The Free-Competition Sector
This simulation shows the economy as it was, back in the days of relatively free competition.
The Free-Competition Sector grows exponentially - as each generation of tool makers sets the stage for the next. As technology expands, production costs fall. In addition, products become much more useful. For example, pony express - to telegraph - to switchboard telephone - to dial phone - to cell phone - to video chat.
Meanwhile, the money supply (notably, gold and silver) grew only as fast as miners could produce it so prices (the ratio of money to other things) would normally fall. From 1850 to 2000 the gold supply went up by a factor of about 8 times. This represents a growth rate of about 1.5% per year. The system rewarded savers who saw their savings appreciate relative to the things they could buy. Interest rates were typically less than zero, as savers had to pay a banker to hold their gold and to keep it safe. Wages, relative to the cost of living kept rising. Wages, in terms of gold, would stay about the same, or even decrease.
The government also grew, although slowly, under restraint of voter-taxpayer resistance so the government stayed in balance with the Free-Competition Sector. The Freedom-Index remained high. Welfare and other social programs were administered by churches and social organizations that provided counseling, emotional and spiritual support, and community participation - in addition to direct monetary assistance. There was no central bank and no national debt. Private banks would spring up to facilitate capital expansion within towns and cities.
People were all about working and building. Deflation rewarded savers and people postponed consumption and invested in tools. This resulted in the exponential growth of the Free-Competition Sector and an attendant exponential increase in the standard of living. The society accepted and embraced the notion of free competition. Popular books included the Horatio Alger series, that chronicled the adventures of a young man as he adventured into the rough-and-tumble world of fierce competitors.
The assimilation model measures the Free-Competition Sector in terms of the combined power of all its tools. To get an idea of the power of this system, you might notice the difference in standard of living between (1) grinding flour by hand and (2) milling it in a factory - or between (1) having to grow meat locally and store it as jerky and (2) refrigerating it and shipping it by rail - or between (1) plowing with a yoke and (2) plowing with a tractor.
The system generated waves of technology in agriculture, manufacturing, transportation, medicine and, indeed, in all other areas. You might make a case that the standard of living, in terms of how people lived would go up around ten fold every ten years. That corresponds to an increase in the Free-Competition Sector of about 25% per year. Note, standard econometric methods of measuring the economy rely on fiat dollars as a yardstick and also do not account for the expanding power of the next generation of tools.
Today we live relatively free of diseases, in a home with indoor plumbing and heat and air conditioning, with machines to refrigerate our food and clean your clothes. We have cars and mobile video phones. Compare this with the standard of living in 1850 and try to come up with an estimate of how much better off you are now, that your ancestors were then.
With each generation, the standard of living increases so that the poorest people in the society can live as well as the richest of the previous generation. At the end of the run, the model shows us with a standard of living some 300,000 times better than in 1850.
But wait! Hold on just a minute!
Something's really off here. We still have a lot of people living in poverty and many people sense they are worse off now than a decade ago. So what's up with that?
What's up with that is that since around 1913, we don't really have a Free-Competition Sector anymore. To see what we actually have, see below.
The Govopoly System
So, let's start out as before and then introduce, in 1913, a central bank.
The function of a central bank, per how the bankers normally sell it to the public, has to do with stabilizing the economy, promoting full employment and preventing panics. The actual functions of the central bank are to enable the government to bypass the taxpayer-voters and also to enrich the central bankers. A big win for the government and a big win for the central bankers. The price, of course, would be paid by the public, in terms of not participating fully in the exponentially-growing fruits of their labors.
Before 1913, the government stays in balance with the Free-Competition Sector and both the government and the Free-Competition Sector continue to grow exponentially. In 1913, we authorize a central banking system eager to lend money to a government eager to borrow for all kinds of things, including war. At this point, the government turns into a Govopoly System.
The Govopoly System begins to grow at a higher percentage rate than the Free-Competition Sector since it no longer suffers from financial restraints. At first, the effect is relatively minor, as the Govopoly System is still relatively small. As it continues to grow. the Govopoly System starts to take a toll. In particular, it diverts resources from the Free-Competetition Sector through regulations and taxes. This reduces the Freedom Index, notably the freedom to compete. The Govopoly System also induces malinvestment by awarding protections and subsidies to businesses that play along - while punishing ones that don't.
As the Freedom Index falls, so does the growth rate of the Free-Competition Sector and it goes into decline. The best it gets is around 9000 times better than in 1850. That seems a bit closer to reality than 300,000 times better.
Govopoly System and Debt both continue to grow and drive the the Free-Competition sector out of business. Prices rise due to declines in production and also the increase in the supply of fiat money. Domestic goods lose their price-competitive advantage in foreign markets. Imports increase.
Since the system has no internal constraints, it grows to the point where external constraints must appear. An economy cannot function without a Free-Competition Sector, with everyone dependent on the government, and by paying workers with printing-press money who then turn and buy everything from foreign countries.
We can see some of these constraints starting to set in. We now run a large balance-of-payments deficit with the rest of the world. Other countries have a higher competitive spirit. They have an up-and-coming generation that enjoys winning fierce competitive battles and increasing wining market share. Here, we have a generation of students going in debt to study subjects with no marketable value and who view capitalism with disdain and who rely on campus codes to protect them from having to suffer hurt feelings. No contest.
We also have a dollar based on debt rather than on gold or other physical assets. It's worth only as much as people think it's worth. Also, foreign governments hold much of the debt and ultimately determine its value.
The economy cannot continue along in this fantasy for ever. Some external constraint have to set in. The nature and timing of these constraints lie outside the scope of the Assimilation Model. We can, however, make some reasonable guesses about they might come about.
Resolution by Avoidance
The most likely scenario is to keep avoiding the issue. There is no easy way out of the situation and politicians do not want to talk about austerity, smaller government of eliminating central banking. Avoidance is the most likely method, at least in the short term. Ultimatly, it leads on to one or more of the other options below.
Resolution by Protest
Angry citizens sense something just ain't right. The elderly find they cannot live off their savings. Students find they can't pay off their $150,000 debts by serving hamburgers. Workers find themselves losing their jobs to foreign labor and to robots. Businessmen find they cannot compete against regulations that favor large Govopoly businesses. While most people sense something isn't working correctly, few know exactly what it is.
Some people come to express their anger as riots and demonstrations to let off steam. Some support initiatives that do not make economic sense such as building physical restraints to block immigrants and implementing tariffs on free trade. These programs only serve to distract the public from the fact that we are longer competitive - and to postpone a thoughtful and proactive response - like getting back to Free Competition.
Resolution by Austerity
Theoretically, we could return to our earlier Free-Competition culture by implementing austerity measures. This would require eliminating central banking and making the government live within the means of direct taxation. This simply cannot happen. No politician could survive on a platform of cutting government by 90% and eliminating virtually all forms of entitlement.
Resolution by Gradual Inflation
As prices rise, people find they cannot survive on welfare or even on a government salary. Meanwhile, businessmen take advantage of the higher prices and prosper. Eventually, people migrate back from the Govopoly System to the Free-Competition Sector. So far, this hasn't happened and is not likely to happen. The pressures within the system move it toward more, not less, Govopoly
Resolution by Hyperinflation
As prices rise, the Govopoly System prints up and distributes money so people can afford to buy the basic necessities. This results in an exponential increase in prices, reduction in the production of goods and services and a collapse of the system and chaos. For recent examples, see Zimbabwe and Venezuela.
Resolution by Repudiation
Politicians notice they can win elections by promising to forgive debts. For example, students would no longer have to repay their debts. When a country starts to offer debt jubilees, creditors, including foreign creditors who help finance the national debt, stop participating and start selling off the debt they own, thereby putting the debt markets into a tailspin. Money dries up and interest rates skyrocket. The economy collapses and goes into chaos.
Resolution by Confiscation
The captains of the Govopoly System confiscate all private property and try to manage the economy centrally.
Resolution by Martial Law
The Govopoly System imposes martial law. This becomes necessary in order to implement confiscation. One of the first steps is to confiscate personal defenses such as firearms.
Resolution by War
Wars are fairly easy to start - and they justify confiscation and martial law. It also allows the central banks to loan even more money to both sides. After a war, people are usually too tired to fight with their own government.
There is no way to maintain the current standard of living without returning to Free Competition. There is no painless way for us to recapture our fierce competitive spirit. We now have generations of people dependant on the Govopoly System who resent the notion of having to work for a living. These people are not likely to change their views without experiencing some hard times.
Things actually are working out well for a few families who control the central bank and also for a few of the captains within the Govopoly System. As for the rest of us, we'll soon get to deal with inflation and riots, family-dividing politics and, ultimately, global collapse.
We can only imagine the kind of paradise that might attend the multi-million-fold increase in the standard of living the Free-Competition model indicates. During the early American debates about central banking, the world's central bankers agreed that the American experiment had to be stopped before it led to rapidly ascending prosperity and put all the other central bankers out of business.
Operating the Assimilation Model
This model does not intend to predict the dates of any events. It intends to organize a theory of how the economy operates in the long term and to allow you to experiment and try various assumptions see if the model appears reasonable. For example, you can toggle the Fed on and off to see the effect of central banking. You and raise of lower taxes - and notice how the tax rate has very little effect on the economy once it switches over to central-bank financing. If the model seems reasonable and reflects your experience of our economy, you might want to embrace it. If you find parts of the model unrealistic, please send comments and suggestions to me, c/o FAQ.
The main conclusions from the Assimilation Model:
(1) Things are very likely to get worse.
(2) Trying to find someone to blame misses the point.
(3) Trying to fight symptoms does not work.
(4) Trying to change the system is futile.
The good news is that through understanding the system you can protect yourself and even profit profit from events on the horizon.