We are at a strange crossroads now. It is no secret, nor is it up for debate that the US economy impacts that of almost every country except the ones which are protectionist and completely government controlled. Even a country like China, whose iron curtain policies partially insulate them from the volatility of the western economies, is impacted in that there is no more purchasing power for the commodities that they flood the market with.

Reaganomics or Supply-side economics says that an economy is built from up and then downwards. It says that we must make it as encouraging as possible for entrepreneurs to create business, for they are the true producers and providers, and they provide scores of employment to the ‘salaried class’. Thus the wealth trickles down to the lowest on the chain, and everyone prospers. This policy earned it the name ‘trickle down economics.’ It favors great incentives to entrepreneurs and the economic elites with the reasoning that they pay the bulk of the taxes and create jobs and wealth. The incentives range from tax breaks to people as well as corporations, and intellectual property rights etc in order to encourage them to produce more. It sounds great…in theory.

In practice, one must take a lesson from the second law of thermodynamics which says that spontaneous reactions favor an increase in entropy. In layman’s terms, it means that left to their own desires, systems (& people) will move to the state of higher disorder. They will act in instincts that are first self-preserving, and then self-proliferating and eventually in the direction of self-prosperity.

The housing and loans crisis is just an example of regulations being relaxed to the extent that every individual and corporation simply does whatever is good for itself. It goes against the Nash equilibrium, which states that in a state of competition, no one person can increase his payoff by changing his strategy from that of the others when the others stick to their strategy. In other words, as Russel Crowe says, (in A Beautiful Mind) each person must do what is best for himself and the team. Complete selfishness untempered by government oversight leads to chaos.

Obamanomics, on the other hand, says that an economy is to be built from the ground up. He says that while entrepreneurs create jobs and supply products, the interests of the buyers and of the salaried class need to be preserved.

Doing that is good for the people who in serious trouble now. However, while one must support Obama in his attempts, we must also realize that punishing the people who produce and pay most of the tax revenue is not the biggest incentive for them to continue producing. It is a time when the more fortunate have to help the less fortunate, but one must be careful to do this without stifling small and large entrepreneurs.

I am inviting all members of the blogosphere, some economic experts, and others laymen like myself to discuss this topic openly and provide their suggestions for upliftment.

4 thoughts on “Catch-22?

  1. I love the way you have related laws of Science to those of Economics and Social Science. I have more or less observed a similar phenomenon in the current situation which gives rise to a debate. Like we observe, Winds blow from high pressure areas to low pressure areas to bring about an equilibrium. We expect those not in trouble to help out those in trouble. Now this will not come without a price. Like the bailout plan for banks itself. I happened to speak to a friend working in Goldman Sachs the other day and he brought to my notice the reluctance of these firms to accept this money taking into consideration the regulations. TCL bank from MN even filed for sending the money back and the same is being planned by Goldman Sachs by the end of this year.Going further with the analogy I can only think of the graver after effects that might have to be endured because <><>if the difference in the air pressures is vast, it only leads to a hurricane that destroys<><> the areas of low air pressure. Alas! I am no financial guru to predict the market behavior but only a bystander John Doe.

  2. @crumpledpapersThat was a good analogy you gave.. and do not apologize for not being a financial guru, we need the literate junta (non-financial) to be involved in matters of economics & finance to keep the system in check…or it will get out of control again..Edmund Burke said “The only thing necessary for the triumph of evil is for good men to do nothing”

  3. all i say and feel is …this could hv been regulated! It is really scary..after-effects.. if not regulated. every situation can become 'catch 22' if not controlled.

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