Some people, particularly conservatives, are very concerned (or pretend to be concerned) with the threat of inflation in our economy.

Those of us with even a rudimentary understanding of economics explain that under the current circumstances inflation is not a threat. Those circumstances being idle productive capacity in the country, unemployed and underemployed people, people so deeply in debt that they cannot buy much more than the basic necessities, and finally the money that is being put into the economy by the Federal Government is not being put to use buying things. The money that is not being put to use buying what the economy produces is either being given back to the Federal Government for safe keeping through purchases of government securities, or it is being put to use buying stocks in the stock market and inflating stock prices.

The above explanation wouldn’t be sufficient for me if I were one of those worried about inflation. I would ask, “So when the conditions change, and inflation threatens, what are we going to do?”

The first thing to do is obvious. If the economy doesn’t need any more money to facilitate the buying and selling of the existing goods, then the Federal Reserve Bank will stop creating more money to finance the budget deficits that will have disappeared. There is a lot of detail behind what that means that I won’t go into here. The other thing the government could do is to raise taxes (and/or cut spending) to suck excess money out of the economy. That is a politically hard thing to do because the official inflation worriers always want to cut taxes at the exact moment when they should be raised.

With our trade deficit, it has just occurred to me that the Federal Reserve Bank’s tool box is more powerful than it used to be. One of the reasons why the Federal Government has to keep pumping more money into the economy is that money is being drained from the domestic economy by the money we pay to other countries because of our trade deficit. So if just stopping putting more money into the economy might not have been powerful enough tool to use when we had a trade surplus, it is a much more powerful tool when we have a trade deficit.

William K. Black wrote the article Kenneth Arrow’s (Ignored) Impossibility Theorem in New Economic Perspectives. The motivating event for the article was the death of economist Kenneth Arrow.

The author of the obit stressed the impossibility of such systems being optimal. Contrast that emphasis with the author’s treatment of Arrow’s work on “general equilibrium.”

Professor Arrow proved that their system of equations mathematically cohere: Prices exist that bring all markets into simultaneous equilibrium (whereby every item produced at the equilibrium price would be voluntarily purchased). And market competition puts society’s resources to good use: Competitive markets are efficient, in the language of economists.

Professor Arrow’s theorems set out the precise conditions under which Adam Smith’s famous conjecture in “The Wealth of Nations” holds true: that the “invisible hand” of market competition among self-serving individuals serves society well.

That is one way to phrase it, but a more accurate, parallel way to phrase Arrow’s work on general equilibrium would be as an “impossibility theorem.” Arrow actually proved that it was impossible for general equilibrium to occur. The “precise conditions” in which economists can guarantee that a market transaction “serves society well” is the null set. There is no market that meets those “precise conditions” because they are impossible to meet.

This article introduces me to a field of study that I had not known before. I can see that I am going to have to do more reading about this area.

To further quote from the article, Black’s concludes the followin:

The ultimate failure of economics as a field is to:

1. worship an economic model that is criminogenic,
2. hide that disaster from the public by assuming “silently” an “ADM God” that contradicts the model’s express assumption,
3. continue to worship and proselytize that model when its silent assumption of an “ADM God” repeatedly produces criminogenic policies and epic predictive failures, and
4. praise your models as “rigorous,” “scientific,” and “transparent,” and
5. define critics as anti-scientific and demand that their critiques be excluded as heresy.

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In other words, free markets only work when a godlike superior force sets strict rules to guard against criminogenic behavior. Free markets only work when they are not free.