miércoles, 29 de marzo de 2017

Equitativism an Alternative Theory to Keynesianism and Monetarism


This article was translated to English language with the help of Google translator, but the original was written in Spanish and it can be found on the  link "El Equitativismo una Teoría alternativa al Keynesianismo y al Monetarismo"

The purpose of this first translation is to share my economic research with the people around the world who do not know the Spanish language, therefore all comments and corrections from readers are welcome.

Preliminary Considerations:

Humanity has had a need to understand and govern the phenomena related to the activities of the Economy.

The object of Economics as a social science is to study the way to organize society, in order to generate services and economic goods that are scarce, considering the processes of: production, distribution, marketing and consumption, which meet the needs of humans beings in a sustainable manner over time.

However, history has taught us that the economy, viewed as a set of human activities, behaves cyclically and is rebellious and unpredictable, going through periods of expansion and depression, which have generated suffering for citizens and in some cases wars in different nations and in many times, when all else fails.

Although there have been many brilliant minds who have spent a great deal of time and effort trying to understand the laws governing the economy and how to predict their future behavior, nations today have still not been able to make economic cycles smooth and those catastrophic cycles produce the collapses with slow recoveries.

In order to stabilize and recover the collapsed economies, economic policies which led to such collapses must be reversed. These policies are currently based on the application of two prevailing theories confronting each other, and although they contain many relative truths, in practice they have been shown to be incomplete and they fail in the medium and long term.

The following is a brief summary and analysis of the two predominant theories today, which are very respectable but ineffective and also a new alternative economic theory named Equitativism is proposed here.


This theory suggests the strong intervention of the government of a country, to apply fiscal and monetary policies, in order to control the behavior of macroeconomic indicators such as: inflation rate, unemployment rate and GDP growth rate, with the managing of the variables that make up the Aggregate Demand (AD), that is a function expressed by the following formula:

AD = C + I + G + X


C = Household consumption.

I = Business investment.
G = Government expenditure.
X = Net exports.

According to this theory, if we want to increase the GDP and therefore expand the Aggregate Supply, we must increase the Aggregate Demand, through the application of fiscal policies such as: decrease taxes so that families have more money and the Consumption grows and on the other hand it is necessary to increase the Expenditure of the Government.

From the monetary point of view, the interest rate has to be reduced so that there is more Private Sector Investment and increase Monetary Liquidity, so that the Government can finance Public Spending.

On the other hand, from the currency exchange point of view, it is suggested devaluing the local currency to favor exports.

The Keynesian theory states, that the application of these measures in the direction indicated above also generates an increase in the rate of inflation and a decrease in the unemployment rate (Phillips curve or inverse relationship between inflation and unemployment).

Therefore, in order to reduce the inflation rate, it would be necessary to change the direction of the fiscal and monetary policies that led to the growth of this indicator, through the contraction of the Aggregate Demand, that is, to increase taxes to reduce Consumption, rise Interest rates in order to reduce the investment, decrease public spending and revaluate the currency.

The underlying problem with the application of these rules is that they justify governments spending unmeasuredly and without control and even that they promote populism and unproductive bureaucracies or allow corruption, believing that with these practices pushed to the limit, the GDP and the Employment can rise and therefore the central banks create astronomical amounts of irredeemable money out of nowhere and without backing, by printing banknotes, minting coins and creating deposits by the granting of credits (Generating the monetary base with these actions) or worse yet, giving a franchise to commercial banks, to use a rule called fractional reserve.

The fractional reserve allows the banks to grant credits with additional virtual money that does not exist physically and that is not part of the Monetary Base, which leads to exponential levels of the Liquidity variable, which is one of the reasons of high inflation because of the growth of the liquidity bubble (not only by the printed banknotes, but also for loans granted by central and commercial banks) and at the same time the decline in GDP, because when money loses its value internal and external, the Aggregate Demand grows because the consumption variable rises, but the factors of production  lose their interest in investing and producing, because they are remunerated with a currency without value, since the Value of Money, according to the Irving Fischer formula, can be defined as:

{V = GDP/Liquidity}

This simple formula shows that if GDP does not grow at the same rate as the increase in liquidity, the value of money tends to zero, which generates singularities that make the economy of a country collapse.

See the scientific explanation of this postulate in: Theory of the Effects of Monetary Liquidity on the Aggregate Demand and the Aggregate Supply that is written in Spanish language but I am goign to translate it to English, as soon as possible.

Other forms of financing excessive public expenditure, in the hope of achieving increases in GDP are: indebtedness that compromises the future of the new generations who have the responsibility of paying a money that their ancestors spent or embezzled, the exaggerated increase of taxes which produces contraction of Consumption, by the voracity fiscal to support unproductive bureaucracies or corruption and lastly the permanent devaluation of the currency, which leads to the destruction of real wages of citizens and ends up generating inflation and recession, which in turn lead to famine, scarcity and misery which generate protests, that are repressed by brute force and conclude with the discredit of governments and their loss of popularity.


The Monetarism is the other predominant economic theory, that comes from the Austrian school, was created by Milton Friedman and its postulates are based on recommending the replacement of monetary policies suggested by Keynesianism, using simpler monetary rules, so that monetary authorities increase the amount of money in circulation on a regular and stable basis in accordance with economic growth, which is highly desirable, but nevertheless the permanent increase in the money supply and the existence of the fractional reserve for the commercial banks, also leads to Liquidity Bubbles.

On the other hand, in this theory acquires relevance the phrase taken from the French "Laissez faire et laissez passer, le monde va de lui même" = "let do, let through, the world goes alone" which leads to the free market, without any regulation by governments, which despite being very desirable is an utopia that would only work in an ideal world, because in nature there are weaknesses that make people lose the sense of Equity and so perversions appear such as speculation, which if not controlled, also generate inflation and the worst thing is that the real producers, seeing that the speculators do more profit that those who produce, opt to stop producing, with which GDP is contracted, which also generates inflation.

In addition, another perversion with this theory, is the creation of controls for most people and the free market only for very few privileged castes supported by corrupt politicians, who can do whatever they want, excluding to the majority of citizens, which leads to corruption, which also produces inflation. Such is the case of aberrations like exchange controls and its traps, which consist of apply for credits, buying foreign currency or other assets and liquefying debts with devaluations and inflation,  which leads to swindle: savers, workers and producers, without producing any benefit to the countries.

The Paradox:

It seems at first glance that these statements about the generation of inflation because of the exponential and irrational expansion of Liquidity are not entirely true, since: Japan, UK, USA, and the Euro Zone, maintain inflations less than 2% or even deflations and they are permanently expanding Liquidity on an unlimited basis; but what happens is that since their currencies are considered as the only world reserve currencies, they are accepted "for now" by all the economies of the world and therefore could be considered that the GDP for these nations is the whole world production and they can import all the goods and services they want, only printing unlimited banknotes without tangible monetary support and granting credits without adequate regulations, thus temporarily expanding their Aggregate Supply, but having: high rates of unemployment, recession, deflation, negative interest rates, GDP that does not grow, irredeemable debts, unwanted immigration and other economic and social distortions, for having fallen into a Liquidity trap, naively believing that they have found the eternal source of wealth, with a false money that is irredeemable.

Additionally to the aforementioned perverse phenomena, inflation of those countries that are issuing reserves, is transferred to the producing and exporting countries of raw materials and other tradable goods, which are not issuers of reserve currencies, whose money is permanently devalued, to try to make their exports competitive, wrecking their citizens with very low real wages, which in some extreme cases reach situations of neo-slavery or causing their compatriots to be forced to migrate to other countries in search of better standards of living, although in some cases they end up losing their lives.

On the other hand, it must be considered that there are currently attempts to eliminate money in the form of bills or coins, with various justifications (control of terrorism, control of drug trafficking, control of contraband, control of corruption, etc.), in order to replace it only for digital money, changing the handling of exorbitant volumes of papers with no value by digital records, which benefits only those who emit money, whether the central banks or commercial banks, because the seigniorage that is the difference between the nominal value and the cost of paper and ink in the case of central banks or the whole nominal value, plus interest charged in the case of money generated by commercial bank loans, becomes absolute gain for money issuers, with the underlying risk that in the absence of money in physical form, this deficiency can be used for: confiscate, plunder, extort, exclude or enslave citizens through the system of payments for political or other reasons, creating a way for economic domination, like are the controls of foreign exchange and the demonization of the possession of foreign currency, so that financial systems remain immersed in the liquidity trap they have created, which is unsustainable.

History has shown that when the economy of the countries collapses and when all else fails, the governments end up blaming others for their mistakes, marginalizing various sectors of their nationals and making war on their populations or other nations.

The Proposal is the Equitativism:

How to criticize theories that have been produced by the research, effort and ability of our illustrious predecessors, without providing solutions is currently very common, I do not want to be part of this bad practice and therefore, like I have been witness of the effects that the brilliant economists of the past could not anticipate because these situations were unpredictable, then I will present some minimal suggestions from a different point of view, to stabilize equitably the collapsed economies, taking into account that these suggestions could constitute an approximation in order to postulate a new Alternative Economic Theory that I will call "Equitativism", as a concept derived from the word Equity, understanding that Equity is Justice with Equality and Freedom, which constitutes a virtue that implies not trying to favor only ones with the detriment of the others.

The economic stabilization actions suggested by this new theory are:

1. Rescue and maintain the value of the national currency (V) in such a way that the relation {V = GDP / Liquidity} be constant and independent of time, which implies promoting the rational increase of production and adjusting Liquidity according to the GDP, to allow the total money supply to increase or decrease and inflation be always maintained close to zero, with a stable currency.

This is the first action indicated to reverse previous monetary bad praxis and thus defend and recover the economy of a nation, if we take into account the existence of the axiom that indicates "If you want to destroy a country, it begins by corrupting its currency".

2. Use the purchase and sell of foreign currency as an effective complementary tool to adjust Liquidity.

3. Support the national currency with tangible assets such as: gold, silver and / or petroleum, which means eliminating the concept of fiat money, because now the money would be fully redeemable.

This action was taken in the past, to rebuild collapsed economies, after the French revolution, creating the Franc of gold and after the Second World War with the Bretton Woods agreements, backing the US Dollar with gold.

4. Maintain the ratio {Liquidity / BaseMonetaria = 1}. This means to eliminate the use of the fractional reserve and therefore that all the credit will be granted only with money from the Monetary Base, which must be duly backed.

On the other hand, it is very desirable to do a recapitalization of the commercial banks, to maintain the Ratio {[Equity / Assets] > = 0.5}.

With these actions, central banks will be able to regain the ability to effectively control the entire money supply and guarantee discipline when granting credits.

5. Understand, explain and use the concept of real or relative magnitudes instead of nominal or absolute magnitudes, which leads us to the following three additional suggestions:

6. With a banknote of for example 100 currency units, a citizen should always be able to buy a specific good of the same quality and the figure of that reference good, must be printed on the back of the banknote.

7. The daily real minimum wage should never be less than two kilograms of prime beef, regardless of its nominal price, ie the monthly minimum real wage must be at least 60 kilos of beef, so that the citizens can recover the vital energy that they need in order to be productive and this will shield the real wage from the effects of inflation and devaluations.

8. The price of a good such as beef must be used as an index to fix the real prices of other goods and services and thus be able to work with real or relative prices and wages, which are the carriers of the information related to the scarcity rather than continuing to use nominal or absolute magnitudes, which only confuse citizens by making them believe that amounts with many zeros signify wealth and success, which is a monetary illusion until they realize very late that the astronomical figures of nominal values ​​lead to the ruin. For this, it is required that the real price of the reference good such as beef be fixed based on the honest study of its real costs.

9. When liquidity will have reached rational levels in the very short term, it is necessary to eliminate money exchange controls, not to demonize foreign currency holdings and to allow the use of foreign currency accounts in the banks of the country, which must function properly, without restrictions and that foreign exchange circulate freely, like any other good, so that citizens outside the country can send the remittances to their families and the abroad savings can return and can be used for the benefit of the nation, instead of getting zero interest or negative, paying high commissions and taking risks in unstable banks of tax havens or in other countries, where real interest rates are very low, close to zero or negative and taking into account that they will not think twice in order to confiscate foreign money with any kind of justification.

10. The living forces of a nation can be classified into five major groups: producers, distributors, marketers, consumers and government.

As there must be equity between all parties, where the government, through a conciliatory and permanent dialogue, must to act as arbitrator par excellence, in order to polarize the entropy of these living forces of: production, distribution, marketing and consumption, generating synergy that translate those forces into the functions of aggregate supply and aggregate demand, so that there is a stable equilibrium and real prices Equitable real wages that must be reviewed and corrected frequently at least quarterly and a healthy economy based on the rational production of goods, services and knowledge, which constitute the true wealth, prosperity and welfare of the nations, because the money per se, is nothing more than a metaphor of wealth, whose function should be, to constitute a unit: account, exchange and maintenance of value, a function that is not fully fulfilled today, because current economic theories are based on the permanent loss of the value of money, robbing citizens of the fruits of their labor and investment, leading to cyclical economic crises.

Note that this new vision of the economy according to the theory of games, that is a science belonging to the area of ​​Operations Research,the government sector  is placed as the arbiter par excellence, instead of being the passive spectator of monetarism or the active player of Keynesianism, because the economy should be a game of non-zero sum, where everyone wins and not a zero-sum game, where what some win loses others.

A final monetary postulate:

When a country can issue money, which be a true reserve of value, backed by tangible assets and that be a redeemable money: capital, labor, talent, knowledge, goods and services will flow and settle in that nation and by the law of Gresham, all the citizens will treasure that currency, repudiating the other money without value.

This monetary solution is what the rational governments should offer to their countries, as it happened in the past: during the Renaissance in Florence with the Golden Florin, after the French Revolution in France with the Golden Franco, in Venezuela between 1.918 and 1.973 with the Bolivar-Gold and finally in USA after the Second World War with a dollar redeemable for gold with the Bretton Woods agreements and until 1.971.

With these redeemable currencies, current monetary aberrations that create money out of nowhere in astronomical quantities are avoided, because such exponential quantities cause that economies to collapse, ruining the workers and entrepreneurs of the real economy, leaving countries full of rust and misery belts.

To conclude with a moral story we have the brilliant and respected philosopher Aristotle, who defended the Geocentric theory that was wrong and it took about 2000 years to Copernicus in order to postulate the new Heliocentric theory and Galileo confirmed that the earth was not the center of the universe with the use of the telescope at the risk of losing his life on the gallows or at the stake, because He was considered a heretic, which indicates that humanity can not be the slave of thinkers of the past, despite that they had been brilliant and respectable, because truth is relative and therefore must be questioned with the passing of time.

Alejandro Uribe: Economy and Politics

Engineer, Business Consultant and Researcher

Initial publication in English: Wednesday, March 29, 2017

Initial publication in Spanish: Monday, December 19, 2016