Been a while since I let out a good rant

Economics needs a Newton, Carnot, Gibbs or Einstein. Physics and Thermodynamics have laws that are immutable and come in sets of three:

Physics:
1- An object in motion stays in motion until acted upon.
2- Force is mass times acceleration.
3- Every action has an equal and opposite reaction.

Thermodynamics
1- Energy cannot be created or destroyed
2- Disorder increases over time (entropy) – easy law to remember in a house with six kids.
3- Entropy is temperature dependent which means there’s an absolute zero (-273 C) – easy to remember this week in Kansas City; feels like we might have reached 0 Kelvin.

Economics has no such luck. Oh, there are rules and they’re pretty darn immutable, but there’s no Newton, as hard as folks like Keynes, Friedman and Hayek tried, to declare THE three and number them just right. So since they aren’t written in stone we can still try to thwart them – make gravity fall up. Curse you Robert Reich and all the rest of you whose names don’t come to mind nearly so easily as Robert Reich.

My list of three would probably be:
1- Goods are scarce. Not everyone can have everything.
2- Supply and demand. Market price is where the supply and demand come into equilibrium unless smart energy companies collude.
3- People respond to incentives.

Let me get on my soapbox about the final one with a hypothetical scenario that may feel like it’s straight out of yesterday’s paper.

Suppose you’re a political leader of a large capitalistic country going through a recession and you’ve handed out a “relief package” (or two) named after a common camping item to several companies. These are companies so large, so integrated into your economy, so critical for the rest of the economy, that you decide they can’t fail. You borrow your money, your kids’ money and your grandkids’ money to bail them out (all thanks to our Communist brethren to the East). Now you need the very best and the very brightest to take up the challenge of either joining or remaining at these companies on the brink of financial ruin to lead them back into financial health. Only the very best will do. How might you create the right incentives to get just the right people? Would you cap their pay and tell them no more expensive dinners and hotels? Would you tell them to sell the company jet (while standing on the stairs leading up into your own)? Would that get them jazzed up? Kinda seems to me that they might want to go to a healthy company, one not under distress or at least “less critical” to the economy and leave the 80% lower salaries, the Congresssional reviews and the bad press to a few of the dimmer lights on the tree.

Capping egregious pay of CEOs sounds like a cool, populist (ok, it’s 2009 and cool and populist are redundant – my bad) thing to do, but if you remember Law Number Three, you might think otherwise. Sure you don’t want “those same idiots that got us into the mess in the first place [other than our new Secretary of the Treasury – that’s different]”, but let’s assume we know that and we get rid of them and want to keep/hire the really, really best once the dumb ones are gone. A good old salary cap will help, right?

As much as $500K sounds to the average joe (like me), it’s a whole lot less than $5M and for a whole lot more hassle. No one turns down a pay raise or a bonus. No matter what you make, you don’t consider yourself rich. Rich is 10x what you currently make. I regret that I only have three laws to give for my country, or that could very well be #4.

I sure hope this stimulus works and 500,000,000 Americans don’t lose their jobs like Ms. Pelosi said they would. (HT-Annette).



(I wish I could have found a way to incorporate Pete’s firmament metaphor into this…)