Unintended Consequences by Edward Conard - Essay Example

"Unintended Consequences" by Edward Conard Question Edward Conard was the former partner of Bain Capital with Mit Romney, the Republican presidential nominee in 2012. In his book, Unintended Consequences, he states on page 71.” Innovation is the only way to keep our economy at full utilization. And it’s the only way to return to the heated level of employment and growth our economy achieved prior to the Financial Crisis.” He explains in many ways why innovation leads to “buyers surplus,” but the crux of his book is a discussion of the origin of innovation. Some think it is random and based on America's entrepreneurial culture, but he argues it is based on the availability of risk financial capital. Is it one or the other or both? In my opinion, innovation in America is based on both America’s entrepreneurial culture and the availability of financial or risk of financial capital. Innovation is described as using knowledge to create changes in both the technical and organizational departments to create economic advantages for the said countries organizations incorporating it. It involves conducting new research into different field to create new products or enhance the quality of the already existing ones. America as country used the knowledge provided by innovation to obtain their desired productivity growth through such channels like developing new technologies, and absorbing and enhancing on both external and internal knowledge. America had the will, desire; spirit and vision which contributes to innovation making them explore different avenues of opportunities within the country. These were directed towards the economic, cultural and social sectors, and in the process they were able to develop resources and abilities that stimulated their growth into a first world country. Moreover, they used their ideas in transforming ideas, services and financial resources they use in sponsoring and conducting different projects across the country. The availability of financial or risk of financial capital significantly contributed towards the development of America’s entrepreneurial culture. Innovation as a process entails trials and mistakes that require financial risk and resources. Capital plays a significant role in the production of goods and services and without it; the process of production is incomplete. America as country was blessed with capital availability and accessibility thus its innovation process was simplified as they used the capital in purchasing for raw materials and resources that were needed to finish the different innovation processes they were conducting in different sectors within the country. The country was has also been successful because of the financial risk they have taken in their innovation sector. The sources of this finds were diverse like revenues and bank financing. This enabled America to acquire new ideas and enhance them into suitable good and services for their own use and benefit. Question 2 What is Conard's argument that the U.S. trade deficit is a good thing because it provides the U.S. with plenty of risk-adverse short-term financial capital? On the other hand, he thinks this is a problem because that money is difficult to use to support innovation and therefore financial institutions should be able to buy government insurance(rather than get it for free). Explain what he means by all of this. Trade deficit refers to a situation where a country imports more good than those which she exports. It significantly affects the country’s balance payment. According to Conard’s argument, the U.S trade deficit is a good thing because a rising trade deficit is associated to growth in the U.S economy. The deficit leads to a balance of trade in any economic situation. Deficit in trade allows for country to export more products to other neighboring countries and in the process creates new jobs for the unemployed and also creates a demand for a good or a product. Moreover, price competition is promoted by trade deficit and this and this limits the chances of inflation of good and services from hitting country. When there are many countries competing for prices, the commodity prices in the market is affected, therefore, a country’s potential is affected as they produce more than their demand and in the process negatively affects trade in the market. Question 3 In chapter 8 he argues that the government is not a good source of expenditure on innovation and that the government expenditure multipliers are extremely low (often below 1). He also thinks that people have rational expectations and therefore undertake "Ricardian Equivalence" (interestingly, he never uses that term) negating any government expenditure on the economy. Do you think he is correct in his interpretation of federal expenditure multipliers and human behavior? In my opinion, Conard is correct in his statement because i believe that for the economy to be wealthy, the government should allow citizens to accrue wealth and become rich. The government expenditure should be responsible for the numerous developments like infrastructural development and when the spending low, these projects can not be realized. Moreover, individuals develop racial expectations when the government decides to spend low on its expenditures as they are looking for more secure options to enhance their daily economic activities and increase their profits. A good example is that a large multiplier is deemed to more plausible than a small multiplier in situations where the monetary policy is considered to be zero due to the nominal interest rates. Therefore, the utility is maximized because the government expands its purchases in the rush to fill the ouput gap that has been created in the market due to inability by the financial institutions in cutting the interest rates. Question 4 Finally, he argues that redistributing money from the rich to the poor is a counter-productive because the rich provide risk financial capital and therefore cause innovation which helps everyone(trickle-down economics), while the poor only consume. It is really an all or nothing proposition(redistribution of no redistribution) or is there a middle ground and balance between the two positions? (See Conard's very last paragraph on page 285). In my opinion concerning Edward Conard statement of redistribution of no redistribution, I believe that there is a middle ground between the rich providing financial capital and the poor. I do believe that America as a country can not move up the economic ladder significantly because of the social classes created by the gap in the economy. This is because the country’s society and economic systems are built to serve the vast majority of the citizens, any in this case the majority of the citizens are the poor. The rich forms small fractions of citizens who are capable of exploiting the financial system therefore they are the ones responsible for determining the direction of the economy. Therefore, it is productive for them to redistribute money while the poor consume (Conard 285). Work Cited Conard, Edward. Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong. , 2013. Print. Read More