Two Centuries of Parasitic Economics flows like silk to impart radically fresh insights into economics. It calls for updating macroeconomic theory and replacing irrational taxes, finance and the monetary regime with robust alternatives to avert financial shocks, depressions, disorder, as well as to improve democracy.
The introduction explains the gross inefficiency of economic policies during the Great Recession.
Part I reviews past macroeconomic theories. Classical economics assumed that self-interest was the sole economic driver, overlooking societal-interest and several secondary drivers, and used a single homo economicus instead of several. This overly simplified model of the world is still with us to this day. Prominent classical economists, like David Ricardo and his peers, neither appreciated the significance of the economics of morality nor the multiplier effect. Thus, they rarely objected to extreme poverty and rejected the use of expansionary fiscal policies to counter contractions, plunging Europe in depressions and revolutions, which provided the impetus to Marxism. Marxism made the opposite mistake by assuming only societal-interest mattered, which precipitated the economic collapse of the Soviet Union in 1991.
During the Great Depression, neoclassical economists counseled inaction, exposing the inadequacy of their theories. By contrast, Viscount Korekiyo, Japan's Finance Minister, gave macroeconomics its modern foundation by his expansionary fiscal and monetary policies to end the Depression; Japan fully recovered by 1933. In 1936, Keynes published his General Theory, with neither a reference to Korekiyo nor inducing a fast recovery.
Part II proposes a Unified Theory of Macroeconomic Failure. It identifies negative externalities as a common denominator in all macroeconomic failures: irrational taxes, debt saturation, amplified cyclicality, monopolies, monopsonies, extreme-inequality, erosion of democracy, poor quality information, wars of aggression and crime.
Part III examines negative externalities in more depth. Banks' inherently unstable model drives them to coerce governments for support; their prohibitive cost to society parallels the exponential growth of their balance sheets. It reviews the historically brutal negative externality of the US business cycle and what rendered it milder after WWII. Anxiety over the spread of communism drove plutocracies to expand the welfare state and adopt Keynesian economics, which helped smooth the business cycle. When the fear of communism subsided in the 1980s, Western plutocracies again sought to increase their share of GDP by supporting the Thatcher-Reagan Revolution, which rehabilitated neoclassical economics, cut taxes of the rich and welfare for the rest, enfeebled unions and increased the profits of monopolies by deregulating them. Hence, Professor Piketty has misdiagnosed the cause of rising inequality. Part III goes on to analyze other critical negative externalities and concludes by developing a democracy index to measure the extent of democratic erosion, with serious implications for optimal resource allocation.
Part IV offers solutions to negative externalities. It advocates replacing debt with equity by taxing interest, a major negative externality, and remodeling banking. It advises a corporate capital tax to replace the corporate income tax to improve resource allocation, spur growth, and dampen the business cycle and the impact of AI and robotics on future employment. It advocates streamlining personal taxes by limiting them to a tax on earned income and another on wealth. It proposes a "democracy tax" on extreme wealth to stop plutocracy hijacking democracy.
Part V points to the gathering of economic storms in the West. The Euro is unsustainable in its present form. The EU risks disintegrating due to its flawed economic policies. The big banks are subverting democracy and wrecking economies. In the absence of reforms, revolts are certain.
