The Economic Triangle: Part II

Last week, we referenced the basic philosophies of David Hume and Adam Smith and how their writings evolved into the economic theory of supply and demand. From there, we examined the weakness of supply and demand at the macro level and discussed an alternative model, the Economic Triangle, as a different means of explaining how various economic participants operate and the way in which political factors affect the triangle. This week, we will show how the Economic Triangle fits into the major economic systems, offer two contemporary examples and conclude with market ramifications.

The Theories

The history of economic thought and political economics has generated a plethora of theories and paradigms for balancing these interests. Here are some of the important ones:

Traditional capitalism: In practice, it tends to favor capital first and consumers second.

Capital is privately owned. Government interaction in the economy is limited to internal and external security and enforcing contracts. The central idea is that markets bring the optimal allocation of goods and services with minimal government intervention. The markets are thought to be self-correcting and do not rely on government intervention to address imbalances. This model would support globalization and deregulation as the expression of private decisions. The primary advantage of this model is that capital allocation tends to be more efficient under conditions of competition. In other words, the collective wisdom of the market (Smith’s “invisible hand”) leads to the best outcome for capital creation and maintenance. For this advantage to work, misallocated capital investment must be punished by the marketplace in order to discipline investors. Profitability is the most important test for the suitability and success of investment. Because capital is controlled privately, technological change can occur rapidly. The primary weakness of the model is that over time capital tends to become overly powerful and dominates the other two legs of the triangle. Not only does the domination affect the political system but it can also foster malinvestment because large firms can absorb investment mistakes more readily. Although consumers tend to benefit in this model (there is usually a plethora of goods and services at favorable prices), those mostly compensated by wages tend to be disadvantaged.