Self-Regulation of Economy

Fifth mistake in QTM is the self-regulating market. This is not directly stated in QTM but it is assumed as specie-flow mechanism is based on self-regulating economy. QTM is itself self-regulating mechanism that if money goes up then economy will automatically fix the problem. It is stated by QTM that if money is doubled then it will increase the demand and this increased demand will increase the prices in the economy so it will automatically fix the problem. So economy is something that fixes the problem and that’s why we don’t need to interfere in the economy. It is the basic philosophy of Laissez-faire that let things be as they are and everything will automatically work in best way. This philosophy is completely wrong and it leads to wrong understanding of how markets work. In reality markets don’t fix by itself.

Mian and Sufi gives an example related to self-regulation of market in book The House of Debt where they illustrate a town in which everybody works and their job was fulfilling their needs. Everybody was producing the recreational vehicles and suddenly the aggregate demand collapsed and people were out of work. Due to decline in production there was huge unemployment in the town. According the theory all of the unemployed people should have found jobs or they should have moved to other areas where they could find jobs. But it was found that everybody was at their prior place and there was not big movement after few years of this collapse. Everybody expects the demand has gone down so price/wages will go down but they didn’t. So there was no self-regulation as the unemployment that was created remained there. It was not fixed by itself opposed to economic theory.

It is of very great importance to know about what is really going on in the world. Government always say that they don’t have budget to build roads, new schools, can’t provide social service and health facilities because they don’t they have money but in actual government can print as much money as it want. Now the issue is that economic theory says if government starts printing money than inflation will happen because QTM says it. But the point is QTM is false. If government start printing money than inflation can happen but if they use it wisely then no inflation can happen and government can provide good health services to its people and education for everybody.

People of developing countries are fooled into thinking that they can’t think and make new theories as they are backwards and mentally retarded. McCloskey wrote a book called Rhetoric of Economics in which he write that all points in book of Paul Samuelson, The Foundations of Economics, can be made very simply. So, in terms of economics there is no content to this book but the whole point was to show-off and impress people. After that whole profession started doing that on the basis of standards that Samuelson sets. If we want to know that is FDI is beneficial for Pakistan then instead of running lot of regressions we must look in real world that who is doing investment and what are they investing in.