Every school of economics embodies different goals that the government has in the economy. Each shows us a different policy relationship between the government and the economy. Under classical economics, the government doesn’t tax the economy heavily or interfere with the cost of capital. Under classical economics, Say’s Law predicts that workers will always get paid for their production and that demand will be sufficient in the marketplace. And that law held true in an economy that didn’t have a lot of resources being diverted into government projects. An economy that retains its capital resources can put those resources into economic production. And that kind of economy has many paying jobs to do. Anyone who wants to work can work and get paid.
But Say’s Law isn’t what the Keynesians believed. Keynesianism holds sway when the government taxes so heavily that productive resources that should have been otherwise able to maintain full employment are diverted into government projects. Under these circumstances, Keynesians formulate a different idea about employment called the “natural rate of unemployment”. It arises when a growing economy comes to a state of equilibrium and the growth rate slows down. The natural rate of unemployment represents people who can’t get work because the resources that would have paid them to work have been withdrawn. Keynesians thought that the natural rate of unemployment could be lowered by increasing the rate of inflation (a hidden tax on yesterday’s already earned capital). In a heavily taxed economy, some people can’t get work because the resources that would have employed them have been diverted into politics.
But today’s neoliberal economy is much worse. In this economy, fiat money and high volatility constantly destroy economic resources and mobile capital circulation into diverse markets creates constant instability. Taxes continue to be high on the grassroots economy. Low level overall inflation comes from inflation in some parts of the economy and deflation in other parts. Mobile capital undermines small capital holders at home and abroad. The value of money becomes uncertain. Easy money policies exacerbate economic problems by encouraging malinvestments. Unemployment is high because monopolies form as the big economic fish eat the little economic fish and this destroys jobs. Monopolies waste economic resources by charging more because they can in the markets that they dominate. Unemployment is also high because of high taxes that divert capital resources out of the economy. Markets lose the ability to use resources efficiently and to provide a stable employment marketplace where people can be fairly compensated for their labor. Market distortions undermine a stable capital marketplace. Suddenly the circulation of goods to where they are needed has become confused by problems with the value of capital and the value of goods and services. Surely all of these resources haven’t suddenly become valueless? Capital itself becomes a tax resource. Central banks stop paying interest on capital and they threaten to charge fees to hold capital.
These three paragraphs show that the relationship between politics and economics impacts all of us in this interconnected world. To learn about the relationship between politics and economics and how it has changed over U.S. history buy Political Catsup with Economy Fries at Amazon.com.