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posted on 24 June 2017

Is It Possible To Have A 'Theory Of Everything' In Economics?

by Rodger Malcolm Mitchell,

The term "Theory of Everything" has been related to physics.

Quoting Wikipedia,

"A theory of everything (T)E) is a hypothetical single, all-encompassing, coherent, theoretical framework of physics that fully explains and links together all physical aspects of the universe.

"Finding a ToE is one of the major unsolved problems in physics."


The two primary "frameworks" in physics are General Relativity and Quantum Field Theory, which in their current interpretations are incompatible. A "theory of everything" would unite these two frameworks.

If we class General Relativity as a theory of big things, and Quantum Field Theory as a theory of small things, we might draw an interesting parallel in economics with macroeconomics and microeconomics.

And just as General Relativity is the basis for explaining how gravity affects big things, Monetary Sovereignty is the basis for explaining how money affects macroeconomics.

General Relativity is based on the relationships among mass, energy, time, space, and gravity. Monetary Sovereignty is based on the relationships between money creators and money users.

Consider such subjects as income and wealth distribution, health care, taxation, poverty, education, employment, inflation, deficit spending, and economic growth. Any intelligent discussion of these subjects requires an understanding of Monetary Sovereignty.

Obamacare Vs. Trumpcare:

You've been reading and hearing about the Democrats' "Obamacare" vs. the latest iterations of the Republicans' "Trumpcare." Both are attempts to provide health care to Americans, and in different ways, both suffer from fundamental, incorrect assumptions.

The incorrect assumptions are that the federal government's supply of dollars is limited, and an increase in federal spending requires an increase in taxes, an increase in borrowing, and/or inflation.

The facts are:

  1. Our federal government, unlike state and local governments, is now Monetarily Sovereign (since 1971, when it went off a gold standard).

  2. It cannot unintentionally run short of its own sovereign currency -- the currency it originally created from nothing -- the U.S. dollar. It instantly can pay any size debt denominated in dollars.

  3. It needs neither to borrow nor to tax in order to obtain dollars, as it creates dollars ad hoc, by paying creditors.

  4. Being sovereign, the federal government has the unlimited ability to increase or to decrease the value of its sovereign dollar, thus creating or preventing inflation.

Obamacare rightfully is criticized for taxing younger, healthier citizens and for not covering several million people, all because the realities of Monetary Sovereignty have been ignored.

Trumpcare reduces the taxation and the coverage for the same wrong reasons.

The U.S. federal government has the unlimited power to fund comprehensive, no-deductible health care and long-term care for every man, woman, and child in America.

It can fund "Medicare for All" without collecting any tax, and without borrowing, and without price inflation.

Trying to determine whether Trumpcare does or does not outweigh Obamacare, is a fool's mission. Both are seriously lacking due to their false underlying assumptions about federal affordability.

The Kansas's Experiment With Tax Reduction:

We discussed this at "Kansas is nothing like America." An article in THIS WEEK Magazine (6/23/17) illustrates the problem:

"The nation's most aggressive experiment in conservative economic policy is dead," said Russel Berman in Supply-side economics "never works," saod Eugene Robinson in The Washinbgton Post.

The Wall Street Journal, in an editorial said (Kansas Governor) Brownback was "unlucky in his timing. . ." Said Pat Garofalo in, "Conservatives always try to explain away supply-side failures by saying the reforms weren't quite right.

The big question is whether national Republicans will heed the lessons of Kansas, said Jordan Weissmann in President Trump is being advised by the same economists who engineered Brownback's disastrous scheme, and he has proposed a similar strategy of massive income tax cuts and pass-through exemptions for businesses. "Kansas has admitted its mistake" -- but Republicans may try to repeat it anyway.

Image result for bell-shaped curve

Total tax collections based on various tax rates.

Supply-side economics, often exemplified by "the Laffer curve," teaches that tax-rate cuts can pay for themselves by increasing taxable income.

This supposedly will happen because lower taxes will increase both the Supply and the Demand for products and services.

In this vein, Arthur Laffer said that tax rates of 0% or 100% will generate zero taxes, so somewhere between 0% and 100% there is a "best" tax rate that will generate the maximum tax.

However, supply-siders fail to take into consideration four facts:

  1. The federal government has no need for taxes, so federal tax cuts always will be pro-growth for the economy.

  2. Federal deficit spending adds dollars to the economy and so is pro-growth

  3. Federal taxes always remove dollars from the economy, but a growing economy requires a growing supply of dollars. Thus, federal taxes always are anti-growth.

  4. State and local governments do need taxes, though complexity prevents knowing what that magical "best" tax rate is. For each state, it could be lower or higher than the current rate. State and local government deficit spending neither adds nor removes dollars from the economy, so may or may not facilitate growth.

Berman, Robinson, the Wall Street Journal, Garofalo, Weissmann, Brownback, and Trump do not seem to understand the differences between Monetary Sovereignty (the U.S. federal government) and monetary non-sovereignty (the states, counties, cities, you, and me).

The federal government, having neither the need for, nor the use of taxes, should not use the Kansas experiment as a model. Unlike Kansas, the federal government could eliminate all taxes today and yet continue spending, forever.

Kansas needs and spends tax dollars. It can, and has, run short of dollars. Though the Kansas experiment seems to have failed -- tax rate reduction did not generate enough taxable income to "pay for itself" -- exactly the same experiment might work for other states.

Florida, Alaska, and others have no income tax, simply because they receive dollars from outside sources, Florida from tourism and Alaska from oil. The Kansas experiment may apply to some states and not to others, but it definitely does not apply to the federal government.

The common element among the arguments about Obamacare, Trumpcare, and the Kansas experiment is Monetary Sovereignty, or rather, the lack of understanding it.

A need to understand Monetary Sovereignty is at the foundation of meaningful discussions about education access, federal and local tax reform, income and wealth inequality, poverty, Social Security, immigration, inflation, unemployment, infrastructure, climate change, war, scientific research, states' rights, charity, business regulation and many other dollar-related subjects.

In that sense, Monetary Sovereignty is the "theory of everything" only in macroeconomics. It is not a Theory of Everything in all of economics because it barely touches on microeconomics

(Monetary Sovereignty does include "Gap Psychology," the popular desire to distance ourselves from people below us on the income/wealth/power scale, whom we view as inferior, while wishing to come closer to people above us, whom we deem superior).

Microeconomics, being a subset of Psychology, is like Quantum Field Theory in that both involve predictable unpredictabilities we have yet to master. Thus, like physics, economics will have to wait for its Theory of Everything (though I suspect individual humans will continue to be even less predictable than quantum particles).

In summary:

Those who do not understand and use Monetary Sovereignty, do not understand federal economics, and cannot develop workable economics plans.

They are fixated on cost-cutting and budget-balancing, when the federal government needs neither, and both are anti-growth.

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