Thank God we have someone who knows what the problems are and how to solve them in less than ten paragraphs. I hope Prez Obama, Tim Geithner, Ben Bernake and a few hundred Congress people as well as Harvard School of Business and a few thousand bankers and economists will have access to Mr Johnson's highly sensible article. If we followed his leads we could get moving very quickly on solving the financial mess we're in.

This is a very good clear understandable explanation that should be widely circulated. But the role of the government is not simply to regulate businesses and the market. The government also is a direct employer in schools, publicly owned enterprises and authorities and in public services at all levels. Public employment is under attack by the right wing which seeks to privatize everything and direct revenue away from serving the people. Public employment needs to be defended and greatly expanded as was done in the New Deal.

A reasonable summary, but I also agree with Anonymous. Ours is a system that requires jobs for everyone regardless of whether those jobs produce any necessary goods or services. The cosmetics industry is a prime example of utterly useless crap that is foisted on millions of people and may do more harm than good, yet an argument in its defense is that "it provides jobs".

However, in the short term it is probably easier to explain the author's point than to seek some economic utopia.

All you have to do for proof that businesses don't create jobs is :

Look at the Bush years from 2001 to 2008. The jobs declined, except for a short spurt in 2007 that was the housing bubble - short lived- and then the crash. Look at a graph, look at a chart, look at unemployment statistics; whatever floats your boat.

It was the first time in history that the GDP went up and jobs went down. Wall St. was making the money, and it was not by creating jobs.

this is only true of large business. Small businesses create both need and jobs every day. The same way Henry Ford did. This is the foundation of our country.

Almost all job growth in this country comes from small business. We aren't C corps and dont get tax breaks. We dont get stimulus money and now we cant get loans.

The gov is in bed with big corporations who do exactly what is described in this article and offering them incentives is a waste of our hard earned $$ in my opinion.

They want to take this country back.. Then go back to small business and make sure they can get the necessary capital (loans based on solid business plans and/or history) to launch new industries and create new need .. and turn this country back into a world leader!

This article is true, but only for a certain segment of the country, Main Street. For Wall Street, this paradigm no longer applies. Financiers no longer need to actually produce anything to make money. Now, all they do is use things like securities and derivatives to increase their wealth. Obviously, that money has to come from somewhere, and it usually means the rest of us, either directly, like with toxic mortgages, or indirectly, through the government using our tax money. The result of this is plain to see for anyone who's been paying attention for the past few years. Simply put, tax cuts to anybody, even "small businesses", is not going to help. Wall Street will just keep shuffling papers until they get richer, actual businesses are going to keep sitting on their cash until people actually start buying stuff from them, and actual people aren't going to start buying stuff until they can afford it. Bottom line: shut down the casino, and make it so people can actually afford stuff.

More Socialism hyperbole! Of course businesses create jobs--when they expand, when they add a new product line, or when a new business is created! Government "jobs", on the other hand, just create another demand for tax dollars (government jobs don't create wealth, they are a black hole--TAX DOLLARS pay government salaries, which come from the folks who have the non-government jobs....anyone who doesn't get this needs to go back and repeat Econ 101!).

What we need is a rocket ship so we can send the unproductive 1/3 of our population...the accountants, the politicians, etc., off to settle another planet a la "Hitchhikers Guide to the Galaxy" and get our country back on track!

Let's step back and look at this for a moment.

Jobs are our main and only means for obtaining the money to spend for our survival.

As we get smarter figuring out how to do things with less effort (aided by computers, better machines, etc) we inevitably find that businesses need less manpower to put out the same amount of product. The result: people out of a job and in difficulty to survive. Secondary result: Less demand, meaning even less jobs. This is an inevitable downward spiral.

A positive development (smarter production) has been turned into a serious problem (less jobs).

Two ways we usually look at for solving this are: 1) make more jobs by emphasis on doing things manually, or doing things that aren't strictly speaking necessary and 2) prevent businesses from doing what would be natural for them - which is to increase efficiency and cut costs of production.

There is another way to handle this.

Let's look at ways to obtain spending money without the necessity for having a job.

Yes yes, I hear the "socialism" comments. But then - go right ahead and try to solve this one without looking at a larger picture.

We need spending power (demand) to create jobs. We can't have spending power without jobs. Technological progress decrees that there be less jobs as efficiency increases. What to do?

Give everyone, and I mean EVERYONE, a basic income on which to survive. The money is available. We can spend it for war, we can spend it to bail out the banks, why can't we spend it to guarantee a decent life for everyone?

And don't say it is because "people wouldn't work if they did not have to" that's bollocks. They would, and with great pleasure. And minus all the pain and desperation.

Ken: I read your comment before replying to it. This is, judging by the content of your comment, more than you did before replying to the original article. That is all I have to say about your comment.

look at this closely then pass it on. It's up to us now since the democrats are too damned cowardly to fight back with the truth. Remember the budget is crafted in Oct. a year in advance
Page 11 here
http://www.fms.treas.gov/bulletin/b2009_3.pdf

Page 12 here
http://www.fms.treas.gov/bulletin/b2010_3.pdf

I hope your Economics professor failed you. That assumes you ever took an Economics course.

I had a whole response to this that explained how the economy works in the real world, but apparently your website didn't like it and blocked it as spam.

Let's suffice to say that a Ph.D. candidate in economics, who has passed all of her exams and courses and has only to finish her dissertation to be granted the doctorate in the field by a Research I university within the borders of the United States, says you're wrong. Entirely wrong.

However, the Constitution of this great nation guarantees you the right to be wrong, even in public places. It just also guarantees me the right to point out your ignorance.

"Let's suffice to say that a Ph.D. candidate ...says you're wrong. Entirely wrong."

And let me say as a graduate of a research I university within the top 10 of the world in business and econ that YOU are wrong, and it's indicative of just how corrupt the halls of academia are, that riffraff such as yourself have managed to make their way to such credentials without an adequate understanding of the discipline.

Please revisit: multipart game theory, the fundamental pitfalls and fallacies of economics, moral hazard, and the basic theory of supply and demand. Also, read Stiglitz's analysis of supply side economics, why its so appealing, and why, in the end, it does not work. Businesses do not create jobs, demand forces them to add them to keep up.

That was kneejerk, I apologize.

The supply and demand model you cite implies that the market is always in short-run equilibrium. That means that this concept of demand exceeding supply simply can't exist under this view of the world. In fact, the S&D model can't even explain the natural rate of unemployment without imposing a minimum wage. We need search-theory models to create this effect.

There is a model that utilizes the concept of excess demand---the Keynesian model. Hate to break it to you, but Keynesianism has fallen out of favor. I am pretty sure that it has something to do with the general consensus that it's wrong.

As for your reference to Stiglitz and a supply-side paper, I can't seem to find that. Do you have a date and journal/book in which it was published? I did find a 1990 article in the Oxford Economic Papers by Lucas that's a supply-side review of literature, and the only Stiglitz piece it cites is a 1980 lecture published in a book. And I think you're the one who brought up supply-side economics, not me :D

Profits drive businesses to expand, which creates jobs. Nothing "forces" businesses to create these jobs; it's purely profit-maximization. If there aren't profits, there aren't businesses, and therefore there aren't any jobs.

"Profits drive businesses to expand, which creates jobs. Nothing "forces" businesses to create these jobs; it's purely profit-maximization. If there aren't profits, there aren't businesses, and therefore there aren't any jobs."

This outlook is called supply-side economics. The thought was you reduce costs to the suppliers and thus increase their profits, and they in turn will expand and create jobs, except it doesn't work that way.
They need a reason to expand production (e.g. - demand outstripping the capacity of labor force, and only then in positions which must be filled locally) or that profit goes straight into compensation for existing staff (bonuses, heavily weighted to the executive staff). Additionally, in the absence of trade barriers/stiff penalties, studies indicate 2 out of every 3 jobs created by such demand will be in nations with lower labor standards/compensation than the company's home nation.

I am through with this discussion. I hope that bachelors degree is working out for you. I guess this is why universities don't let people without at least a masters in economics teach the subject.

I've heard Rush Limbaugh rave about how great "productivity" is - and his poor ignorant listeners don't understand that increased productivity means creating the same amount of product with fewer employees.

Sepp writes:

"Give everyone, and I mean EVERYONE, a basic income on which to survive. The money is available. We can spend it for war, we can spend it to bail out the banks, why can't we spend it to guarantee a decent life for everyone?"
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

This is what used to be called a "Guaranteed Annual Income". It was proposed by (of all people!) Richard Nixon. I've never admitted to agreeing with Nixon on ANYthing; but we'd be so much better off (politically, economically and culturally) if this proposal had passed.

Edward Bellamy fans will recognize this as very similar to the model he used in his novel "Looking Backward". High school students should be required to read Bellamy's book--along with the works of other "utopians" and socialists--just to spur imagination, creativity and critical thinking skills in a generation conditioned to accept the world as it is, rather than how it might be.

"Imperfect markets can only be generated in the basic demand and supply model through price ceilings and price floors"

Spoken like a classic "academic idiot", e.g. someone who is so cloistered in their theories they wouldn't see practical application if it spat in their face.

Almost all markets are imperfect, and if you opted for those courses on the hows and whys behind it you might understand economics as a discipline.

The people reviewing your thesis, whatever hack job it is, will rip you to pieces with the simplistic outlook you have.. unless of course they're paid by the heritage foundation to let you through so you can do their bidding on TV. I can't tell you how many so called "Ph.D.'s" were raving over the past 2 years about how the fed's loose policies would cause inflation of all things! You remind me of those people, eminently unqualified.

For the Ph.D. candidate,

"Profits drive businesses to expand, which creates jobs. Nothing "forces" businesses to create these jobs; it's purely profit-maximization. If there aren't profits, there aren't businesses, and therefore there aren't any jobs."

You left out one important part. If there is no demand, there aren't any profits. Furthermore, even a business, realizing profits, is not going to expand without demand, to further increase profits. That's the whole point of this piece.

My ability to explain fully any of the concepts to which I referred was greatly hampered by the well-meaning spam filter on this discussion board. I do believe that some of my statements were misconstrued to be incorrect when they were, in fact, incomplete. The simplicity of the models I invoked was more to facilitate intuition rather than illustrate the true models underlying my system of beliefs. My dissertation uses models of heterogeneity to endogenously generate the price stickiness typically imposed exogenously in New Keynesian dynamic stochastic general equilibrium models. Ex-post heterogeneity created through Markov transition processes creates market imperfection. I'm quite certain none of you care about that, and calling on such models to explain phenomena that we observe in the real world is counterproductive when the goal is to demonstrate intuition.

I realized I also fell victim to the fallacy of assuming a level of pre-existing knowledge of the most basic assumptions on which Economics is based. Concepts such as utility maximization, the invisible hand principle, and the desirability of efficient outcomes in a positive (as opposed to normative) context are second-nature to someone who, like myself, has studied Economics for somewhere in the neighborhood of ten years (if one is to count Advanced-Placement [AP] courses during high school). Being surrounded on a daily basis by people who also take these and other fundamental assumptions as given has made me lax in my explanations.

2. "The cause of all our economic woes is the institution of private property of land...": From "Macroeconomics: Private and Public Choice," by Gwartney, Stroup, Sobel, and Macpherson (13th edition, 2008): "Clearly defined and enforced private property rights are a key to economic progress because of the powerful incentive effects that private ownership generates. ...In his book The Mystery of Capital, economist Hernando de Soto argues that the lack of well-defined and enforced property rights explains why some underdeveloped countries (despite being market based) have made little economic progress." (pp 33, 36) They continue on page 46: "Alternatively, an economic system in which the government also owns the income-producing assets (machines, buildings, and land) and directly determines what goods will be produced is called socialism."

And my final comment (though given my previous statement that I was through with this discussion, the credibility of my commitment to quit arguing the nature of reality with you folks is probably reasonably called into question): Sir/Madam, that is, the argumentative college graduate, why do you demonstrate such distaste, distrust, and venom toward the university system and holders of higher degrees in general? The vehemence with which you have constructed your insults, not only toward me, but toward the field of Economics and the higher educational system, seems to imply to me some kind of embitterment. You seem to have a lack of curiosity toward the phenomena you observe, and instead of asking questions of those who are regarded to be better-educated than yourself in an attempt to understand their arguments (and why these arguments are so widely accepted), you make rash generalizations that tend to defy the rules of logic and the accepted order of the world. Is this a result of your upbringing, lack of acceptance by your peers, a general lack of self-confidence? Were you rejected by a graduate school from which you felt you deserved acceptance? I sincerely hope that one day you can make peace with the world.

To argue that there is a tradeoff between additional benefits and costs and ethical practice simply demonstrates value in one's utility function for fairness or some other measure of social standards. But to argue that an idea is true when it has been decisively proven to be false by experts and mathematics/science...I fail to understand that. An article published in the New York Times in August 2005 reported that a researcher at Northwestern University conducted a study, the results of which indicate that, statistically speaking, 1 in 5 adult Americans believes that the sun revolves around the Earth, despite the fact that the geocentric model of the universe has been discarded by the scientific community at least since 1631, when Kepler successfully predicted the transit of Venus based on a heliocentric model with elliptical planetary orbits. Other theorists rejected the geocentric view even earlier than this. These days, even the heliocentric model has been rejected by those who study physics and astronomy, but at least the heliocentric view describes the Earth and all of the planets as orbiting the sun, which is an indisputable fact. Given that elementary education is mandatory in the United States, the information that the Earth revolves around the sun should be inexpensive for most people to obtain. Yet...this study concludes that 20% of Americans persist in their belief of a geocentric universe. Why? I do not have an explanation, nor do I have an explanation for why some people choose to believe false claims regarding economic data.