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Side Effects, Collateral Damages, and Unintended Consequences.

Plea for a New World Economic Order.

Chapter II, Paragraph 4:
Side Effects, Collateral Damages, and Unintended Consequences.

"Perhaps the return to a low-inflation environment in recent years in itself explains the intensification of competitive pressures, which has been a spur to the growth of productivity. Indeed, the data do suggest a relationship between inflation and productivity growth over the long run. But that statistical relationship is modest at best and inferring causality is complicated by a circularity that arises because increased growth in output per hour depresses unit labor costs and, hence, prices."

Chairman Alan Greenspan
At the U.S. Department of Labor and American Enterprise Institute Conference, Washington, D.C.
October 23, 2002
Click to enlarge


People tend to think that if productivity is higher the better for the economy. If it is true from a microeconomic point of view, that is not always true from a macroeconomic point of view.

A higher productivity means that costs are lower and profit higher. But the costs are in fact the revenues of other agents with weaker bargaining position. The more productive an economy, from the capitalist point of view, the higher the income / wealth disparity.

An increased productivity means a higher income wealth disparity and hence a lower yield of investments and a faster fall in the Liquidity Trap.

Japan was by far the most productive economy; it felt sooner than everyone else in a crisis tangent to the Liquidity Trap.

The natural behaviour of man in his pursuit of higher profit and hence higher productivity results inevitably in an increase, over time, of income / wealth disparities.

Although the pursuit of higher productivity is the only way to insure that supply and demand do clear and hence the efficient working of the economy. It is the duty for the governments and/or emission institutions to make sure that they don't result in macroeconomic changes in income / wealth distribution.


Globalization is only one special case of search for productivity: by transferring the production to people with lower wages in their quest for higher productivity economic agents have engineered an increased competition among workers and savings which means a faster decrease of the yield on investments and a faster fall in the Liquidity Trap.

Moreover their low cost of capital means that the position of high productivity country is reinforced which means lower cost of capital.

It is not surprising hence that the flow of trades are going from countries with high income / wealth disparities to country with lower income / wealth disparities.

The so called division of labour is nothing less and nothing more than a segregation of production between countries of different disparity of income / wealth, which, over time, keeps self reinforcing.

It is not surprising, hence, that trade deficit or surplus keeps increasing.

Factors of Production:

The Marxist framework states that there are two independent and competing factors of production:capital (NYSE:K) and labour (NYSE:L).

What our framework says is that there is a direct link between the cost of capital (interest-rates) and the cost of labour which is exemplified by the disparity of income/wealth. As the revenues of labour goes down so does the revenues of capital. When both are unsustainable low the system falls in Keynes' Liquidity Trap.

Unions and Class Struggle:

The Marxist vision of class struggle and it by-product, unions, are the most ill devised means of protection for the poor. and restraint of the explosion of income/wealth disparity. The competition of the poor in his search for wages is another poor. How could they both compete and join forces. Hence it is the case that the bigger the income/wealth disparity the less unionised the work force is. This idealized view of mankind does not pass the test of reality.

Unions like minimum wages laws are cartel organizations. As such they are unstable and have no chance to achieve any useful purpose.


As capital competes with labour in order to produce the highest present value if work does not produce a profit that covers the yield of long term investment it is not used. This explains unemployment. It is hence logical that, outside the Liquidity Trap, the lower the long-term interest rates, the lower the unemployment rate.

Fiscal Regulation:

The general perception is that taxes decrease the income/wealth disparity. This is an illusion.

Taxes are used to buy weapons infrastructures... It is the corporations, the rich that get the contract.

Taxes are used for education. The purpose of education in our society is to make workers more productive.

Moreover the tax laws are not uniform and, due to the many loopholes resulting from the competition from different countries savings go where the return is higher and the tax smaller. Moreover most of the taxes are passed on the customer so the end result of the taxes in controlling income/wealth disparity is almost nil.

General Interest, Private Interest and Externalities:

As we see it is generally the case that the interest of the economic agent goes against the interest of the system.

"he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases,
led by an invisible hand to promote an end which was no part of his intention."

Adam Smith
An Inquiry into the Nature and Causes of the Wealth of Nations IV.2.9
March 9, 1776

“Capitalism is the astounding belief that the most wickedest of men
will do the most wickedest of things for the greatest good of everyone.”

John Maynard Keynes

However, contrary to Adam Smith belief, it is not true that "by pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." Sometime he does sometime he doesn't.

It is hence the duty of government to correct these dysfunctions, notably by correcting the drift in income / wealth disparity. It is the only systemic risk there is.

John Maynard Keynes called this the management of externalities:

"The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."

John Maynard Keynes
The End of Laissez-Faire IV 1926

Beware: I am not saying that the income / wealth disparity should be 0, which would render free market ineffective and would be simply impossible to manage even from a mathematical point of view

I am saying that inequalities linked to birth should not be reinforced by human intervention namely the invention and usage of credit.

A common belief is that the bigger the reward the more productive the agent. This is simply not true, the agent looks to maximise his present value. Weather he receives $x or $x000,000 (after his opportunity cost of time, which itself is a function of income/wealth disparity) as a result of his work is irrelevant to his decision and hence to his contribution to the common good.

All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.

Extreme Economic Conditions Call for Radical Solutions.
The Controversial Innovation Since John Maynard Keynes and Milton Friedman.

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