Is Time and Choice the Fundamental Components of Economic Development?

Development of financial success rests in part in the psychological functioning of individuals engaged within the market. A paper by Raines and Leathers (2011) helps understand how and why markets have under defined psychological components and how these components influence the economic system. They base their analysis on post-Keynesian economics, group experimental psychology, and the works of John Galbraith. At the very core of economic development may be the concept of choice?

Economic markets are not perfectly predictable as history has shown that even some of the best analysis has failed at one time or another. Mathematical explanations alone are not yet sufficient for the overall understanding and prediction of markets. Keynes observed that even though mathematics is helpful many economic choices are made on the micro level based upon alternatives. Sometimes people may rely only on wishful thinking.

If we think of a large economic system we might be surprised that it is really made up of the people, individual dollars, businesses, governmental systems, culture as it influences choice, and many other small components. At its most basic level, people use their options to make hundreds and thousands of small choices every day that impact the market. For example, a person buying a toaster from China or one from the U.S. has made an evaluation and determination. The more people make a determination one way or another more the economic system is impacted and pushed down certain paths.

The psychological factors have been discussed by economists for some time. For example John Galbraith stated “it can be said with some assurance that in economic, social and political matters, if the controlling circumstances are the same or similar, then so will be at least some of the consequences” (1988, p.xi; see also 1987, p.62). The development of markets doesn’t rest in economic conditions alone but also within social and political spheres. Economic development must therefore be seen as something wider than finance and when circumstances are similar it can be repeated.

These systems are not stagnant and continue to develop as an entire entity. Galbraith further went on to state, “economic life is in a process of continuous transformation, and, in consequence is an uncertain guide to the present or the future” (1993, p. 105). These markets develop and continue to develop over time. Because they are always changing and developing it can be difficult to predict and measure them accurately.

Snap shots through economic measurements are only a particular time and place. Moving beyond the study we can see that multiple snap shots create trends and assuming that additional pressures in the wider market do not change their trajectories the market will continue to develop on a basic course. At its most basic level the market is not made up of finance but the fundamental choices that lead to financial selection. It is the neuro-economic choices of hundreds of thousands of participants that create the right atmosphere that leads to economic development. Without changing the fundamental thought processes you cannot change the system.

Galbraith, J (1988). The Great Crash. Boston: Houghton Mifflin

Raines, J. & Leathers, C. (2011). Behavioral finance and Post Keynesian–institutionalist
theories of financial markets. Journal of Post Keynesian Economics, 33 (4).

Keynesian Theory: Benefits and Detractors

Keynesian economic theory has been under increased scrutiny as the U.S. national debt load increases and the economy suffers from a long period of recession. The theoretical standpoint of the Keynesian model is one of a mixed bag where those elements that would have a positive impact are often drowned out by inefficient governmental waste, political favoritism, and the cost of servicing the debt. Under certain circumstances the policies can help stave off economic collapse but fail to bring about positive benefits the longer it is used.

According to the U.S. Census Bureau an era between 1790's to 1930's only saw deficits in government spending in approximately 38 years. Most of this debt was short-term and a direct result of increased costs of war or economic downturns (Lee, 2012). Total federal budgets ran at approximately 3.2% of GNP when compared to nearly 70% of GNP today (The 2012 Long-Term, 2012). At such a high debt-to-earnings scenario the Keynesian approach loses its power to encourage future economic benefits.

To Dr. Dwight Lee, from the University of Georgia, most recessions were relatively small before the Great Depression of the 1930's (2012). They were small because market forces moved in to clear up slack in the economic system and create more productivity. He further makes the argument that Keynesian economics work best when running a surplus for many years and then used to spur economic growth in a quick paced fashion. However, running a long-term deficit and then applying additional debt on top of old debt creates higher levels of inefficiencies and costs. It dilutes the potential positive power of each dollar spent and increases its costs. 

One problem with Keynesian economics result from the political process that filters effective action through multiple competing interests and short-term results that create fiscal irresponsibility (Lee, 2012). What could have been considered effective government spending is often wasted in unrelated expenditures that do little to solve economic problems. This often occurs as decisions are filtered through the political process and sifted to those who support that process. It is always easier to spend then it is to save or ask for a tax increase.

It can be beneficial to see how poorly designed spending matched with political favoritism can impact the effectiveness of taxpayer liabilities. Accordingly, natural disaster legislation has shown that in the past nearly half of the funds were allocated based upon political interests versus that which actually aligns with the needs of victims (Garrett and Sobel, 2003). Such wasteful activities dilute much of the potential benefits of a stimulus that encourages recovery and growth by inappropriately allocating resources to the least effective entities and pinning them to taxpayer debt. 

It is this political favoritism that has made economic policy more dangerous. For example, the multiplier effect is based upon the concept of Keynes statements, “to dig holes in the ground" can benefit society (Keynes, 1936). In this concept, as money is paid for employment purposes it impacts secondary services through the economic chain passing resources to small businesses, companies, and other entities. However, if only a percentage of that money makes it through to these secondary entities its overall impact is diminished.

The end result of misguided economic applications of Keynes theory will result in higher taxes and greater expenses on debt (Barro, 1974). Someone will need to pay back the money. In most cases it will be the next generation and the one thereafter. The costs associated with debt servicing rises above the original costs creating ever increasing problems for the future. It is this future that is short changed for current needs.

The concepts of Keynesian economics works well under certain circumstances but can be disastrous if inappropriately applied in the long term. Positive applications of Keynesian economics occurs when the nation has been running a surplus for a number of years and uses this surplus to spur economic growth through liquidity that fosters cash flow and lending. Such monies will need to be effectively and efficiently allocated only to those areas where it is likely to have the most beneficial and long-term impact. As political favoritism, debt servicing costs, and inefficiencies rise the effectiveness of the financial economic injection diminishes.When used appropriately with assurances of proper expenditures in strategic entities it has the ability to increase economic activity in the short run.

Key Points:
-Keynesian Economics comes with benefits and risks.
-Money spent should have an immediate impact with long-term potential.
-The economic chain and spending decisions should avoid all waste.
-The cost of debt rises over time.

-Keynesian policies work in the short-run to counter quick shocks to the market.
-Political favoritism diminishes its impact.

-Economic activity would need to pick up much more than the costs associated with debt and misspending when compared to low debt and efficient spending in order to justify such policies. 
-The risks and benefits of using such policies should be carefully analyzed and calculated. 

Garrett, T., and Sobel, R. (2003) The Political Economy of FEMA Disaster Payments. Economic Inquiry 41 (3): 496–509.

Lee, G. (2012).  The Keynesian Path to Fiscal Irresponsibility. Kato Journal, 32 (3).

Keynes, J. M. (1936) The General Theory of Employment, Interest and Money. New York: Harcourt, Brace and Co.

The 2012 Long-Term Budget Outlook. (June 5th, 2012). Congressional Budget Office. Retrieved January 14th, 2013 from http://www.cbo.gov/publication/43288