Political Economy Simplified Version 2.0 just released

Download for free from this website until January 1, 2012, after which the ebook can be purchased exclusively at Amazon.com, or borrowed for free through their Kindle Select Program for Amazon Prime members.

Read the Executive Summary here:

Executive Summary

• Time, uncertainty, and risk: Our physical and social worlds pass through time, introducing change, uncertainty, and risk. These are the concepts that inform our study of economics, finance, and politics.
• Consumption/acquisitiveness is the traditional foundation of classical economic theory. However, we need to incorporate uncertainty into our contextual framework and loss aversion into our behavioral assumptions in order to comprehend macro phenomena.
• Loss aversion is at the root of political demands for social insurance entitlements and government intervention into the economy.
• Sustainable growth is the primary objective of economic policy. Long-term labor productivity and capital accumulation are the sources of real wealth.
• Sustainability and stability through time is a function of individual and systemic adaptability to change.
• The input/output flows of the economy are distributional problems that need to balance consumption, production, and investment through time.
• Monetary phenomena cannot substitute for real phenomena. The role of the term structure of interest rates is crucial to managing the balance required for long-term market stability and economic sustainability.
• Financial markets are inherently unstable because asset price movements promote herd behavior. This herd behavior becomes more threatening to the system with excessive debt and credit financing relative to equity.
• The main policy challenges we face are

1. Transparent Federal Reserve policy that targets the stable value of the currency and the financial integrity of the banking system.
2. Entitlement reform to manage risk through a combination of self-insurance, private insurance markets, and social insurance, in that order of priority.
3. Tax reform that balances budgetary requirements across different sources of tax revenue by function: consumption, production, and wealth. Tax policy should align with economic growth through private capital accumulation and productivity.
4. Agency failures in all institutional settings must be managed with transparency, open competition, and accountability, combined with regulatory statutes and oversight.
5. Skewed distributions of resources, especially income and financial wealth that can best be mitigated by understanding the mechanisms of the market and the interaction with policy.
6. A more responsive democratic political process by controlling the agency problems in government through electoral competition, transparency, and accountability.