The Argument for a Managed Economy

For as long as I can remember, there has been on-going debate for the pros and cons of managed and supply-side economic policies. While it seems that this has led to a general consensus of managed economic policies working better, I’d like to discuss why I believe this is true.

The opposition’s talking points against a managed economy have generally attacked it as being socialist or rooted in communism, however this is not true since it isn’t about who owns the means of production, but more regarding how the market is influenced and guided. While I personally believe these attacks are politically motivated rather than based on evidence or rational reasoning, it has been powerful messaging across the political spectrum resulting in a further disconnect from reality that much of the United States elecorate is currently experiencing.

Supply-side economic policies tend to be rooted in the idea that one needs to allow the market to decide, but this relies on two major assumptions: the individuals who make up the market will operate in a specific way which is generally counter to their existential instincts, and that there is always sufficient competition for the safe operation of the market without any sort of need for regulation or external management.

There is a deeper, philosophical question here asking: “Will people always operate for the betterment of society, or will they always operate for their own benefit?” We won’t get into this, but I do see it as a running theme in this discussion.

I should also mention that while I have been educated in the basics of economics, having taken micro-economics, macro-economics, and a handful of other courses within the economic and political science spectrums, I am not an economist. My formal training is in mathematics and physics, and I have been working in the software engineering industry for over twenty years. My perspectives on this topic are based on my economics education coupled with my skills in problem solving, pattern identification, and process optimization.

Let’s first recall the concept of supply and demand. When there is a greater demand for goods or services, then there will be a natural move towards supplying those goods and services – find a need and fill it. Similarly, when demand is reduced, then there is a natural reduction of supply. This concept will directly impact pricing since if something is in high-demand and the supply is low, then it has increased value and the prices increase. When supply is high and demand is low, then there is a natural reduction of the prices since fewer people are looking for and purchasing these goods and services. This is where the market can be self-correcting. I say can be because we are still operating within a finite space when it comes to the economy. There are numerous reasons why a company will fill a space and it isn’t always going to happen in a timely fashion or at all. Furthermore, the problem of oversaturation does not appear to always encourage market competition. It seems intuitive that it would – the more entities within the market place, the more active competition, right? Unfortunately, this is not always the case. Oversaturation also means an extreme number of variables that influence the creation and maintainability of companies, namely size. The big fish tend to eat the little fish and predatory tactics become far more common and accepted, resulting in a natural drive to reduce competition by any means necessary.

One key principle of supply-side economic policies is large tax cuts for the wealthiest Americans and corporations. This is given as an assumption that these wealthiest Americans are the “job creators” and titans of industry, but we will focus on the corporate tax cuts. The idea is that if you cut taxes and regulations, then corporations can make more money and therefore invest more money. It’s unrealistic to assume this will be the case for most corporations, and we’ve actually seen that it rarely seems to work out. Once again for the sake of argument, let’s assume that half of corporations will in fact re-invest and create more jobs. This now relies on more assumptions that the existing workforce properly reflects the needs of those companies which decided to invest. It relies on the notion that any worker can work any job and there will somehow be an even distribution across the spectrum. This is not the case and ultimately encourages less investment since companies know that they are limited by the skills and experience of the workforce.

With a managed economy, specific and strategic policies are introduced based on a realistic reflection of the workforce. If you have a large number of available agricultural, service industry, high-tech, or whatever else, in a managed economy, the policies are crafted to encourage more jobs within a given sector rather than a blanket change across the board.

When the government applies blanket investment across the entire economy, it only excaserbates income inequality, which at best slows the economy down and directs us towards recessions, and at worst forces the workforce to form the shape of the market rather than the market forming around the shape of the workforce.

Tax cuts are also not particularly helpful for middle class Americans. While overall it may stimulate additional spending in the market in the short term, this also relies on the assumption that the market will remain competitive and unemployment will remain low. The better option would be to focus on increasing job availablity as well as wage growth. When people have better paying jobs which match their skill sets, then they are more likely to bring more stability to the workforce which ultimately means less sharp shifts in the economy. This means that simultaneous investments in education will result in higher impact changes across the economic spectrum. If we lived in society which consisted of a majority of low-skilled laborers, then supply-side economics would be more valid and result in more positive change to the economy. However, this is not the case with the United States which is not only a first-world country with a majority of workers being skilled and highly-skilled, but we also have a greater need for high-skilled labor than low-skilled manufacturing or agricultural jobs.

Ultimately what helps build a good ecomomy is enacting policies which will slow things down and provide as much stability as possible. It is all about having the market form around the shape of the workforce and needs of the population. This encourages both more stability and more mitigation of risk. When it comes to economics, there is no silver bullet and we are never operating within the scope of just a few variables. Every aspect of the economy impacts and influences several other aspects. Furthermore, many of these functions of the economy are non-linear, therefore the input of one function is rarely proportional to the output except in a few, more distributed cases. The goal is therefore to provide as much stability across the board so that when there are hard changes to one part of the economy, other parts are not as significantly influenced.