshall whose book on economics has been the gospel of economics. Incidentally, Keynes was one of Marshall’s outstanding students.
But the millionaire’s view was different. He saw income as having two streams. One stream flowing to the workers where it is spent (spending stream). The second stream to businessmen where it is saved (saving stream). Dennison believed that the Depression was caused by the saving stream.
His solution: that saved stream should be spent, which may include shifting from sales tax to income tax. (Note: in contrast, our VAT approach is not good, according the the Dennison philosophy.)
Heretic
Galbraith, the Harvard professor, wrote: “To anyone properly learned in economics, it would be hard to imagine a more horrifying idea. Well over a century earlier Jean-Baptiste Say, the great French economist, had formulated the Say’s Law of Markets, which established that all production created the purchasing power by which it could be bought. All of the income from the sale of a product accrued to someone, somewhere, in wages, payments for raw materials, interest, or profits. And in doing so, it provided the purchasing power to buy what was produced. Were some of these receipts saved, it made no difference; someone else would borrow and spend the savings, and if they didn’t, the price of the product would automatically adjust itself downward so the reduced expenditure would still be sufficient to clear the market. In 1936, it was not only wrong but professionally unwise to reject Say’s Law. It was a litmus by which the reputable economist was separated from the crackpot. The crackpot failed to pursue income from the sale of a product on to its use; thus his simplistic conclusion that there could be a shortage of purchasing power in the economy. Since I took seriously my reputation as well as my commitment to economic truth, my dilemma, given Dennison’s heretical vision, was difficult one.”
Indeed how does one refute errors in the economic thought of a multimillionaire who is providing you with a nice house and nice office in writing your book?
Shaken
How was it resolved? In the weeks that Galbraith was writing and refuting Dennison, he was reading at nights, the newly published General Theory by Keynes.
Galbraith wrote: “I discovered that Keynes was with Dennison, and not with me. His explanation of oversaving was much more sophisticated than Dennison’s but in the practical consequences precisely the same. There could be unspent savings’ when they appeared, prices did not adjust smoothly down to ensure that the same volume of goods would be bought by the reduced (after-saving) purchasing power. Instead output and employment fell until reduced profits, increased losses, and the need to spend from past savings ensured that all income from current production or its equivalent was spent. A new equilibrium was thus established, one with a lot of people out of work – the underemployment equilibrium. I was shaken. This was not the primitive instinct of a businessman; this was the sophisticated case of a greatly renowned economist.”
This was intellectual honesty of the highest rank. In a humbling experience, the student he was supposed to be tutoring, completely converted the teacher. The intellectually arrogant Galbraith was completely converted to the Keynesian religion and even became the leading disciple of Keynes in America.
When Galbraith told Dennison, the latter replied: “I’m not surprised, Keynes had always made sense than most economists.”
History repeats
Dennison’s company is still alive, it’s now called Avery Dennison, and we use their labels in our offices everyday. Galbraith became US Ambassador to India, and Keynes changed the world.
It was because of his encounter with Dennison that Galbraith applied for a grant to study under Keynes in Cambridge, England. When he retuned to the USA, he brought Keynesian economics with him.
Why did I relate this story? Come to think of it, a Harvard professor in economics thought a millionaire with street strategies is a crackpot. And yet, the professor did an 180-degree turn. And not only that became the prophet of Keynes in America.
Remember the reaction of two former secretary-generals of the National Economic and Development Authority? They could be as wrong with Hyperwage as was Galbraith to Dennison.
The General Theory of Keynes was written heavily in 1935 and published in 1936. The Hyperwage Theory of the Street Strategist is being written in 2005 and is to be published in 2006.
History repeats itself. And yet, Keynes was only all about economics. In contrast, Hyperwage covers both the economic and non-economic aspects of society. Watch out Keynes, the greatest social theory in the millennium is about to eclipse yours.
(Thads Bentulan, Nov. 10, 2005)
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To join the mailing list send an email to streetstrategist-subscribe@googlegroups.com
A PDF copy of the entire book on Hyperwage Theory is available currently for free.
Send an email to streetstrategist@gmail.com for the latest edition.
Want to order other books by Thads Bentulan?
The Misadventures of the Street Strategist Vol 1 to 13
..................................................................................................
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