Understanding Finance from scratch

Chapter 19 Who will protect the "money" and pay attention to the "invisible hand" - learn some financial supervision and regulation knowledge every day (1)
When Adam Smith Met Keynes
A man wakes up on a foggy morning in London, but he's still lying in bed, disheveled.He was on the phone with his agent, making a decision for himself, a university, a huge syndicated venture.

This man was the famous economist Sir John Maynard Keynes, who not only opened up the research field of macroeconomics (his two major books brought him a huge and enduring reputation), but also served as a University Treasurer and Chancellor of Cambridge University, government officials and advisers, etc.Baron Keynes was also a wealthy investor.Keynesian economic theory has influenced generations, still plays a pivotal role in current economic policy making and will continue to shape economic thinking for years to come.

Once, Cairns and a friend were vacationing in Algiers, the capital of Algeria, and they asked a group of local children to shine their shoes.Cairns paid so little that children threw stones at them.His friends advised him to give more money and Keynes, the world's greatest economist, replied: "I don't depreciate the value of money."

One of the most influential economists in modern Western economics, the macroeconomics he founded, together with the psychoanalysis created by Freud and the theory of relativity discovered by Einstein, are called the three major revolutions in human intellectual circles in the 20th century .However, his state interventionism is constantly colliding with the "invisible hand" of Adam Smith, the originator of classical economics. So which is right and which is wrong?
In the world financial turmoil triggered by the "subprime mortgage crisis" in the United States, people seem to have abandoned Adam Smith's "invisible hand", but the "visible hand" of the governments of various countries has been fully extended.Thus, the dispute between the "visible hand" and the "invisible hand" started again.Simply put, Adam Smith belongs to the liberal economics school, which does not advocate too much intervention in economic operations, but relies on the "invisible hand" of the market and prices to spontaneously regulate economic operations.Keynesianism belongs to government interventionism, that is, in the case of market failure, the government takes the initiative to intervene in economic operation by adopting a series of fiscal and taxation policies, stimulating the economy, expanding employment, and restoring the economy to the track of healthy development.

Before discussing the advantages and disadvantages of the two, we might as well first understand the respective propositions of the two sides in detail.

Adam Smith is the greatest representative of British classical political economy, a masterful economist on the eve of the manufacturing industry and the industrial revolution, and the main founder of economic liberalism theory. In 1776, Adam Smith, a professor at the University of Glasgow in Scotland, published The Wealth of Nations, the foundational work of economics. In "The Wealth of Nations", Adam Smith put forward the theory of "invisible hand" and analyzed why the market system can widely combine the individual freedom to pursue their own goals with the economic field to produce our clothing, food and shelter. stand up.Adam Smith's most important insight was this: Both parties to a transaction benefit, and, as long as the cooperation is strictly voluntary, there will be no transaction if the parties to the transaction do not benefit.There is no need for any external coercion and violation of liberty to induce people to cooperate when everyone can benefit.Adam Smith pointed out, "This is why an individual who 'contemplates only his own gain' is 'guided by an invisible hand' to an end which has nothing to do with his calculation. For society, It is not always a bad thing to be irrelevant to his calculations. He often promotes the interests of society more effectively when he pursues his own than when he really intends to. I have not heard that those pretending to be for the public How much good is done by those who trade for profit."

Adam Smith believed that in a free and competitive market economy, the state only plays an extremely simple and passive role—as a "night watchman".All things that individuals can do by relying on their own strength, and all things that can be done more efficiently by individuals under the influence of the market economic system, should not be done by the state.The state only performs certain essential and most important tasks, such as protecting private property from infringement, etc., and should not directly intervene in economic operations.That is to say, in the free market economic system, the state is only an exogenous variable, it only exists outside the economic system, and as an environmental factor externally affects the operation of the free market economic system.The functions of the state are strictly limited to three aspects: "First, to protect society from the encroachment of other independent societies. Second, to protect as far as possible every individual in the society from the encroachment and Oppression, that is to say, the establishment of a just judiciary. Third, the establishment and maintenance of certain public works and certain public facilities."

The policy of the "invisible hand" theory advocates a free market economic system, advocates taking individual dignity and individual freedom as the basis of basic values, and fully develops the utilitarianism shared by all people (the principle of exchanging the least sacrifice for the greatest benefit) Psychological structure) and rationalism (choice of the best means to achieve utilitarian goals), setting up a market that anyone can freely enter and exit, and free economic exchange in it.At the same time, try to restrain the third party who is neither a producer nor a consumer—the country and the government from intervening in the economy.It seems that this will lead to chaos due to anarchy and disorder, but in fact, due to the guidance of the "invisible hand", resources can be allocated rationally, and the economy and society will naturally be in a state of harmony.This is Adam Smith's laissez-faire market economy thought as an institutional invention.

In the 18th century at the time, Adam Smith's "invisible hand" theory was an amazing idea and was highly respected.Once Adam Smith went to a party of politicians. When he entered the door, everyone stood up and stood still. Adam Smith asked them to sit down. Prime Minister Peter said: "No, you sit down, and we will sit down again. We are all your students."

Until World War II, capitalist countries have been relying on this "invisible hand" to regulate social production, and achieved remarkable economic results.But the arrival of the economic crisis destroyed all this, and the capitalist countries found that it was not so sensitive to rely on this "invisible hand" to regulate production. In 1929, the great crisis that swept the world broke the myth that free competitive capitalism was the most ideal social system, and Adam Smith's "invisible hand" was overwhelmed by the conflict between personal and social interests and the crisis of prosperity in reality. Cut off the blade.

The facts of the economic crisis show that only under the control of the market mechanism without intervention, supply and demand will be seriously out of touch, and behind the prosperity lies the threat of economic crisis.Therefore, in order to achieve rapid and stable economic growth, capitalist countries tried to find other ways to make up for the defects of the "invisible hand" after the war.

During this process, Keynes emerged. His theory of state intervention not only helped people complete such a transformation of the state view, but also stipulated how and how to expand and contract fixed rules for the public sector and government economic policies.The countermeasure proposed by Keynes is: use the "visible hand" of the government to participate in the national economy, and use the power of the state to promote the operation of the economy.Keynes also wrote a letter to US President Franklin Roosevelt expressing his views.In the letter he said to Roosevelt: You have become the client of those who seek to correct the ills of our society by the application of sensible experiments within the existing system.

What was Keynes's economic view?A prominent feature of the modern market economy is that the state no longer just plays the role of "night watch police", but uses the "visible hand" to coordinate the overall balance and some major structural contradictions in the economic operation, that is, the state Entering the interior of the economic system has become a basic role in the modern market economic system.

To simplify Keynes' policy proposition, it is to abandon the principle of laissez-faire, use fiscal policy and monetary policy, and implement state regulation and intervention in the economy to ensure sufficient aggregate demand and achieve stable economic growth.To achieve full employment, effective demand must be stimulated, that is, to stimulate consumption and investment.It led to the transition of Western economies from liberalism to state interventionism, known as the "Keynesian Revolution".This set of theoretical views and policy propositions of Keynes was called "Keynesianism" by later generations.

After Keynes's "General Theory" was published, it quickly became popular in the western economics circle and became a major school of economics in the mainstream.Franklin D. Roosevelt's "New Deal" created a new model of market economy.In this model, the "invisible hand" of market law and the "visible hand" of government intervention are combined to affect the economy together, and the functions of the market and the government are brought into play at the same time.

After the Second World War, the capitalist countries pursued "Keynesianism" as a national policy for a long time, which contributed to the emergence of the "golden age" in the history of capitalist economic development.So much so that Keynesian believers called the post-war period the "Keynesian era" and described Keynes as "the savior of capitalism" and "the father of post-war prosperity".

In fact, the theories of Adam Smith and Keynes can be regarded as two aspects of one thing, each has its own reasons and conditions of application, and it cannot be said absolutely which one is the absolute truth.They are all valuable experiences summed up by human society in response to economic changes, and choices should be made according to specific conditions.

Fiscal Policy and Macro-control

According to statistics in 2006, the per capita cash income of farmers in the first three quarters was 2762 yuan, an actual increase of 11.4%, maintaining a relatively rapid growth.So, where does the increase in farmers' income come from?If we analyze it in detail, we can find that, in addition to migrant workers, income from agricultural products, and income from the secondary and tertiary industries, among the factors that increase farmers’ income, the most direct factors for increasing income are transfer payments from the central government and various financial subsidies. .

Since 2006, the central government has adopted special transfer payments for rural tax and fee reforms, improved the "three subsidies" for grain, issued comprehensive subsidies for agricultural materials, promoted the reform of the guarantee mechanism for rural compulsory education funds, expanded the pilot scope of new rural cooperative medical care reforms, and supported rural financial reforms In the first three quarters alone, about 1500 billion yuan of financial funds have been invested in rural areas.The 142 yuan per capita cash income of farmers mentioned by the spokesperson of the National Bureau of Statistics is part of it.

Fiscal policy is also a part of macro-control, but it is often ignored because its regulation is always silent.So what does fiscal policy control include?
The definition of fiscal policy is very broad. It refers to the guiding principles of fiscal work stipulated by the state according to the tasks of political, economic, and social development in a certain period of time, and regulates aggregate demand through fiscal expenditure and taxation policies.Increasing government spending can stimulate aggregate demand, thereby increasing national income; otherwise, it can depress aggregate demand and reduce national income.Taxation is a contractionary force on national income. Therefore, increasing government taxation can restrain aggregate demand and reduce national income; conversely, it can stimulate aggregate demand and increase national income.

One thing that is quite special is that in some cases, fiscal policy will play its role without the government making pre-judgment and taking measures in advance.This automatic stabilization mode of fiscal policy is called "automatic stabilizer", and its tools mainly include progressive income tax, social welfare expenditure and agricultural product price maintenance.Let's analyze them one by one:
First, progressive income tax.Generally speaking, when the economy is in inflation, taxes should be increased to reduce the total social demand; when the economy is in recession, taxes should be reduced to expand the total social demand.The progressive income tax system has such an internal stability mechanism that automatically adjusts the aggregate demand of the society.

Personal income tax, specifically, during the economic recession, due to economic recession, personal income will decrease, the number of people who meet the tax requirements will decrease accordingly, the tax base will be relatively reduced, and the applicable progressive tax rate will also decrease accordingly, and the tax revenue will automatically decrease.Since the reduction in taxation will exceed the reduction in personal income, taxation will generate a driving force to prevent excessive contraction of consumption and investment demand, slow down the degree of economic contraction, and thus achieve the effect of preventing further economic recession.This point will be mentioned later, so I won't go into details here.

Corporate income tax, specifically, during the period of economic depression, due to economic recession, corporate profits will decrease, and the number of enterprises that meet the tax payment requirements will decrease accordingly, so the tax base will be relatively reduced, and the applicable progressive tax rate will be relatively reduced.Taxes will automatically be reduced.Since the reduction in taxation is greater than the reduction in corporate profits, taxation will generate a thrust to prevent excessive reduction in corporate investment demand and slow down the degree of economic shrinkage, thereby playing an anti-recession adjustment role.In the period of economic prosperity, due to the booming economy, the profits of enterprises will increase, and the number of enterprises that meet the tax requirements will increase accordingly. Therefore, the tax base will be relatively expanded, and the applicable progressive tax rate will be relatively increased, and the tax revenue will automatically increase.Since the increase in taxation will be greater than the increase in profits of manufacturers, taxation will create a kind of resistance to prevent excessive expansion of corporate investment demand, thereby playing an anti-inflationary regulatory role.

Value-added tax also has different regulatory effects on investment.Production-type VAT does not allow taxpayers to deduct the value of purchased fixed assets when calculating value-added.Therefore, there is a problem of double taxation on this part of the value, which can objectively play a role in inhibiting investment in fixed assets.

Second, social welfare spending.Social welfare expenditures include unemployment benefits and various welfare expenditures.There are certain standards for the distribution of unemployment benefits, and the amount of unemployment benefits mainly depends on the number of unemployed people.During economic depression, with the decline of national income and the increase of unemployed people, the distribution of unemployment benefits tends to increase automatically, which is conducive to restraining the continuous decline of consumption expenditure and preventing further recession of the economy.During the period of economic prosperity, as the national income rises and the number of unemployed people decreases, the payment of unemployment benefits tends to automatically decrease, which is conducive to restraining the continuous increase of consumer spending and preventing severe inflation.

There are also certain standards for the payment of various welfare expenditures, and the amount of payment depends on employment and income status.During a recession, when personal incomes fall, welfare payments, one of the transfer payments, tend to automatically increase as the number of people eligible to receive them increases.In this way, it is beneficial to curb the continuous decline of private consumption expenditure and prevent further aggravation of the economic recession.During economic booms, when employment increases and personal income rises, welfare payments, one of the transfer payments, tend to automatically decrease as the number of people eligible to receive welfare payments decreases.In this way, it is conducive to restraining the continuous increase of private consumption expenditure and preventing serious inflation.

Third, the automatic stabilization of agricultural product prices.According to the common practice of market economy countries, the government should maintain the price of agricultural products at a certain level.When the price is higher than this level, the government sells agricultural products to lower the price of agricultural products; when the price is lower than this level, the government buys agricultural products and raises the price of agricultural products.This price maintenance system for agricultural products is also sensitive to fluctuations in economic activity.During a recession, government spending on the purchase of surplus agricultural products automatically rises as prices of agricultural products fall.In this way, the income of producers will be increased, and the established income and consumption levels of producers will be maintained.In times of economic prosperity, along with inflation, the price of agricultural products rises, and the government throws out agricultural products.In this way, it can not only restrain the increase of farmers' income and consumption, but also stabilize the price of agricultural products and prevent inflation.

Laffer Curve: The Parabola Drawn on the Dining Table
One day in 1974, the economist Arthur Laffer was sitting in a restaurant in Washington with some prominent journalists and politicians.He took a napkin and drew a graph similar to a sloping parabola on it, explaining the relationship between tax rates and tax revenues to those present: when the tax rate was high enough, the total tax revenue would not only not increase, but would start to decline.This is the famous Laffer curve.

So, what is the meaning of the Laffer curve?What is the significance of the overall economic regulation?

What the "Laffer Curve" tries to explain is that the tax rate does not increase with the increase of the tax rate. When the tax rate is higher than a certain point, the total tax amount will not increase, but will decrease.Because the factors that determine taxation depend not only on the level of tax rates, but also on the basis of taxation, that is, the income of economic entities.Excessively high tax rates will weaken the enthusiasm of economic activities of economic entities. Because the tax rate is too high, enterprises will only have little or no profit, and enterprises will be disheartened. Tax sources shrink, which eventually leads to a reduction in total tax revenue.When the tax rate reaches 100%, no one wants to invest and work, and the government tax revenue will drop to zero.

Over the past 20 years since the Laffer curve came out, not many countries have proved Laffer’s hypothesis, but most economists believe that taxation will reduce the total economic welfare of the society, and the excessive tax rate will bring the government a very high probability. Not the rosy prospect of tax increases.

(End of this chapter)