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The Keynesian Ball

Updated: Mar 7, 2022

I wrote this piece in the summer of 2019 and later forgot about it.

A ball in a valley is safe and stable. It can sustain forces from all directions. The shape of the valley creates a sort of downward stability in it. The inevitable destiny of this ball is stability until a strong force knocks it out of the valley.

A ball on top of a hill is also at equilibrium but an unstable one. As soon as it receives even a minutia of force from any side, it rolls over. When slightly disturbed, it has to be reestablished with external forces. The inevitable destiny of the ball is instability. This is our Keynesian ball. In this case, our valley is multidimensional. There are many ways to destabilize the ball.

Whenever an economy recedes, we increase the money supply by reducing interest rates. When it heats up, we do the opposite. These two nudges in opposite directions are supposed to keep the ball stable. Another way to expand or contract an economy is via sale of government assets. When the central bank sells an asset, the money supply reduces. When it buys assets, the money supply increases. You can also change the reserve requirement for banks. When the requirement is lowered, they can loan out more money, causing the economy to expand. When it is increased, the opposite happens. Taxation is yet another means to contract/expand an economy. High taxation reduces disposable income, which in turn reduces people's ability to transact. Low taxation does the opposite.

All these variables have to be just right for a Keynesian economy to function. As I stated previously, a central planner can balance the ball artificially by constantly monitoring and adjusting all these variables. But the ball must roll down one day, just like you can't forever balance a stick on a finger. The planner must fail. This is the fate of all systems at unstable equilibrium. They must collapse.

In comparison, a free economy is akin to a ball in a valley. It absorbs shocks from all directions, makes adjustments, and returns to its mean position. Its inevitable destiny is stability. Such a stable economy emerges (it can't be planned) when there is no legal tender (definitely no paper money), no taxation, no state ownership of assets (assets must be owned by individuals, not groups or organizations), etc. A free economy regulates itself because individual consumers and suppliers jump in to neutralize inefficiencies and shocks in demand and supply.

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