Political Compass Revised The Comparison between the Old and the New, Left and Right wing --- Part 3

... previous

... previous

6. New Right-wing
The New Right-wing represents Neoliberalism, Utilitarianism, Objectivism, and the developmental dictatorship. This is the political ideology which many human individuals love to hate, and the previously introduced New Left-wingers regard of as their arch-enemy. Unlike the other political ideology groups on the other sides of spectrum, the New Right-wing does not offer any sweet-sounding dream song.

The other political ideology groups on the other sides of spectrum may provide them with some instant satisfaction for promoting their superstition and their rights to act and acquire something. However, these ideologies are less likely to induce the prosperous consequence they would want to induce. These individuals only believe that their believing policy induces the prosperous outcome meanwhile they are not practically guaranteed at all.


The New Right-wing supports the justice determined by the equitable reward and punishment rather than the principle. The incentive to reward for something profitable and comfortable and to punish for something deteriorating the living standard and violating fairness is effective in order to keep the stable and productive distribution and the stable and progressive order. In addition, the principle base of law and contracts should be simple but flexible and practical rather than an ideal abstract one.

As same as the Old Left-wingers, they think highly of the responsibility of acquiring right and liberty and the inevitable conditions imposed by the objective realities so that they insist on the equitable reward and punishment instead of protecting the unconditional right based on the abstract principle. Their difference from the Old Left-wingers is whether they regard of liberty as an impregnable natural right or a useful tool to derive a desirable consequence.

The New Right-wingers regard of the social class as an inevitable factor under. But, unlike the Old Right-wing, the class stratification shall not be based on the zealous worship of superstition and the rigid social norm and value. This stratification process needs to be formed under what the objective realities such as the natural resource limitation, mathematical and scientific factors, and the market mechanism, of the world instruct as.

There is no need of law & order and any structured institutes such as family, company, government, and nation unless there is no resource limitation. Furthermore, there is no norm and value naturally impregnable and rigid in the world: All norms and values are artificially created so that should be flexibly transformed, altered, newly created, and deleted. This change may occur either he nature, the antinomy of artificial concepts, or technology, the mixed factor of nature and artificial, evolves.

Instead if either a human sovereign, such as monarchy and dictator, or an unproductive illogical superstition, individuals ought to be directed by these objectives and treated differently owing to the exogenous objective realities which are based on either the interaction effects of various individuals and the nature or the technological evolution not fully controllable by each one human individual’s effort. Then, individuals can optimise their resource distribution, the incentive to encourage them contributing to increase the greatest sum of the aggregate utility, and cohabit together under an agreeable contract with each other.

The level of both the law enforcement authority and the government intervention into economy depends upon different material and spiritual development of each civilisation and individuals themselves living there. When majority of individuals are rational enough to understand the previously mentioned objective realities and the mechanism to be adapted to, any authority over distribution system and contract creation and management is less likely to be demanded. By contrast, when either majority of individuals are ignorant and immature enough to be unable to understand he previously mentioned objective realities and the mechanism to be adapted to, then some rational paternalistic guardian selected by means of the feasibility to adapting to the objective realities to guide the majority.

The IS-LM Model is wrong!

* Preface *

Many students of economics may have studied about the IS-LM model, and then tackled with various homework assignments requiring to solve the excessively complex formulas and understand the theoretical reasoning behind them. These macroeconomic teachers always expect students to consume their precious time and energy to solve a ton of equations and memorise the theory to explain what these algebras denote. The mathematical formulas applied to this model are mostly linear and straightforwardly simple but all equations are interconnected to all the others. As long as they are familiar with economics in general, it should not be a big problem to understand the theoretical bases. But, these teachers require these students to interlink all the necessary theories which textbooks show to all equations. In addition, when the interpretation of these students differ from what the textbooks and the teachers expect, their mark tends to be lowered. Therefore, studying the IS-LM model is very exhausting.

Nevertheless, despite their efforts and well-understanding, there is a big scepticism about the IS-LM model. There are still many debates about whether or not this model successfully explain the real world economy. Of course, there is always a residual gap between what the prediction model estimates and what the real world phenomenon is in real. This is why the IS-LM model is a problem because of its complex tangle of a bunch of the equations. Especially in social science, when many mathematical equations are used and interlinked together, the total sum of the residuals tends to be significantly magnified, and the bias and the inconsistency of the model also tend to take place much often. Furthermore, these estimate mathematical models are not statistically tested as their formulas are merely based on the literature of economic theories. Therefore, it is really a natural fact that the IS-LM model often fails to fit into what really happens in real.

Even in the pure literature based economic theories and the logical economic theories also counter to the IS-LM model. This report introduces some significant counter-arguments against the IS-LM model as follows.


1. The Ricardian Equivalence


This theory implies that providing economic agents with extra income by the stimulus package does not successfully induce them to spend enough to stimulate their economy. When they prefer consuming/invest less and saving more at the present time to the extra consumption&investment, the extra income available by the tax cut and/or the government expenditure rather causes the negative impact on economy than the positive impact. The cost incurred by the tax cut and/or the government expenditure at the present time period has to be paid back in the future. As the economic stimulus becomes unsuccessful due to their preference of spending less than expected, the tax revenue in the future time period is lowered meanwhile the cost remains.

Those who disagree with the Ricardian Equilibrium argue that there are many economic agents with the low income insufficient to satisfy their needs and wants during the recessionary period so that they happily spend their extra income provided by the stimulus package to stimulate economy.

However, their extra income spent for consumption/investment is eventually transferred to owners of the means of production who produce the consumptions and own the assets invested. These owners will rather want to shift their income earnt from their capital investment to their assets in this downward market to either saving in their bank account or investing more active foreign markets.

When an economy become at the point that even these owners of the means of production become deprived enough to cling to the extra income provided by the stimulus package, the national government is less likely to be able to issue their bonds to incur the debt as the bond credibility is substantially lowered.


2. Liquidity Trap


The stimulus package by the monetary policy channel still does not work due to the liquidity trap. As mentioned in the Ricardian Equivalence, economic agents tend to be reluctant to spend their extra income available during the recession. Even the monetary policy is less likely to incur the cost like the previously mentioned fiscal policy channel, the result is identical to the previously mentioned scenario.

This phenomenon is explained as the liquidity trap. As shown in the graph above, although the extra money supply becomes available to transform to the extra income available for economic agents to spend, the effect is substantially low or even nothing under a very low liquidity level i.e. the investment motive is very low. The little effect on the interest rate reveals little impact of the money supply increase on economy. This means that the factors determining the interest rate such as the price indices, the business activity rate, and the value of this money currency in the foreign currency exchange market hardly changed by this monetary policy.

On the other hand, this interest rate shown in this LM graph merely implies the central bank interest rate, and this only partially affect on the banks' interest rate setting for their borrowers. The rest of this report explains the effect on these interest rates. The IS-LM model neglects explaining the following factors because the IS-LM model assumes all these factors are positively correlated to what it indicates in the model. Nonetheless, the more real economy is obviously different from this false assumption.


3. Under the Banking Monopoly in case of Risk Neutral


The supporters of the IS-LM model assume that their margin rate tends to be always positively correlated to the central bank interest rate so that the final interest rate for both investment and saving is always controlled by the central bank interest rate affected by the fiscal and monetary policy.

The IS-LM model is based on the assumption that all or majority of private banks and the other financial institutes are under the perfectly competitive market. By contrast, the real world economic situation is even not close to this assumption and actually far away from it. They are in the less competitive market due to the nature of the financial industry and market.

The interest rate is the price of money rent and borrowed. So, the private banks and the other financial institutes need to add the extra rate on the central bank interest rate after borrowing from the central bank to rend their money to their customers in order to compensate for the renders' service cost and reward.

Also, in a market economy, the characteristics and the quality of the financial service is heterogeneous to each other, and the demand is severely affected by their geographical situations e.g. access to customers and clients (both quantitative and qualitative), cultural attitudes toward finance, and the infrastructure for obtaining information and technology available there.

On the top of the service quality issue, the service users are difficult to change their service providers often as much as the mainstream economists assume due to the contract binding them together and the transaction cost to close and open their bank accounts. So, these service users are more likely to be bound to their already contracted financial services.

All in all, the market nature is far more monopolistic owing to these aspects. Then, the interest rates are set at the quantity of money invested where the marginal revenue becomes equal to the cost which is the interest payment for savers for this case. So, the quantity invested is lower than the quantity at the investment and saving intersection, and the interest rate charge for borrowing is always significantly way higher than the interest rate payment for savers.

The interest rate payment for savers may be affected by rise of the central bank interest rate increase but not often by fall of the central bank interest rate unless the market is very competitive. These financial service providers take advantage of this situation so that the interest rate payment for savers often tend to be notably lower than the interest rate charge to borrowers.

The following charts explain the different situations to set the final interest rates.

3.1. When the Central Bank Interest Rate is high


When the central bank interest rate is high, then the interest rate paid to savers is adjusted to be equal to the central bank interest rate.

The quantity of money invested is adjusted to the point where the marginal revenue from the return from investment intersects with the central bank interest rate, and then the interest rate charged for investment becomes higher as the central bank interest rate becomes higher.


3.2. When the Central Bank Interest Rate is low


When the central bank interest rate is low enough to be able to split from the investors' profit margin, then no change of both interest rates tends to take place as shown in the graph above.

This aspect completely contradicts what the IS-LM model assumes. As the market is less competitive, the monopoly power is stronger enough to maintain their high interest charge for investment payment unchanged.


3.3. The extreme case: The Central Bank Interest Rate is either zero or minus



In this extreme case which seems to occur frequently under the world economic crisis period nowadays, many central banks of this world have set their interest rate notably close to zero. Even some claim that they should set the rate zero.

Nonetheless, as shown in the previously mentioned mechanisms, the previously mentioned interest rate setting under the low liquidity, the money supply offered by the central bank with a sizably low interest rate hardly stimulates economy.

The interest payment for savers cannot be set below zero because they will no longer save in these banks or any other financial institutes setting such a negative interest rate.


4. Risk Taking Patterns

On the top of the gap between the interest rates, the IS-LM model over-simplifies the investment pattern influenced by the psychological characteristics of banks, investors, and other financial administrators.

What should be concerned is that the interest rate setting based on the investment volume is not always counter-cyclical to the business cycle, and not all economic agents are risk neutral as many mainstream macro-economists tend to assume.

The following examples are based on the situation of the fiscal and monetary policy is tightened to repress the economic boom or the recession repressing the aggregate income level.

The Y_t denotes the aggregate income invested to economy by these investors, and X_t denotes the investment safety (A higher value indicates the lower investment risk).


4.1 Risk Neutral: The IS-LM Curve assumes all agents are as such


This is the way which the risk neutral agents regularly react to the business cycle downturn causing the aggregate income shrinking.

They simply reduce the investment volume, and passively react to the investment risk change.

The IS-LM model may work as long as all the economic agents act as such.


4.2. Risk Averse


The risk averse economic agents put priority on their investment safety to their nominal income gain from their investment volume.

When their investment opportunity becomes more limited, they tend to take this situation warning of losing their business opportunity and potential collapse of their investing clients.

Even in the case where the fiscal and monetary policy represses the booming economy, they imagine about the negative side effect of the over-expansion which the policy alerts, and then they prefer preparing for the worst case scenario.

In particular during the recession, more agents tend to become the risk averse because their perspective tends to be more pessimistic about the future.

All in all, the income downturn exaggerates the investment discouragement furthermore.


4.3. Risk Lover


What the mainstream macro-economists supporting the IS-LM model ignores is this psychological characteristics of economic agents the risk loving attitude toward investment.

When the macroeconomic level of the aggregate income goes down during either the policy tightening or the recession, these risk loving investors start investing more in order to compensate for their loss by the downturn. Even though their action notably increases, they tend to be willing to invest a lot for increase the nominal investment return furthermore.

Their prior objective is to maximise the gross income growth despite the high risk reducing the average expected investment return. So, they will either maintain the current investment volume or even increase the volume in spite both the investment risk, the high central bank interest rate, and the high tax and/or the less government expenditure.

In particular during the economic bubble, an euphoria severely affects people's mind enough to lose their rationality. So, they often tend to become the risk lovers while the economic bubble.



5. Risk Premium in case of the Perfect Competition

Even in the Perfect Competition Model fails in the real investment mechanism because it ignores the interest rate influenced by the risk premium of investment. When renders invest, they add the extra interest rate charge on the top of the risk free interest rate which the mainstream economists supporting the IS-LM model use in the macroeconomic model.

The graph indicates the interest rate setting of a bank under the monopoly:

Under the monopoly or a less competitive market, these firms simply takes the cost incurred by the investment risk by spiriting the expense from their profit.

By contrast, in the perfect competition, it is very complicated to explain with only the saving=investment curves so that the graph will be a overly complicated mess if it attempts to explain the risk premium rate setting under the perfect competition.

So, this analysis introduces the cost denoted as C, which indicates the cost of attracting savers, the interest payment to the central bank, and then the risk premium all together.

The graph below sets the saving motive and the central bank interest rate as rigid so that takes account of only the investment motive and the risk premium.


In this case, the interest rate is not guaranteed to be counter-cyclical to the business cycle, and it can be acyclical or even possibly pro-cyclical to the business cycle.

Some economists argue that the risk premium factor may affect the investment cost more than the other factors such as the central bank interest rate, the saving ratio, and the aggregate income/productivity level.

So, the final interest rate influencing the investment volume may rather rise during the recession because the risk premium rises meanwhile the rate may fall due to the lower risk premium during the stable or booming period.

Political Compass Revised The Comparison between the Old and the New, Left and Right wing --- Part 2

... previous

... previous

4. Old Left-wing
After civilisation of human individuals became matured enough to preserve the record of their knowledge and wisdom, they started thinking differently and the notion of individualism was born among these human individuals. They started realising that they are able to overwhelm the fear and improve their living standard by developing technology and individuals’ voluntary will under right procedures. They researched and developed the procedures from learning about the objective realities such as resource limitation in the substantial world, the market mechanism, and mathematical and scientific factors. They became also enlightened to know that their social norm and value can be flexibly changed by not sticking to their rigid tradition and loyalty to their human authorities. This enlightenment has enabled them to act and think by means of their own invincible will and mind influenced by neither their authority and superstition nor any others.

Various liberation and revolution in the early modern period originated from this enlightenment movement. These revolting individuals became sceptical about their old common sense basing their old ruling traditional status quo, and then started claiming that they would form and develop their civilisation far better than their traditional status quo. Then, they also started believing that there is an impregnable individual right naturally endowed to all individuals equally, and then started claiming for abolition of any social class.

Under this revolutionary ideal, technically speaking, all individuals must be treated equal as long as the distributable resource is available and these individuals claiming for their right bear responsibility to negotiate with the others. In addition, their freedom of speech, thoughts, and choices is widely permitted as it is their right. Those who believe in this ideal expect that the material and spiritual development is eternally unlimited as long as the power of their imagination prevails. But, many of them also affirm that there is a limitation to provide individuals with their right and require, and it is required to spend sufficient time to increase the resource to offer a higher degree of liberty for individuals. Therefore, individual right and liberty are mandate but highly conditional to provide under the natural restriction.


5. New Left-wing
Meanwhile some of these revolutionaries affirm that right and liberty for all individuals are conditional, the other newly emerging revolutionaries argue that they shall be unconditional. These new radicals explain that their scientific ethical theory enables individuals to acquire their ultimate freedom of living as long as they follow the required ethical code. These revolutionary radicals, collectively called the New Left-wingers in this essay, insist that individuals with their unlimited ethical imagination and aspiration rooted on it may overwhelm the barrier of the objective realities, and eventually control over these objective realities. Moreover, they claim that distribution of the rights and protection of individuals’ life security must unconditionally be a top priority over anything regardless of the disequilibrium condition of the resource distribution.

According to their idea, their logical inference to conceive what has been claimed as the objective reality is a false hypothesis deserving their enemy camps. They also claim that which fundamental principle, equivalent to a mathematical axiom, they refer to is far more important than the logical inference for deriving their desiring outcome. According to this theorem, all the logics are subjective because there is no unified objective measure like a mathematical axiom enabling their logical inference to self-contradict and self-verify itself. Therefore, they “invented” an axiom for ethics like an axiom of mathematics which, they think, leads individuals to preserve their unconditional human right. Then, they express that this invented ethical axiom ought to be enthrone in order to alter the whole world natural and social structure.

However, even though they say their new alternative principle shall be objective but this principle is invented from their mere faith which is equally subjective and irrational as much as the superstition maintained in the Old Right-wing world. The mathematical axiom is merely the mathematical theorem which is used in mathematical procedures and their theoretical application. This only exists, as a rule set by the peer groups, to enable the applied theories based on mathematical modelling to self-verify and self-contradict so that it only affect their validity of theories and hardly directly affects the decision making processes of daily politics and individuals’ personal lifestyle. By contrast, their claiming ethical principle as the axiom of our politics and personal life directly affects decision making processes and daily life choices. The fundamental concern is who and how to determine what the leading universal ethical principle is. The universality of moral is still debatable to judge whether the moral validity measurement is universal and relative. Therefore, even though they claim that their claiming ethical principle is an ultimate objective and universal, it still sounds hypothetical by means of the perspective of majority others who are either not familiar with the study of ethics or sceptical about their logical deduction.

It is also the matter of who control the resource distribution to adjust it to their claiming ethically desired state. It requires a huge degree of controlling both moral and material distribution in order to accomplish their desired state. First of all, it ignores the equitable reward and punishment for individuals to motivate to increase their productivity, discourage from causing civil-disorder, and maintain the stable and productive equilibrium of the distribution. When the justice is determined by the principle rather than the equitable reward and punishment, these peer groups who sound more plausible to these peer groups taking the actual controlling power over the court of judgement. In order to keep the stable and productive distribution and the stable and progressive order, then the positive equitable law is more desired. But, these New Left-wingers deny this aspect to zealously cling to their claiming ethically correct state which is merely a utopian dream world. They believe that, even though their claiming ethic base order may disturb the short term instability and unproductivity, the human individuals’ aspiration of pursing their ethics enables individuals to resist against the temporary harms. Thus, rather than the fairness, these New Left-wingers cling to expecting individuals’ genuine patience and collective responsibility based on altruism i.e. sacrificing individuality for collectively protecting all individuals’ survival and morally well-being.

... continue reading:

Kenrokuen: Pencil Drawing

Political Compass Revised The Comparison between the Old and the New, Left and Right wing --- Part 1

1. The Critique of the Original Political Compass
The original political compass based on the Left/Right (Collectivism/Capitalism) axis of the economic and the Authoritarian/Libertarian axis succeeds in explaining about the complex characteristics of political ideologies which are not enough to be explained by the single linear political spectrum. Nevertheless, this political compass analysis seems to over-simplify the philosophical backgrounds of these political theories. Firstly, it easily equalise Authoritarian to Theocracy, and Secularism to Libertarian. Secondly, it lacks differentiating between the teleological focus (consequence first) and the deontological focus (Duty/Will first). Overall, this cannot distinguish the philosophical intention, the rationality behind determining the degree of intervention.



First of all, this neglects considering about the necessary law enforcement whose principle is rational enough to be fair, and about the critical difference between chaos and self-governance. Many political philosophers affirm that, in order to secure liberty for individual citizens, the rule by law and its enforcement are essential. For instance, Montesquieu argued that liberty and equality require significance of law. The original political compass seems to mix up the rule by law with the law by rule.

Secondly, this original compass equalises the theocratic regimes to the authoritarian left. It can be easily imagined that these two camps, the secular authoritarian left and the theocratic authoritarian left, would strongly condemn its labelling based on this compass. Even though both Authoritarian-Leftists are anti-capitalism and highly authoritarian, their philosophical principle is completely opposite to each other.

Thirdly, the original political puts an excessive emphasis on distinguishing their policy practice and ideal, which majority of the New Left-wing nowadays believe in, from the state socialism imposed by the socialist nations under various Communist party regimes. Nonetheless, even though their external characteristics is different, their quality is still essentially identical to each other in both good and bad way. Both are fundamentalistic secular as though it were a fundamentalist monotheism without God, and supporting revolutionary subversion of the world. Only the difference is their process and the tools they apply to their aim.

2. How the Revised Political Compass is Revised
The revised compass presented here takes account of both the consequence they aspire to induce and the duty they are obliged to. Unlike the original political compass, the axis introduced does not mention about the scale of intervention by either government or any other autocratic institute such as a feudal lord, religious organisation, or private corporation into both economic and social schemes. By contrast, this revised compass based on these axes representing political thinkers’ action planning and mind principle enables to analyse how the intervention is applied more or less by means of their philosophical objective.

The vertical axis represents political thinkers’ action planning. It measures whether political thinkers focus on individuals’ right and duty or the overall consequence induced by individuals’ actions. The Deontologists on the left hand side scale claim that politics must put the highest priority on the universally absolute principle, basing individuals’ right and duty, all individuals ought to follow over any hypothetical estimation and thought. By contrast, the Teleologists on the right hand side scale think that politics has to be functional as a whole part so that the hypothetical estimation and thought to draw the big picture of their governing state are essential. Then, the Teleologists argue that fundamentally sticking to the absoluteness of moral right and duty is meaningless because these measure vary across different times, places, and occasions in order to form a stable functional structure in each different situation.

The horizontal axis represents political thinkers’ mind principle basing their action planning. It measures how the principle individuals’ actions and mind are base on. The bottom scale indicates the principle which individuals pursue in by means of their subjective wish, emotional attachment, and fear of the others. Those who obey this principle follow what individuals are taught or commanded to believe or what is wished to become true in real. The top scale indicates the principle guided by the objective realities such as resource limitation in the substantial world, the market mechanism, and mathematical and scientific factors. Those who understand this principle use analyses based on logical inference to determine their decisions and establish their rule.

3. How the 4 Category groups are characterised on this compass
- Old Right-wing
When the technological development and the civility of individuals are at the primitive level, politics tends to be a primitive form as the simplicity, more than the complexity, prevails to satisfy their needs and wants. These individuals living there are often under the constant threat of harsh disasters, fatal endemic diseases and persistent lethal assaults by neighbouring tribes. They have little methods to protect themselves from these threats because technology and civility of individuals living in this kind of world are significantly insufficient enough to prevent these threats. Then, their mind tends to dominated by fear, and their priority is to prevent their haunting fear. Furthermore, such a situation is less likely to enable individuals to form their rational mind set and voluntarily fairly compete and cooperate together. Therefore, the first political priority is establishing a strong cohesion bundling individuals to one community group.

In this case, resource distribution is too limited to distribute equally among all individuals, and there tends to be little technology and wisdom to develop their rationality encouraging fairness. So, the wealth and the opportunity are inevitably unequally as well as unfairly, and majority individuals tend to take their situation for granted. Under the substantially low resource and technology level, this unequal distribution prevented from a competition is an effective way to concentrate all the resources available to one authorised institute to use them for sustaining one strong figurehead charisma and mature the cultural standard within one family or religious organisational structure. In such a world, majority subordinates obey and unconditionally contribute to their powerful minority such as feudal lords and religious authorities because of the majestic charisma as an authority figure of their belonging community. These individuals strictly follow their retained tradition and worship a superstition which they are emotionally attached to. They feel secured under an umbrella of one cohesive community even with a sacrifice of their material well-beings and their individual rights.

... continue reading: