Why Conservative Economics Can't Work (12-25-2014)

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I AM OFFERING THIS SECTION, as well as the glossary at the end of the book, because I think it
will be very helpful in understanding the two basic schools of thought about how the economy
works, which, in turn, is necessary to understand the fight between the Conservative/Minimal-state
Liberals (MSL) and the more progressive, Active-state Liberals (ASL). One school describes the
conservative economic philosophy, and the other school describes that of the progressives. The
essential difference between the two philosophies is as follows:
1. Conservatives and MSLs believe the market is a self-correcting mechanism and is supply-driven;
leave it alone, and it will take care of itself (the Austrian/Classical School or family of conservative
economic thought).
2. ASLs think the market is demand-driven and not always self-correcting, and will need government
intervention from time to time (Keynesian School or family of progressive economic thought).
Both Conservatives and MSLs, from the late 1700s to today, have followed some variation of the
Austrian/Classical (which from here on out I will simply call the Classical) School of economics. So
strong was the belief in this system that it persisted as the dominant economic philosophy of all
major political parties until the 1900s. Periodically, over that era, economic progressives tried to
implement different policies; but they were largely short-lived until President Theodore Roosevelt
began making permanent changes to federal policy. Ultimately, it took the Great Depression to
usher in the progressive Keynesian School of Economics developed in 1936. The current incarnation
of the Classical School is known as Supply-Side Economics or, derisively, trickle-down theory. The
progressives are less inventive in their descriptive titling; the latest version of progressive theory is
called the New Keynesian Economics.
I have talked a lot about schools of economic thought like you knew what I was talking about, and
probably many readers do. But for those who might be drawing a blank and wondering why it is so
important or why I waste so much ink on it, let me explain them a little bit. I hope more experienced
economists forgive me the lack of exactness in my use of terminology and the broadness of my
explanations, but all I am really trying to make clear is the fundamental differences between the way
conservatives and progressives think in terms of how and why the government should or should not
be involved in the policy aspects of economy as it relates to business activities and the
individualeconomic interface. The fact that there are such things as elasticity and inelasticity in
demand or that luxury items flip the price-demand curve on its head or that eigenvectors and values
play some part in the deep esoteric economic calculations that I have long forgotten is interesting,
they nevertheless play no part here. The point I am trying to get across is the fact that Classical
economists think microeconomics is all that is important while Keynesian economists think
macroeconomics is important as well and is useful in preventing damage caused by boom-bust
cycles. Therefore, let me, if you dont mind, spend a little more time drilling into these two theories;
we will revisit them again in the Analysis Section.
GLOSSARY:
ACTIVE-STATE LIBERAL: A liberal who does not hold to the social Darwinist theory and believes
there is a role for government to play to ensure all have an equal opportunity to succeed, should
they so choose.

AUSTRIAN SCHOOL OF ECONOMICS: A sub-set of Classical economic that rejects econometrics. It

was founded in the late 1800s, when it split from the Classical school, by Austrians Carl Menger,
Frederich von Wiesner, and others[1]. The Austrian schools basic tenets include a fundamental
believe the economy is driven by individual people. It is their subjective actions based on knowledge,
experience, and expectations that set demand and price, and ultimately everything else that follows
from that.
CLASSICAL SCHOOL OF ECONOMICS: This theory grew out of Adam Smiths 1790 seminal work
The Wealth of Nations. Smiths famous metaphor of the Invisible Hand
http://www.pdf-explode.com/blogger.php describes the self-regulating ability of free markets to
reach natural equilibrium without outside intervention. Unlike Keynesian and Austrian economics,
which are demand-based, Classical economics maintains and tries to prove that supply creates its
own demand (Says Law). Nevertheless, like the Austrians who broke off in the late 1800s, Classical
economists maintain all economic activity can be described in terms of activity at the level of the
individual, i.e. microeconomics.
CONSERVATISM: In academia, conservatism means something different than what lay people
conceive of it today; most people who call themselves Conservative today are actually Minimal-state
Liberals. An actual Conservative, in the philosophical meaning of the word, believes in a certain set
of values which Edmund Burke (1729 1797) first identified in his writings. Based on these, Russell
Kirk (1918 1994), one of the foremost promoters of modern conservatism developed the Ten
Conservative Principles, based on Burkes original thoughts, in his book The Politics of Prudence[2].
They are:
The conservative believes that there exists an enduring moral order - all social questions, at heart,
[are] questions of private morality.The conservative adheres to custom, convention, and continuity Conservatives are champions of custom, convention, and continuity because they prefer the devil
they know to Delivery Invoices the devil they dont knowConservatives believe in what may be called
the principle of prescription - that is, of things established by immemorial usage, so that the mind of
man runneth not to the contrary. It is perilous to weigh every passing issue on the basis of private
judgment and private rationality. The individual is foolish, but the species is wiseConservatives are
guided by their principle of prudence - acts only after sufficient reflection, having weighed the
consequences. Sudden and slashing reforms are as perilous as sudden and slashing
surgery.Conservatives pay attention to the principle of variety - preservation of a healthy diversity in
any civilization, there must survive orders and classes, differences in material condition, and many
sorts of inequality. The only true forms of equality are equality at the Last Judgment and equality
before a just court of law; all other attempts at levelling must lead, at best, to social
stagnation.Conservatives are chastened by their principle of imperfectability - All that we reasonably
can expect is a tolerably ordered, just, and free society, in which some evils, maladjustments, and
suffering will continue to lurk.Conservatives are persuaded that freedom and property are closely
linked.Conservatives uphold voluntary community, quite as they oppose involuntary collectivism - In
a genuine community, the decisions most directly affecting the lives of citizens are made locally and
voluntarily. Some of these functions are carried out by local political bodies, others by private
associations: so long as they are kept local, and are marked by the general agreement of those
affected, they constitute healthy community.The conservative perceives the need for prudent
restraints upon power and upon human passions - A just government maintains a healthy tension
between the claims of authority and the claims of liberty.The thinking conservative understands that
permanence and change must be recognized and reconciled in a vigorous society - When a society is
progressing in some respects, usually it is declining in other respects.
DEPRESSIONS: Severe recessions but also have no particular definition. So, again, it is left up to the

NBER
FISCAL POLICY: The use of government revenue collection and expenditure to influence the
economy. The two main instruments of fiscal policy, accomplished at the Congressional level, are
changes in the level and composition of taxation and government spending in various sectors. These
changes are intended to affect the following macroeconomic:
GOVERNMENTAL MONETARY POLICY: Includes actions taken by the
http://www.pdf-explode.com/blog1.php US Federal Reserve to increase or decrease the money
supply (the amount of money in circulation) by manipulating interest rates. The Federal Reserve
System is an Independent federal agency which incorporates both public and private aspects. The
controlling organization is a Board of Governors, appointed by the President. They oversee 12
regional Federal Reserve Banks and a host of private banks that belong to the system who respond
to Federal regulations. The mandate of the Fed is to 1) maximize employment, 2) keep prices stable,
and 3) keep long-term interest rates moderate.
KEYNESIAN ECONOMICS: Developed in 1936 by John Maynard Keynes to answer the question as to
why classical economics could not account for the violent boom-bust cycle experienced by the
American (and world) economy for the last 130 years. While Classical economics continues with the
original supply-driven approach to economic behavior, Keynes believed economic activity was driven
instead by demand and that by using monetary and fiscal policies, the extremes of economic cycles
can be mitigated in order to prevent recessions or reduce their size and thereby reduce the
economic and social pain that result from them.
LIBERALISM: This philosophy is summed up in John Lockes statement "All mankind...being all equal
and independent, no one ought to harm another in his life, health, liberty, or possessions"[4]. From
this, the ideas of old and new liberalism emerge. In concert with this, Locke believed that to secure
these natural rights required the formation of a "sovereign" authority with universal jurisdiction[5].
From this came the idea of a social contract between the governed and the government they
consented to protect their rights. There are four principles regarding liberalism[6]:
Individualism The rule of man is replaced by the rule of law where the protection of individual
rights, in most instances, is more important than the rights of groups.Egalitarianism Is legal and
political equality, as well as, equal opportunity without artificial barriers, e.g., while all are able to
start at the same place, not all finish togetherUniversalism The moral principles that define
liberalism apply to all human beingsMeliorism The capacity of human beings to become better just
as their social and political institutions can become better.
MACROECONOMICS: This theory is an adjunct to microeconomic by considering economics at the
aggregate level. While microeconomics is worried about how much supply there is for product A,
macroeconomics is concerned with the aggregate supply of all products in an economy. By doing so,
larger questions regarding overall fluctuation in interest rates, inflation, and employment can be
understood and acted upon.
MICROECONOMICS: Theory of supply and demand. Microeconomics considers what happens at the
individual buyer and seller level; what motivates people and companies to buy a service or a product
and what encourages investment into the production of a product or service.
MINIMAL-STATE LIBERAL: A liberal who does hold to the social Darwinist theory and believes there
is no role for government to play beyond providing for the common defense from outside harm. All
people start out having the same chance to succeed in life and the government does not have an

obligation to keep the playing field level.

NEGATIVE FEEDBACK: A process in many fields of social, economic, and physical sciences where a
systems output influences the input of that process in such a way as to decelerate future output in
the next iteration.
POSITIVE FEEDBACK: A process in many fields of social, economic, and physical sciences where a
systems output influences the input of that process in such a way as to accelerate future output in
the next iteration. Examples will be offered in Part III.
PRIVATE MONETARY POLICIES: Actions by banks to set their own interest rates and print their
own money as the market forces direct or as they simply see fit.
PROGRESSIVISM: Can apply to both conservatism and liberalism, but is generally considered the
social and political activities that move a society from barbarism to civility. For example, the efforts
to end slavery in America is considered progressive in nature as was giving suffrage to women with
the 19th Amendment and the 1964 Civil Rights Act and 1965 Voting Rights Act.
RECESSIONS: Significant declines in economic activity but there is no clear-cut definition. One
common rule-of-thumb is two consecutive http://www.pdf-explode.com/support.php quarters of
negative economic growth, but the National Bureau of Economic Research (NBER) is generally seen
as the authority for dating US recessions. The NBER defines an economic recession as: "a significant
decline in economic activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production, and wholesale-retail sales[i]
SPECULATION: Trading in an asset that has a significant risk of losing most or all of the initial
outlay, in expectation of a substantial gain. The risk of loss is more than offset by the possibility of a
huge gain. Speculation is not gambling, whose outcome is based solely on chance, instead, the
speculator is taking a calculated high risk.[7]
[1] Joseph A. Schumpeter, History of economic analysis, Oxford University Press 1996
[2] Russell Kirk (1993), The Politics of Prudence . Chapter 2. Wilmington, DE: ISI Books
[3] Arthur O' Sullivan; Steven M. Sheffrin. Economics: Principles in action. Upper Saddle River, New
Jersey 07458: Pearson Prentice Hall. (2003) p. 387.
[4] John Locke, Second Treatise of Civil Government, (1690), Chap 2, Sec 6, in
http://www.constitution.org/jl/2ndtr02.htm
[5] Shawn Young ((2002). Beyond Rawls: An Analysis of the Concept of Political Liberalism. p. 30-1,
Lanham, MD: University Press of America. ISBN 0-7618-2240-2.
[6] Ronald Chau, Liberalism: A Political Philosophy, Mannkal Economic Education Foundation
Library), November 26, 2009, 3-4
http://www.mannkal.org/downloads/scholars/liberalism.pdf
[7] Found in http://www.investopedia.com/terms/s/speculation.asp, referenced 3/30/2014
[i]"Business Cycle Expansions and Contractions". National Bureau of Economic Research. Archived

from the original on 12 October 2007. Retrieved 19 November 2008.

http://hubpages.com/politics/A-Short-History-of-Significant-American-Recessions-and-Depressions-an
d-their-Causes