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Understanding what an economy is (lemmygrad.ml)

submitted 9 months ago by yogthos@lemmygrad.ml to c/comradeship@lemmygrad.ml

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I get the impression that a lot of people in the west fundamentally fail to understand what the purpose of an economy actually is.

An economy is a model for allocating labour and resources in a way that meets the needs of the people in the country.

The original argument for capitalism was that market economy with private ownership is the most effective way to allocate labour and resources in a way that benefits everyone.

Measures such as the stock market and GDP were meant to act as proxies for measuring how well the economy was accomplishing its stated purpose, which is to improve the standard of living for everyone.

Understanding that these metrics are simply proxies has been lost today, and they've been turned into goals of themselves. People have started treating the stock market and GDP as the economy.

This is why we're seeing an increasing disconnect between the economy that people are experiencing in their daily lives and news reporting on how the economy is doing.

And that's why we see absurd articles like this one arguing that the recession people are experiencing isn't real.

https://www.wsj.com/economy/it-wont-be-a-recession-it-will-just-feel-like-one-1919267a

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[–] Ronin_5@lemmygrad.ml 1 points 9 months ago (1 children)

What Volcker did wasn’t special. Interest rates must be raised or lowered in proportion to inflation caused by supply or demand disruptions. That’s it.

It’s one of the many maintenance mechanisms needed to maintain capitalism. If handled incorrectly, without centralized control, the economy will crash every time there’s a disruption. That’s why we say there’s no such thing as the free market.

In this case, interests rates were raised in response to the 1979 oil crisis causing massive inflation. It’s not a conscious choice or a change in policy, but rather a response to material conditions.

As a result, this is why you need to look at trends on a longer scale in order to even out these disruptions to find the macro trend. And these macro trends usually have to have something huge as a root cause, like the fall of a rival superpower. Not a temporary increase in interests rates.

[–] zifnab25@hexbear.net 2 points 9 months ago (1 children)

What Volcker did wasn’t special.

Jacking the Federal Reserve Rate from 4% to 21%, when it was the primary means by which new money entered the economy, was enormously transformative on the state of the domestic economy and the Western nations that had pegged themselves to the USD.

If handled incorrectly, without centralized control, the economy will crash every time there’s a disruption.

I honestly don't know what you think has been happening every ten years or so. But these market cycles continue to occur regardless of the explicit monetary policy. The result of this regulation is to divert the accumulated gains from cycle to cycle away from labor and into the hands of private equity markets. It does not prevent disruptions or protect the market from downturns, it just buffers private profit while exposing labor to the bulk of the financial pain.

In this case, interests rates were raised in response to the 1979 oil crisis causing massive inflation.

The rate hikes began in '74 under Nixon and were renewed in '78 under Carter. And while the oil crisis was routinely blamed for the implementation of these drastic Fed policies, they continued well into the mid-80s when oil prices had dropped to historic lows.

It’s not a conscious choice or a change in policy, but rather a response to material conditions.

Fed Funds rates are explicitly a consequence of domestic policy. The response to material conditions is the aftermath of the fallout that these sudden and drastic spikes in federal interest rates create.

[–] Ronin_5@lemmygrad.ml 2 points 9 months ago (1 children)

Then do you want to explain the 1:1 correlation between interest rates and inflation?

Or this investopedia article?

https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp

And a market crash would be something like the Great Depression, where there was world-wide hyperinflation and money was worthless. This specifically happened because the gov refused to bail out corporations.

The closest that we’ve gotten was Covid. But even then, it was understood that there would be a recovery after vaccine deployment.

[–] zifnab25@hexbear.net 2 points 9 months ago* (last edited 9 months ago)

Then do you want to explain the 1:1 correlation between interest rates and inflation?

Again, that's got nothing to do with the USSR.

And a market crash would be something like the Great Depression

Or The Great Recession. Or the Enron / Worldcomm crash. Or the '97 East Asia Financial Crisis.

The closest that we’ve gotten was Covid. But even then, it was understood that there would be a recovery after vaccine deployment.

Because of the Keynesian economic model that we still kinda-sorta adhere to when shit hits the fan.