Thursday, August 19, 2010

Thoughtful Thursday: Review Peter Elkan "New Model Economy"

Review of The new Model Economy: Economic Inventions for the Rest of the Century by Peter G. Elkan, review by Kenneth E. Boulding. in Journal of Economic Literature, September 1984, Volume XXII, Number Three

Peter Elkan says there are two current approaches to a government regulating the economy. They are setting legal rules like the new Financial Reform bill. The other are various macroeconomic effects such as the Fed setting the interest rate. But Peter Elkan proposed a "grand palever" among all the other interest group to divide the economic pie. Kenneth Boulding proposed a macroeconmic mechanism: wages are paid in yellow money, we buy goods in green money. The Fed sets the conversion rate between the two to control inflation. I proposed a system of two types of money. Type A was to allocate scarcity to buy goods and Type B was to express satisfaction with goods and services One received Type A money in proportion to the amount of type A money one received. My goal was to deal with goods whose marginal costs were small or zero--the empty seat in the Amtrak or the music one downloaded.

But Elkan became more complicated, regulating imports with some sort of forward contract. And he proposed identifying "utility" goods. The British did this in World War II. Thus, they would produce a large amount of functional but unfashionable glass frames so everyone who needed glasses could have them. The sortition jury would give these a low or zero excise tax.

I was impressed by another point that Kenneth Boulding made. In 1932 and 1933, real rates of interest were three percent but companies were losing three percent. He was surprised the economy held together as well as it did instead of totally collapsing. He claimed that businesses kept going hoping things would get better and from "benign force of habit." I wondered whether business might have lost more money shutting down completely due to the sunk costs for their factories, for which they presumably would still owe interest on debt or at least the costs to mothball and pay property taxes.

Obviously, I will get the book by Peter Elkan for another Thoughtful Thursday.

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