And it is interesting how the pressures of the marketplace work and really cannot be held back for long. In postwar Europe, the occupying allied forces imposed price controls in Germany and other countries to keep prices reasonable and prevent shortages and hoarding. One of the greatest movies of all time, The Third Man, is based on this scenario, in post-war Vienna. The allied occupying forces tried, to no avail, to shut down these black markets and institute order. Things only changed when a new commander was appointed who immediately eliminated all price controls. There was chaos for a few weeks, as people bid prices through the roof, and people were hoarding goods, but eventually, the market reached equilibrium, and shortages and hoarding disappeared, and prices came down due to competition. This is not a "system" of economics or politics, no more than Newtonian Physics or Quantum Mechanics are imposed "systems" that force how masses or particles behave. It just is how things work.
The fact that our economic theories - just like our theories about Physics - are incomplete or inaccurate, does not make them wrong, just not finished. And inventing new ideas out of whole cloth is not the answer. Communism or flat-earth theory are the same thing - saying things should be so because you'd like to believe it to be so, in spite of evidence and data to the contrary. It is belief, not science.
And I think people get away with this today because our economic theories are so primitive and incomplete - despite the best efforts of Nobel-winning economists. Take basic things like interest rates and inflation. The basic economic theory about inflation has been that if you increase inflation, people will spend more today and prime the pump of the economy. They will perceive that they can pay off debts in the future with money that is worth less, so they will borrow more now. They also perceive that goods will be more expensive tomorrow, so they will buy now. It gets more complicated than that, of course, but from what I understand, it is the general idea.
To decrease inflation, so the theory goes, you raise interest rates - which should decrease inflation:
There are three main ways to carry out a contractionary policy. The first is to increase interest rates through the Federal Reserve. The Federal Reserve rate is the rate at which banks borrow money from the government, but, in order to make money, they must lend it at higher rates. So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their rates as well. When banks increase their rates, less people want to borrow money because it costs more to do so while that money accrues at a higher interest. So, spending drops, prices drop and inflation slows.
The problem I have with this sort of model is that it has been proven wrong time and time again, and also it relies on the idea that the average consumer does this sort of math when making purchases. When I came of age, we were in an era of "stagflation" which arguably was triggered by the Arab oil embargo of 1973. Oil prices rose quickly, and in an economy where everything is based on oil, prices rose spectacularly as well. One of my professors at GMI claimed that in order to make a glass of milk - from the farming for crops, keeping the cows, processing the milk, refrigerating it, and shipping it to stores by truck - you would use the equivalent of a half-a-glass of crude oil. I don't know if that statement is entirely accurate, but it is probably not too far off.
So by the late 1970's, we had been through several "oil shocks" including incidents where there was no gasoline to be had on some occasions, to the point where we were rationed to buying gasoline on even and odd days, to prevent long lines and hoarding of gas (many people back then had 5-gallon cans of gas in their trunks - sometimes several of them - out of fear of running out. This was a safety problem, to be sure, and the hoarding aspect added to the shortages).
Inflation was running rampant - by American standards, anyway - at 10% or more. Unemployment was well over 10% and interest rates were as well. Mortgage interest was 14% or more - stifling the demand for new houses and tamping down housing prices (which exploded in the late 1980's when rates went down to "only" 10% or so). Increased interest rates slowed the economy - to be sure! But they did not tamp down inflation one whit, largely because inflation was due to an external force (the increase in the price of oil) than it was due to increased economic activity.
Despite this experience, however, economists still use these same levers to control the economy based on the same theories - even as past experience has proven them wrong. More disturbingly to me, it seems these economists drive like old people do here on retirement island - alternately slamming on the brakes and then pounding the gas pedal. I kid you not about this - we sit on our front porch and see and hear people drive by, the engines on cars going "whooo... whooo...." as they pump the gas pedal as though it were a bicycle or an old pump organ or player piano. The idea of using the cruise control and going at a nice, steady speed seems to elude them.
Cruise control for the economy - what a neat idea. Rather than jerk the levers of the money supply and interest rates, gradually control these for a smoother ride. Republicans complain that the eight years of the Obama administration didn't have enough growth. Coming off the worst recession since 1929, we had eight years of steady, if not spectacular growth. Maybe the economy wasn't skyrocketing, but it wasn't crashing, either.
Today, the GOP gets its wish - the economy is taking off based on little more than exuberance. And if you read the financial papers closely - the articles citing experienced traders and Nobel laureates, you see a pattern. Most are predicting that the bull market will have to end - and it will end - sometime this year or next. And the longer the exuberance carries on, the worse this ending will be.
But as others have pointed out, a nice boring steady market doesn't provide the wild profits for a few individuals. It spoils the whole speculative bubble party! As I noted in A few win a lot, a lot win few, these ups and downs of the market are excellent vehicles for a few wealthy and knowledgeable people to take a little bit of money (by their standards, of course - like ten grand) from a lot of little people, and make themselves fabulously rich. Best of all, they don't really "take" the money - we schmucks give it to them with our blubbering thanks.
As I noted before, wealth inequality in our country didn't occur because the rich "stole" it from us, but because we, as a people, decided that having cable teevee or a jet ski was more important than having money in our 401(k). Read any sob story about Mr. and Mrs. Middle-Class, who are lurching toward retirement with no savings. Odds are, you will hear comments here and there in the story about how hard they have it, as they can barely make the Harley payments or can no longer go on vacation to Las Vegas to gamble.
You give these folks a chance to vote, they lurch from far-right policies that don't favor their own interests at all - tax cuts for the rich, and gutting the Consumer Protection Agency to the point where it now protects payday lenders instead of prosecuting them. Once they are fed up with this, Johnny and Josephine Lunchbucket will decide that "guaranteed annual income" and a $15 minimum wage are the answer and vote for extremist solutions of the opposite sort.
And these sort of lurches, from one economic extreme to another and one political extreme to another, seem to be increasing in frequency. Something has changed in our economy over the years that has affected how we behave. And maybe social media - the latest iteration of electronic communication - is partly to blame. In Adam Smith's era, you went down to the "market" with your basket, and exchanged a few ha' pennies for some rutabagas or whatever. The data available to you as to what was a fair price or not, was somewhat limited to what you saw in the market, or perhaps the gossip you heard down at the well. Even in the larger markets and stock markets in London, data was pretty limited in terms of availability.
Enter the electronic communications age. Telegraph, radio, then television. Now economic data is beamed into every home - and sold in the form of advertising. Demand for products can be created out of whole cloth merely by repetitive advertising. But it was a top-down system - a single message broad-casted (thank you very much, Mr. Sarnoff!) from a single source. Today, we have social media, where anyone can generate a message, which may take off in a viral fashion. In fact, the description of social media posts as "viral" is fascinating in and of itself. It describes, in a way, the sort of thing that accompanies speculative bubbles - things just take off, on their own, and get out of control.
So, rather than our economy becoming more and more mature and stable over time, it is doing just the opposite - with more and more bubbles and market ups and downs, with increased frequency. A mere decade after one of the worst market collapses in the last 100 years, we are sitting on a number of bubbles - which have been clearly identified as such by economists - that are set to burst. Cryptocurrency, real estate, dot-com stocks, gold - all the usual suspects. And when one bubble bursts, it likely will burst the others - and take down the overall market, at least temporarily.
And once again, we will ask ourselves, why? Why did we let this happen? Why did people blindly believe that some guy on YouTube had the secret answer to fabulous riches? Why did we loosen regulations just at a time when we needed them most? Why did we cut taxes to "stimulate the economy" when it was in fact, already over-stimulated? Why do certain people think that high rates of growth are always a good idea?
Of course, we will never get these answers - or ponder them very long. We will once again enact new regulations to limit speculation and rein-in predatory practices. And before long, the people who profit from those enterprises will cry once again that the economy is being stifled by the inability of organized crime to charge the very poor 300% interest on a title pawn loan.
And once more, we go back into the breech!