Chapter 7b

How Profit Maximization Disrupted The Natural Balance of Economies

August 8, 2022

The industrial revolution in Europe in the 19th century allowed mass production which then allowed huge profits for those who invested in them.

This prevalence of profits then led to concept of profit maximization taught in universities under the Marginal Revolution of the 1870’s. Previously, the teachings of Classical Economics, then called the Political Economy, warned against the doctrine of profit maximization which was closely associated with Mercantilism.

The Marginal Revolution, however, enshrined proit maximization. This caused the Political Economy to mutate into Neoclassical Economics, with the former being called Classical.

However, the bad effect of teaching profit maximization in the later part of the 19th century is that everyone from the early part of the 20th century became programmed to go after high profits. They were no longer happy with low profits, at higher frequency, which was advocated by Classical Economics:

A country fully stocked in all the trades possible would have great competition everywhere. It would reduce ordinary profits to the minimum.

Wealth of Nations Book 1, Chapter 5

This obsession with high profits stopped investors from investing in low-profit ventures. This caused them to crowd into high-profit ones which became more and more speculative. This starved most parts of the economy of its money-lifeblood, while oversupplying a few parts only.

This led to an imbalance which resulted in a crash, and then a recession which represents the starvation of value.

Under Classical Economics, low prices during a recession would prompt both businesses and consumers to invest and spend to revitalize the economy again. However, in a Neoclassical profit-maximizing economy, the people still do not invest nor spend, since they have been programmed to go for high returns only.

This prolongs the starvation of value, causing the Great Depression of the US in the 1930s.

The Wrong Solutions of Keynes

The 2 main solutions of the British economist John Maynard Keynes to the Great Depression were:

  • deficit spending
  • open-market operations

Deficit Spending

Deficit spending is when the government gets in debt in order to prop up employment or the economy. We can say that this is a fiscal solution. This now manifests as big public works projects.

It follows that if the people choose to consume, then the multiplier k is 10, and the total employment caused by increased public works, for example, will be 10 times the primary employment provided by the public works themselves The General Theory Simplified, Chapter 10
A big decline in income due to a decline in the level of employment may even cause consumption to exceed income. In the case of the Government, it will run into a budget deficit by providing unemployment relief by borrowing money. The General Theory Simplified, Chapter 8

Open-market operations

Open-market operations is when the central bank buys or sells government bonds in order to control the money supply. We can say that this is a monetary solution. This now manifests as quantitative easing.

The aggregate demand for money to satisfy the speculative-motive continually responds to changes in the rate of interest, as a curve. These changes are in the changing prices of bonds and debts of various maturities. This is why “open market operations” are done... Open-market operations may influence the interest rate since they may change the volume of money and change expectations on the future policy of the Central Bank or the Government. The General Theory Simplified, Chapter 15

Instead of going against profit maximization and monopolies, Keynes gave the burden of growing the economy to the government. This makes the economy totally dependent on the whims of government policy, instead of being based on the feelings and decisions of the people.

  • Deficit spending has led to government shutdowns as the stoppage of some government programs or offices.
  • Open-market operations and monetary easing has led to moral hazard where speculative banks were bailed out and ‘animal spirits’ are fed.
    • Moreover, the pumping of money through the banking system and money markets has led to rising inequality, manifesting nowadays as underemployment and ‘bullshit jobs’.

The Superphysics Solution to the Great Depression

The Great Depression was caused by the scarcity of money which was, in turn, caused by profit maximization.

This scarcity led to the failure of many businesses. This then led to massive unemployment which led to a decline in demand. These created a cycle of downturns that caused a lot of hunger and poverty.

Superphysics would resolve the Great Depression by letting the government nationalize the major or critical banks and factories that were threatened by collapse.

The government would borrow from the wealthy by issuing bonds, which it will then use to recapitalize those enterprises. The competitors of those enterprises will then be awakened into action, at the prospect of them losing market share to the nationalized company. This will then restart employment which will drive demand anew.

After the nationalized companies have gone back to health, the government can then sell them in order to pay back the bondholders.

Unfortunately, because of the doctrine of laissez-faire pushed by Mercantilism from the 18th-19th centuries, policymakers are unable to think of this solution.