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Hackernoon logoWhat Comes After Adam Smith and Keynes? [A Deep Dive] by@kaylonlee

What Comes After Adam Smith and Keynes? [A Deep Dive]

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@kaylonleekaylonlee

In the morning, we rub our eyes and stretch ourselves, ready for a new day. After washing,we open the refrigerator, take out the sandwiches and milk we bought last night, put them in the microwave to heat up, and perhaps go to the living room to open the meditation videos stored in the tablet and relax with the rhythm of music. 

On the way to work, we may read news, reply to the messages in our mobile phones, and then purchase new financial products according to the recommendations of experts or friends. During the lunch break, we find that someone has responded to the post about the transfer of second-hand speakers posted last night, so we tap the keyboard to start a new round of bargaining. 

After selling it satisfactorily, we are excited to open the sale website of our aspired new bag.

Purchase, sell, bargain and investment are all important parts of the economy. Every now and then modern people are in it, ranging from the use of cash, credit cards and e-payment, to every time they get a call from customer service staff, get new job invitations, or receive open ceremony coupons for shopping malls, and we are closely related to the “economy”. 

Economic activities include the production, distribution, exchange, and consumption of materials. It is not new but has existed many years ago. For example, we catch fish and shrimps in the lake and exchange them for the fruit picked up by others in the mountain; or we weed and water the crops in our fields, and harvest abundant wheat in the fall but the early humans didn’t think deeply into the economic behind these behaviors.

Until the rise of capitalism, the increase in productivity and social division of labor have brought a wealth of commodity types and a large number of exchange demands, and economic activities have become more complex and important.

Only then did we begin to systematically summarize the various laws contained in it, and economics came along with it.

As one of the most important foundations in human development (the other is the political system), the economic system has played a decisive role in the evolution of the entire society. The phenomenon of alternating distribution and consensus in human history that we mentioned in the previous article is affected to a great extent by economical production and consumption conditions at that time. 

By sorting out the history of economics development, we find that economics, as an inductive and empirical discipline, its own development has once again confirmed the laws of distribution and consensus. Let's roughly categorize economic history via the familiar distribution / consensus theory, where bold type
represents the distribution bias stage, and non-bold type represents the
consensus bias type:

Mercantilism —— Physiocrats —— Classical School  ——  Socialist  & German Historical School —— Marginalists & Neoclassical School  —— Institutional School —­­— Keynes School —— Chicago School (New Classicism)

The above classification is incomplete. For example, it omits such as socialist economics represented by Marx, a utopian socialist thought originating in the late of the Classical School(in around 1880 ); the milestones of economics entering the age of mathematics since 1935 mentioned by Paul Samuelson and the significant contribution of Pigou
and others to welfare economics are not reflected here. 

We basically describe the development course of economics chronologically. When feudal society was slowly replaced by the emerging commercial capitalism, modern economics came into being in around 1500, when mercantilism was the mainstream doctrine advocating centralized management by the government, export promotion, and foreign colonization to achieve economic prosperity and the increase of national power. 

Physiocracy, which flourished in France thereafter, opposed mercantilism, and focused on free trade and respect for the natural order, which was a mainstream thought continued into the 18th century. In 1776 , Adam Smith published the masterpiece TheWealth of Nations, which narrates the free market and " invisible hand " theory, declaring the birth of the Classical School, and opened micro-economic study era ( taking the economic entity as the research object). The Classical School advocates self-interested economic behaviors and opposes government's economic intervention. 

It can be said that the Marginalism, the new classicalism and the Chicago School are revision and improvement of this theory in the light of the state of economic development in different periods.

In addition to microeconomics, another main line of economics development took place after mercantilism. Based on criticism of physiocracy, especially for the Classical School, socialism and German historical schools emerged.

Their core values ​​are to oppose the free market and emphasize the positive role of the government. Based on the economics, the institutional school emerged after the historical school further absorbed the experience of law, politics, sociology, folk customs, and ideology, and put economics in a broad perspective.

Under this background, a master appeared in 1936, when Keynes published his work The General Theory of Employment, Interest and Money, also marked the emergence of the Keynesian school named after him. 

This book is the founding work of another branch of economics, macroeconomics (study on the operation and laws of the entire economy), which has had a profound impact on the economic and social development of the Western world for many years.

The roots of the Keynesian School thought can be traced back to a number of works that were not in the field of microeconomic studies of classical economics before 1929. 

Its generation was based on the experiments of economic regulation led by governments during the World WarI. 

Moreover, a large amount of data accumulated in the statistical measurement of post-war industrial production and trade has also made the inductive and aggregate comparisons research method from a macro perspective more feasible than in the past. 

In 1930s, the most serious economic crisis, the Great Depression, broke out in the Western world since the advent of capitalism, which made the public increasingly urge the Government to actively deal with the problem of unemployment, and eventually contributed to the birth of the Keynesian system.

This is similar to Smith’s situation. The formation of The Wealth of Nations and its related theoretical systems is also inseparable from the influence of free economic theories such as the Enlightenment and physiocracy. The consensus formed by these ideas was used to resolve the contradiction of economic development of the society at that time, which provided a series of systems of great value to future generations. 

The story of economics once again shows the law of human evolution contained in the Game - Consensus - System model we mentioned earlier. As a matter of fact, this social development model is also compliant with biological genetic theory. In Mr. Mukherjee The Gene, where there is a famous formula:

Genotype + environment + trigger + probability = phenotype

As is known to us, DNA is a genetic material of an organism, and genes are the fragments of DNA that store genetic information. Genes determine the basic structure and function of organisms.All biological phenomena such as birth, growth, aging, disease, and death are related to genes and are passed on to the next generation via genes. 

Phenotype is the natural features reflected by the genes, such as the color of eyes and the shape of wings. Natural environment or social background can affect the phenotype of an organism without changing genes. For example, the shape of a football player’s legs has changed in long-term competition.

In addition,some genes may be activated by external triggers or random factors, for example, BRCA1 gene mutations will increase the risk of breast cancer, but not all women with this mutation gene will have breast cancer. 

Even if these mutated genes are inherited to the next generation, the actual appearance depends on a certain " trigger " or " probability ".  For example, some carriers of the BRCA1 gene may have malignant breast cancer due to dietary habits at the age of 30. 

Some women with the same gene may have a low malignancy degree of breast cancer, while others with these genes may not have breast cancer for life. This is where " environment ", " trigger " " probability " factors like the game in social development, which is full of various cooperation, conflict and uncertainty. 

Phenotype is the consensus that we have generated in the
game. The birth of theories on production, consumption, and prices in economics is similar to this process. 

And the final part of the excellent thoughts left by the struggle of natural selection and evolution will become the shining lighthouse of the system, that is, the genes in heredity, which will be passed on from generation to generation by us.

After Keynes, the most representative economics school is the Chicago School. The influence of this school continued until around the 1980s, the most famous part of which came from Friedman's theory of the role of money in the economy. 

The main contribution of this theory is the introduction of monetary policy measures into the regulation. These methods, along with previous views on the role of financial measures, have been applied to solve practical economic problems, effectively prohibiting the currency inflation that Keynes's theory cannot solve. Swelling. 

But after a decade till the 20th century, neither the pro-market (biased distribution) represented by Adam Smith and Friedman, nor pro-government (biased consensus) represented by Keynes can’t independently solve the variety of new issues in the economy. 

Thus, eclecticism that integrated Chicago and Keynesian theories began to dominate economic development.

During this period, countries generally began to adopt a micro + macro unified approach to economic governance, and tried to combine the ideal individual supply and demand model of the market with the overall regulation of the government, as well as a series of theories such as information, incentives, morality and adverse selection. 

However, no matter how hard the economics scholars works, the essential contradiction between distribution and consensus has not been completely resolved. The financial crisis that broke out in 2008 is, to some extent, an irreconcilable external reflection of this contradiction.

In contemporary complex economic society, people hand over the decision-making power of the most important funds and assets to large banking institutions, but many of these giants' action are obviously contrary to the interests of users. 

Due to the lack of an effective coordination mechanism of distribution and consensus, human greed has finally led to a global financial tragedy. Shortly after the financial crisis, Satoshi Nakamoto invented the first Bitcoin. 

From being initially disapproved to becoming a value asset known to the public a few years later, Bitcoin has been operating well without any systemic failure, which has surprised many economics and finance scholars. 

From an economic point of view, the biggest significance of the Bitcoin blockchain is that it is the first time in human history to achieve the unity of the distribution and consensus within the economy. 

Under this system, each participant can put forward his own economic demands, and at the same time, there is a fair mechanism to ensure the reasonable order of the entire Bitcoin production and distribution.

Facing with the issues left by the financial crisis, government officials, bankers and economists began to think, if this Bitcoin electronic system can be applied to the real economic society in the future, many problems that economics has not been able to solve for hundreds of years may be solved. 

For example, eliminating the alternative emerge law of inflation and unemployment, or may even allow human to escape from the nightmare of the economic crisis forever. The purpose of economics or all social science studies is to help the whole society and individuals reach a state of material enrichment and happiness. 

Regarding this economics standard of happiness, Pareto, a master in welfare economics, proposed a " Pareto optimal " theory. This theory refers to a social state (resource allocation, social system, etc.). Compared with this state, there is no alternative state, so that at least one person’s state can be better while nobody’s state becomes worse. 

From this perspective, the blockchain technology is a consensus produced on the basis of the game, of which its core value is to have the potential for both to meet the reasonable demands of everyone, while achieve optimal mechanism of the overall interests of the community, and furthermore help human society to be closer to the state of " Pareto optimal ".

In textbooks, the definition of the nature of economics is to use scarce resources to produce valuable commodities and distribute them among different individuals. 

We have produced countless production tools, dug day and night, planted crops, built factories, machines and workshops. Humans use labors to obtain fancy food on the table, warm clothing and warm and comfortable houses. 

But till now, there are still hundreds of millions of people shrouded in the curse of poverty and disease. 

On the one hand, human beings are constantly inventing advanced technology, which allows us to continue to expand the
boundaries of commodity production; on the other hand, we are also trying to eliminate the poor communication, misunderstandings and mistrust between each other through more thinking, so as to reduce the large-scale man-made costs. 

In fact, we are wasting food without restraint and struggling to provide a few slices of bread for starving African children. We use a lot of resources to produce expensive clothes, but sometimes we only put them on the bottom of the wardrobes after only wearing them once or twice. In order to make a profit, we waste a lot of electricity, unscrupulously discharging chemical pollutants into the river, and even sell bad-quality generic drugs on the market. 

For our individual interests, we continue to devour other people's living space and destroy the ecological environment on which we live. We have built huge organizational machines, but they are not fully devoted to social well-being as humans originally thought. 

Even though we are struggling to reach consensus, it has indeed brought about a higher material civilization, but we will find that the light of warmth will be always forgotten by most people.

We are in a world lacking in trust, which often forces us to think only of ourselves. We are worried about losing our savings, or we don’t get the returns we deserve even if we try our best. 

Traditional economic theory is on the basis of the assumption of rational people, and individual rationality drives us to pursue the happiness of our lives first. Adam Smith, Father of Economics well-recognized by the public, was clearly aware of this, so he wrote The Theory of Moral Sentiments, calling people to establish high moral, and teaching nomology in many multiple places to explore the ways to boost economic prosperity and restrain bad behaviors. 

But apparently, so far, there is no perfect system to manage human greed.

The emergence of blockchain technology has given us a completely new perspective, which will not help us to give too much moral preaching to economic participants, and look forward to everyone's self-sacrifice. The blockchain even encourages people to consider only their individual interests, but it will record these personal interests driven labor results, confirm it and give well-matched compensation for them to arouse full enthusiasm for production and consumption. 

Behind this enthusiasm is the strict reward and punishment mechanism based on the blockchain, and at the same time, technical tracking ensures that the cost of committing evils is extremely high (thus goodness is a more rational choice). 

After the " private interest " is satisfied in a controlled way, the entire group can benefit from it, while gaining a healthier growth trend. In the blockchain world, we ensure the transparency and openness of information through the wide application of technology, and turn " distrust " into " trust ". 

In the past human society, there has never been an economy entity where everyone " trusts " each other , so it is necessary to analyze and verify the world in a wholly new way.

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