A brief anatomy of the economy
Buoyant Economies takes a systems approach to explaining the economy. Like a computer, the economy consists of two basic systems:
Just as computer software comprises an operating system and applications. The economy’s operating system is its monetary system. Its applications are the institutions that operate using the monetary system. The institutions can be broadly grouped as:
These institutions each use the monetary system but operate in different ways to provide goods and services:
Institutions such as markets can be considered to be applications, also. For example, rules that govern the labour market can be considered as application software that operates within the monetary system or economy's operating system.
The hardware of the economy can be divided into two basic types: inputs and outputs. Inputs in economics are usually called resources. Outputs are usually called products or goods and services. In addition, there are intermediate goods and services which are the output of some industries and the inputs of other industries.
Buoyant Economies is primarily concerned with the operation of the monetary system: the economy's operating system. This system must function effectively if the three basic institutional applications are to function effectively to maximise the output of the economy and the welfare of the community.
Like computer software, an economy's monetary software can be programmed. The rules that govern how money is created and distributed alters the behaviour of the economy. For example, a country in which money is created mainly from the growth of export income will prosper from export growth while one in which the main source of additional money is bank credit would accumulate debt.
Leigh Harkness has prepared a number of papers on the monetary system that explain the failings of the present monetary system and how it may be made more effective. There is also a model that enables you to consider the effect of changing the monetary operating system.
The main implication of this approach is that it enables the diagnosis of economic problems to be classified as either hardware or software. If it is in the software, it can be further classified as either in the operating (or monetary) system or in an application such as the private, government or quasi-government sectors.
The papers linked to this site provide strong evidence that if a country has a balance of payments problem, it is likely to be a monetary problem in the economy's operating system. Thus to solve a balance of payments problem requires a change to monetary policy. Trying to change the hardware through better education or improved physical infrastructure may be good objectives in themselves but they will not solve a balance of payments problem.
Similarly, a problem such as high unemployment may be due to flaws in the labour market. But if it is associated with problems in other applications such as slow growth in the private sector, it may be a symptom of a problem in the operating system.
While this approach is not radical, it does allow the economic problems to be diagnosed in a more systematic manner than is often currently the case. Is it the operating system or an application that is causing the current economic instability? Too often we see no clear diagnosis of economic problems with the resultant subsequent failure of economic policies.
For example, the dismantling of previously successful institutions such as public utilities and labour institutions has not brought about the macro-economic outcomes that they they were intended to achieve.
Also, it is evident that the 2008-09 global financial crisis relates to the monetary or operating system. Yet solutions to the crisis are being made mainly at the government or application software level. No attempt has been made to diagnose the problem in the monetary system. Rather, attempts are being made to prop up the failed system. This is unlikely to produce sustainable long term stability.
The Growth of Debt and Loss of Income in America considers the relationship between bank credit, the exchange rate, foreign debt, slow economic growth and high unemployment.
Formula for the current account balance explains mathematically and diagrammatically how the monetary system has generated current account deficits and raise foreign debt in many countries. It also explains how other countries have been able to achieve balance of payments surpluses.
Last update: 29 March 2015