Organic Vs Engineered Economies, Are Diminishing Marginal Returns Possible in an Organic Economy?

2/7/2011 Portland, Oregon – Pop in your mints…

We mentioned our hypothesis to our lovely wife last night.  She astutely noted that my use of the term "Organic" was a sign that the Portland lifestyle and terminology is starting to have a definite influence on my thinking.  Could this be the same lifestyle so eloquently parodied in the new series "Portlandia"?  We shudder at the thought, but perhaps it is true.  Still, our skin has not yet turned green so there is still time to reverse the process, if we so choose.

Notwithstanding our current influences, we must carry on with the hypothesis as originally stated:

"As a predominantly Engineered (Socialist) economy becomes less Engineered and more Organic (Capitalist), it experiences exponentially increasing rates of economic growth.  Conversely as a predominantly Organic economy becomes more Engineered, it experiences exponentially decreasing rates of economic growth."

We left off yesterday with mention of two of the most recent attempts to Engineer the US economy, the Dodd-Frank Financial and Health Care reforms recently passed.  We would like to emphasize here that we only single these out as they are recent and highly publicized examples.  The engineering of the US economy has been happening on an ever increasing scale, through government interventions in nearly every sphere of public and private life, since the Federal Reserve was handed control of the money supply that dark day in 1913.  We define this as an important turning point in the history of the US economy, when it reversed its tendency toward becoming a more Organic economy to becoming a more Engineered economy.

Perhaps it is not a coincidence that this change coincided with the onset of World War I.

But is it necessarily the Engineering of a previously Organic economy which causes its GDP growth rates to lag those of economies that are being de-Engineered?  Would it not make more sense to simply say that lower GDP growth rates in the West are simply a product of Diminishing Marginal Returns in the Organic economies?  Would that not be an easy explanation for the phenomenon?

Easy, yes, but it infers that an Organic economy, once it reaches a certain size, must be Engineered in order for growth to continue.  Our guess is that, apart from the effect of Benford's Law, that an increase in accumulated capital (characteristic of an Organic economy) will always lead to superior returns, year after year, decade after decade over those in and Engineered economy.

In other words, the cause of the "Diminishing Marginal Returns" is the very Engineering of an Organic economy, not simply an inherent characteristic of an Organic economy.  True, the law of Diminishing Marginal Returns is always at work in every corner of an Organic economy.  This process does the dirty work of purging the economy of companies and organizations that no longer operate efficiently.  Some economists call this process "Creative Destruction."

This purging is absolutely necessary for future growth, as is a forest fire or the human body passing a virus out of its system.  The process simply allows the human body, forest, or a sector of the economy, to grow more rapidly in the future.  It literally lays the foundation for future growth. 

Is Sequoia Reproduction a Metaphor for creative destruction?

Take the mighty sequoia tree.  Heat from a fire greatly aids the drying of its cones which causes them to release their seeds to the ground or to the wind to be dispersed and to have the potential for future growth.

But look at how much effort is put into fighting forest fires!  Obviously, an old, grand sequoia is more pleasant to look at, as is perhaps a large old bank in the US financial system.  It gives comfort.  

What is often unseen is that it sucks an ever increasing amount of water and nutrients from the ground and absorbs sunlight that would otherwise be essential to the growth of any seeds that it has slowly dropped to the ground.  Its presence not only takes an ever increasing amount of resources, it uses these resources to maintain a tight grip on its seeds, barely allowing them to fall to the ground or be taken off by the wind.  If a seed is lucky enough land in a place where it has the necessary resources to grow, it is fortunate indeed.

In the same way, a large old bank, while it may be pleasant to look at and maybe even comforting, retains "seeds" (representing employees, clients, and capital) that would potentially grow into hundreds of other grand old trees if only allowed the Freedom and the resources to do so.  In this sense any attempt to save a large old bank, or a grand old tree, is to act on sentiments rather than sound economic or environmental theory. 

Sometimes, as the fires swirl around the grand old tree, it is best to do nothing but wait with anticipation the forest that is being released amidst the flames!

Stay Fresh!

David Mint

Email:  davidminteconomics@gmail.com

P.S.  If you enjoy or at least tolerate The Mint please share us with your friends, family, and associates!

Key Indicators for Monday, February 7th, 2011

Copper Price per Lb: $4.56
Oil Price per Barrel:  $89.03
10 Yr US Treasury Bond:  3.65%
FED Target Rate:  0.17%

Gold Price Per Ounce:  $1,349

MINT Perceived Target Rate*:  4.5%
Unemployment Rate:  9.0%
Inflation Rate (CPI):  0.5%
Dow Jones Industrial Average:  12,092
M1 Monetary Base:  $1,763,300,000,000
M2 Monetary Base:  $8,886,500,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.