Milton Friedman attacking hippocratic socialist medical service

This is a fabulous lecture criticising an overly state controlling health (medical) service. This clarifies why free market system is not bad for medical industries to operate unlike what socialists and any anti-freemaketists and financial repressionists describe as. This warns that, when people allow medical services to be marged into the public sector and the degree of government controll increases, peole rather suffer than gain benefit in spite of what socialist government promises.

Islamic World Political Compass

Majority of people outside Islamic world tend to be ignorant about the political ideology of the political leaders in the Middle-East, South East Asia, West Asia, Africa, and the Western world. Some Westerners claim that Osama bin Ladin and Saddam Hussein cooperated together but it would be impossible. Osama bin Ladin and Saddam Hussein have a totally different ideology from each other, and they had never seemed to be able to cooperate together.

Osama bin Ladin was an Islamic conservativist who detested combining Islamism with any modern political ideologies such as socialism, pan-Islamism (United Islamist nations), and political party ideology. Osama bin Ladin formed his own politically influential groups such as Taliban and Al Qaeda. But, his initial aim was to establish individual people and their community following the traditional Shariah law, and keep them away from modern politics. Unlike Sadam Hussein and Colonel Gaddafi, Osama bin Ladin was not interested in modern ideology such as either forming a strong iron fist political party for himself such as Hussein did or establishing a political community gathering different people from different nations to be unified under a strong modern political administration such as Gaddafi did.

By contrast, Saddam Hussein was a hard core atheist and highly influenced by the USSR communism. Even though Hussein persecuted all members of Iraqi Communist Party, his political ideology was a resemblance of Stalin's. As same as the communist nations' leaders such as Stalin and Mao Zedong, Saddam Hussein wanted his nation to follow him and his iron fist political party by admiring his charisma. If there were an Islamic worship in his nation, the loyalty of his nation to him and his political party would decline because people no longer worship him and his party as a Godly charisma.



Nowadays, the movement to use Islamisn as a tool to establish the modern nation state or a tool to fight against the political oppression. Therefore, some people tend to think of Islamism as a sort of the modern political ideology. However, although the original Islamism takes account of economic, cultural, and metaphysical taughts, the style of Islamism is different from some Islamic political thinkers nowadays regard. The modern political ideologies focus on analysing how individuals live in and react to law, legislation, monetary economy, fiscal policy, and ideologies political parties hold, and attempt to establish these systems which are more likely to stabilitise a community where individuals live in, benefit to particular one individual or a group of individuals, bring a high level of utility to individuals living in a community, and/or gurantee individuals' right. By contrast, the traditional Islamism focuses on how individuals are living supiritually well regardless of how their surroudings are in order to accomplish what God wanted human-beings to be, and only created their own law as a principle guide line for them to live for their God's sake. All in all, the modern political ideologies regard the law to be a contract between individuals themselves whereas the traditional Islamic law (Shariah law) regards the law is a cntract between any individual and God.

The modern political ideologies regard human-beings are well-determined, semi-rational, and consistent enough to follow their own decision based on their needs, wants, and values. Therefore, they trust in the contract with only human-beings without will of a super-natural supreme-being. This trend is high influenced by the Christian way of thinking which claims the worship of God and religious taughts should be separated from the secular authority, law, and custom in order to keep the religion from interests of the secular world. Thus, as the modern political ideologies were highly inflenced by Christianity, even though some of them were highly sceptic about or even strongly against Christianity, so that all people following the modern political ideologies are influenced by this separatino of the religious world view and secular world view. This aspect motivates individuals to create their own moral, law, legislation, their own ethics about monetary economy, fiscal policy, and their custom and culture by human-beings' own decision based on their needs, wants, and values.

All the traditional Islamists, who are not only Osama bin Ladin and the fundamentalists but also all the genuine Islamic people following the traditional Islamic way of living, believe that individuals are too weak and inresponsible to establish the order. Therefore, the modern political systems based on the contract between individuals is too weak and inconsistent to be maintained so that these systems eventually corrupt individualsm, instabilise their community, and spoils their soul. This is the aspect that the traditional Islamism is sceptical about allowing human-beings to create their own moral, law, legislation, their own ethics about monetary economy, fiscal policy, and their custom and culture by human-beings' own decision based on their needs, wants, and values. These Islamists put emphasis on the importance of the interaction of God's will as a mediator of human-beings' own decision based on their needs, wants, and values. It means that individual human-beings make a contract with God at the first stage, and then agree or disagree with the other human-beings. This characterisitics denies the existence of the modern political ideologies, which over-estimate human-beings and their decision making process as explained previously, take place in their community.

Osama bin Ladin was one of these traditional Islamist who are highly sceptical about the modern political ideologies which over-estimate human-beings. This aspect explains that he wanted to react against this tradition to bring the traditional Islamism based on the contract between individual and God (The super-natural), and was highly sceptical about individuals and the modern political contract.



The modern Ismamic political activists combined the modern political ideologies and the traditional Islamism together.

Colonel Gaddafi attempted to combine Socialism, the modern Western political ideology, with Islamism together. His aim was to unite people by both the modern contract between individual people and the Islamic contract between each individual and God. Gaddafi combined the ideology about the the equality among people insisted by the Western socialism and Islamic tought insisting all people are equal in front of God. His original aim was to put emphasis on the equality among people to attract his supporters and alliance nations to him.

Malcolm X, in the United State of America (USA), was also the one who combined the modern political ideology with Islamism. He combined the human right idea invented by the Western modern ethics and Islamic attude of anti White suprematist Christinamism (* Only mentioning a particular kind of Christian groups). Malcolm X thought highly of protecting the individual right stated by the modern political philosophy which is formed by the contract between individuals in their secular law. However, he also thuoght that the equity (fairness) of this contract was violated due to the situation that some human-beings are not considered as variable to be treated fairly. Then, he thought all individuals living in a community need another form of strong doctrine which implant the idea of all individuals' right into their mind. His choice was Islamism which claims all human-beings are equal in front of God, and always put emphasis on the interaction of God's will while human-beings are making any contract.

The problem of these modern political figures is that both could not develop their political ideologies to be influential in a long term. We are not sure whether Gaddafi once had a strong altruism to use his political ideology to unite people and put the equality policy into practice or he initially wanted to use his ideology just to attract people to obey him. Nonetheless, regardless of what he might have initially thought, he turns up to be very corrupted,and operated the policy which was very different from what he promised people to bring. Malcolm X 's policy was so violent that it turns up to become a descrimination using an anti-descriminational ideology. These two were so idealistic and aspired to establish the community which precisely follows their idea that they could not tackle with obstacles in the reality. Furthermore, both Gaddafi's Socialist Pan-Islamism and Malcom X's Black Islamism cannot be accomplished because they combised two different kinds of ideologies, the modern political ideology and Islamism, which regard of a totally different world view from each other as explained previously.


Sukarno, the founder of independent Indonesia, was much more able to achieve to combine the modern political ideology with Islamism. The reason is that he remainded his political ideology, the Islamic State Socialism, only in a constitutional level. Sukarno was pragmatic to put his policy into practice. Unlike Gaddafi, he did not rant his political ideology as if it brings a utopia, and rationally faced with realities. Unlike Malcom X, he did neither violently exaggerate nor enforce the equal right as a fundamental objective to be accomplished. He only refered to the principle of equality, right, and islamic ethics as the objective guide line (not the way it must always be).



Nevertheless, both the fundamental Islamists such as Osama bin Ladin, and the genuine traditional Islamists may say that marging Islamism into the modern (Western) political ideologies lead people and their community far from what Islam treaches. The original Islamism insists well-beings of people come into reality when people in their community become supiritually well by being aware of the contract with God; not with the contract with the system human-beings established themselves. So, they would not want Islamism to be used as a tool for someone who wants to establish a system to rule the others under his/her administration even though the ideology held by this administration sounds wonderful. Therefore, United Socialist Pan-Islamic nation invented by Gaddafi would not be able to convince these traditional Islamic people. It is agaist their theory to exaggerate the right because their religion teaches the nature in this world is severe so that we need to take for granted. Therefore, the hatrate against the oppression to the individual right is unproductive so that they would not agree with Malcom X. They may say that Sukarno's policy was practical to develop a nation where protects Muslim people's life style, their interests, and their material well-being, but does not particularly follow precicely how Islamism requires people to do....

All in all, Islamism is a complex religion, and a mysterious ideology at the same time. In this globalised world where the way of all political systems work is based on the modern (Western) political philosophies (ideologies). Some attempted to use both Islamism and the modern political philosophy together to administrate their own nation. However, the fundamental problem is that Islamism involves a totally different basis of philosophy which may never be harmonised with the modern political philosophy (ideology). Thus, both Islamic fundamentalist, who aspire to enforce people and their community to follow the original traditional Islamist practice, and genuine traditional Islamic people, who just want to keep their own Islamic life style whose Islamic identity is not diluted by adapting the modern (Western) life style, isolate themselves and their community from the influence from any modern political ideologies and the globalisation. This segregationist method has a problem causing a huge tention of conflict between themselves and people from outside their community. Hosni Mubarak selected the alternative way which does not use Islamism in politics. Mubarak operated a rational and secular political administration which can adapt into the current globalising world trend to both protect and develop his own nation. Unlike Sukarno, Gaddafi, and Malcolm X, Mubarak considered Islamism is not practical to be combined with the modern political ideology which bases the philosophy to operate the political administration. Furthermore, Mubaraku realised the global free market system is beneficial for his nation and people living there. So, socialism is a hindrance, and Islamic intervention in his nation's political administration (Although he did not think Islamism is worthless; He admitted Islamism thrives). Hence, although Islamism is respectable religion and an interesting ideology, it seems to be still troublesome to be used for a principle basing any political administration. It will be interesting how Islamism become evolving to be adopted into the political administration in the future though.

Three Dimensional Political Spectrum

* Prevalence was calculated by multiplying the percentage possibility of policy existence and the percentage of people gaining utility from policy. The level of prevalence becomes higher when the colour become closer to red / orange whereas the level of prevalence becomes lower when the colour becomes closer to pale blue. The higher prevalence means possible to both exist and please people whereas the lower prevalence means less possible to either exist or please people, or both.

* Economic scale shows the size of government and adaptability to the market mechanism. More authoritarian implies big government controls economy. More libertarian implies little or non government interaction exists, and adapting rationally to the natural flow of marchet mechanism.

* Political scale shows the degree of freedom from the political peer pressure such as a unified political ideology, an political institute, and a powerful minority group such as a religious institution and a capitalist corporation. More authoritarian implies people are encouraged or enforced to follow the political peer pressure. More libertarian implies that people are more self-governing themselves.

* Personal scale shows either community/group interest or individual interest prevails. More authoritarian implies the community/group interest comes faster than the individual interest. More libertarian implies that the individual interest comes faster than the community/group interest.

Political Philosophical Compass (Spectrum) --- Part 2

... contuned from Part 1:

2: From the late medieval to the modern:

Machiavelli openned the gate way from Antiquity and Medieval to the modern political philosophical world. There is no doubt that Hobbes was inspired by Machiavellian philosophy to write his Leviathan. All remarkable modern political philosophers were highly influenced by Hobbes so that it may be possible to say that all these philosophies were merely the footnotes of Hobbes's work. If Hobbes was the founder of the modern political philosophy, Machiavelli would be the person who evolved the political philosophy from the old Antiquity to the progressive modern philosophy.

Machiavelli's ethical focus was how individuals should act owing to the surrounding evnrionment. Machiavelli had ever mentioned about neither the ideal world (Utopia) nor how human-beings ought to be naturally. His philosophy is about deriving the optimum solution for each different individual to act according to their own individual subjective interests regardless of an objective moral principle. His book called "Prince" indicated how a nation, the community of human-beings, and her sovereign such as a monarchy and any top political leader should act like. Machiavelli's success was having simplified the method to consider and analyse how the world is formed and how the human-beings ought to be.

All Antiquity and Medieval philosphies were too complex to analyse the decision making of human-beings. These ancient philosophers always started imaging about the world and and the moral judgement from thinking about the universality and the essentiality of human-beings.

By contrast, Machiavelli started to argue about political philosophy (Ethics) from the individual subjective interests rather than an objective moral guide line stated by Plato (as Idea) and Augstine (as God), and a metaphysics by Aristotle (as the nature (essentiality) of human-beings and their community) and Aquinas (as Natural law of human-beings and Divine law of God). Machiavelli could be one of the first political philosophers who invented the "moral relativism" which denies the existence of Utopia, the absolute universal value of moral judgement, and the essentiality of human-beings.

In terms of Machiavelli's world view, individual human-beings should act by following their expected merit gained from their action, so by neither the ideal moral guideline nor how human-beings ought to be naturally. The merits mentioned by Machiavelli are security (protection) of individuals, their family, and their significant others, material gain, full-filling desires, admiration to charisma (beauty, masculine power, authority, family-tie, friendship, and something related to self-identity).

Only the objectivity mentioned by Machiavelli was the power of an authority with these merit. The one holding a high level of these merits is the one who control the most. Machiavellian philosophy of measuring these merits is highly subjective and varies across time, place, and occasion. Unlike Platonism and Aristotlean, Machiavellian does not have an universal objective measure to tell what is right and wrong. The judgement highly depends on how human-beings can see and feel at their moment. Thus, Machiavelli is one of the most subjectivist philosophers because there is no objective principle to measure the volume of these merits; only the measure is human-beings' sujective sensation.

Machiavelli regarded the essentiality of human-beings is the instinction that they follow the charisma and the merits they can immediately see. However, unlike Aristotle, he did not mention all the human-beings are naturally same. Machiavelli regarded the quality of human-beings varies across their endowed talent, family, ethnicity, civilisation, and their sovereign they obey. All in all, Machiavelli saw human-beings have a natural instinct to follow the charisma. Nonetheless, Machiavelli seemed to believe in the evolution of human-beings to the next step and the alternative world more than Aristotle did. Unlike Aristotle, Machiavelli aspired to create a new ideal world although it was not strong desire as much as Plato did. Machiavelli seemed to have thought that if the strong and admirable charismatic sovereign could have existed and prevailed in this world, the better alternative world could have existed. However, Machiavellian world view is still based on the assumption that, although human-beings maybe able to create an alternative better world, the instinction of human-beings will not change.

He regarded highly of the existence of a sovereign (monarchy and any other form of political leadership) who ought to possess a high level of these merits. The interesting fact of Machiavellian philosophy is that, although Machiavelli put a high priority on the existence of sovereign and supported the position of sovereign should be inherited, he claimed that the one who becomes a soveign and his/her family has to possess these merits he mentioned. Therefore, he seemed to have criticised and contradicted the existence of the sovereign who lacks all these merits he mentioned. Furthermore, although the position of the sovereign must be inherited, the family of this sovereign has to have an ability to keep the high level of these merits to inherit. Thus, Machiavelli seemed to have used a rhetoric to criticise the existence of monarchy by pretending the existence of monarchy. But, we never know whether Machiavelli was a supporter of monarchism or a critic of monarchism.



Hobbes seemed like to have taken over the philosophy of Machiavellian moral relativism and optimum decision making based on a subjective interest of individuals and a nation, the community. On the top of his emphasis on the moral relativism and need of the powerful authority, Hobbes offered more mathematically and logically structured analyses of political philosophy than Machiavellian. Hobbes regards that there should be moral codes which guide human-beings to establish a stable and cohesive community.

Hobbes was more realist than Machiavelli. Unlike Machiavelli, Hobbes did not believe in the ideal sovereign with a full of the merits Machiavelli mentioned. Although Hobbes admired the power of a charismatic sovereign, he assumed that it is impossible for the sovereign be powerful and charismatic as much as Machiavelli described. The main reason of this difference between Hobbes and Machiavelli is that Hobbes did not believe in the evolution of human nature. Although he insisted that a sovereign should be powerful and charismatic as same as Machiavelli did, he assumed that it is impossible for a sovereign to be always an ideally powerful and charismatic. This is because sovereign is also a human-being, and can be corrupted if there is no rationally coded law guidling people and their sovereign. Machiavelli regarded that a good sovereign makes a good law whereas Hobbes argued a law should select and keep a good sovereign. All in all, Machiavelli seemed to have thought that, although the essential human nature would not change, there would be an non-naturally superior individual who could be a sovereign ruling over the others. By contrast, Hobbes had never believed in any non-natural human-beings at all, and a sovereign is naturally a same human being as same as other individuals.

Instead of the supremacy of a sovereign that Machiavelli insisted on, Hobbes put emphasis on the "legitimacy" of sovereign, and the strictly coded rational law should define the legitimacy of sovereign. Hobbes argued that human-beings need a strictly coded rational law, they should be guided by its legal system. He claimed that the "law" based on rationally (neither superstitiously nor intuitively) constructed codes is the universal moral principle. He argued the rule under this law could actually measure whether human-beings' decisions are morally right or wrong. Hobbes puts emphasis on the obeying "order" rather than charisma. Hobbes did not regard there should be always a perfect charismatic sovereign, whom Machiavelli admired, as long as the stability of humans' community under the law guideline is guaranteed. Unless the sovereign is really useless enough to collapse one enitre civilisation, s/he should reign.

This aspect that Hobbes supported there should be a rationally coded law (legal system) guiding human-beings as a universal principle indicates that Hobbes is more objective than Machiavelli. Machiavelli claimed that action and decision of human-beings are judged in terms of human-beings own feeling, desire, admiration, fear, and all the subjective feelings at any different time, place, and occation. Hobbes agreed with this Machiavelli's point. However, this is not enough to guide human-beings to establish a stabile civilised society which Hobbes considered as necessary for all human-beings. Hobbes strongly required the existence of a strictly coded rule under a rationally constructed legitimate law, and despised superstition and intuitive rules. Machiavellian philosophy still allows either a sovreign or a legal system to be driven superstition and intuition if human-beings and accept to exist. By contrast, Hobbes highlighted that an existence of secular (not superstitious) and rational (not intuitive) law as an objective measure and a universal moral principle.




Both Machiavelli and Hobbes thought a unity of human-beings could be achieved by allowing human-beings' subjective interests to be competing each other, and then the physically strongest, the most charismatic, and the wisest one to win. Both of them thought highly of the natural selection that determines which moral decision is right and wrong when two or several moral decisions exist and decision makers have to decide any one of them. One of the measures of the natural selection is individuals' merit to the others. It indicates those who have more merit than the other shall rule the others.

Although Machiavellism and Hobbesian are authoritarianism as same as Platonism, Machiavellian characteristics is totally opposite from Platonian characterisitics. Plato said the authoritarian heirarchy should be established by following the ideal structure in order to create an ideal world i.e. Utopia so that he claimed that possition of individuals in their cummunity "should be re-shuffled" to re-allocate them owing to their merit accomplishing to establish a Utopia. On the other hand, Machiavelli and Hobbes had never believed in Utopia. Both of them regarded that all individuals' status is "already" given to all individuals owing to the merit distrubuted to each individual by following the natural selection. Machiavelli believed that the natural selection prevails whereas Plato believes the natural selection is not an ideal. In addition, Plato believed there is an absolute universal objective moral guide line whereas Machiavelli and Hobbes regarded that the moral is relative to time, place, and occasion. Furthermore, unlike Aristotle, Machiavelli and Hobbes had never mentioned how human-beings ought to be by nature (Aristotle is more objective than Machiavelli and Hobbes because Aristotle believed there is an objective scale to what human-beings ought to be although his objectivity is not strong as much as Platonian philosophy.

The interesting aspect is that, meanwhile Platonists, the moral universalists, and these two moral relativists (Moral value is a subjective matter and is derived from the human-nature) have an opposite philosophy on the spectrum from each other, both of these opposing groups strongly necessarity and inevitability of the existence of an "absolute authority".


... to be contuned to Part 3:

Political Philosophical Compass (Spectrum) --- Part 1

This is a spectrum allocating major political philosopher (Ethical Philosopher) on according to their thought on the world and the moral judgement.

The vertical axis is the objective v.s. subjective scale which measures whether the moral judgement is based on an objective measure (coming from outside human-beings' emotional feelings and a psychological matter) or the moral judgement is merely a psychological matter so that no absolute objective moral guide line is possible to exist.

The horizontal axis is the non-natural v.s. natural scale which measures whether the alternative better world can be created and the human soul can evolve to become better or the nature of human-beings is permanent and hardly changes.


1. In Antiquity and Medieval:

First of all, the classical example of comparison between political philosophers is the comparison between Plato and Aristotle. There is no doubt to say that the comparative study of philosophy started from Plato v.s. Aristotle, and all the comparative studies of philosophy cannot ignore the debate on Plato v.s. Aristotle. Meanwhile these two philosophers existed in the same time period, one of these two has a totally different ideology from the other.

Plato is the most notable objectivist and non-naturalist in the Western philosophical world. Plato believed there is an ideal community (the utopia) can exist, and existence, morality, and mind-set of human-beings can evolve to be better (by means of how Plato defines what is better and worse). He also claimed that there shuold be a strong, absolute, universal, and permanent moral principle which shall guide human-beings to evolve.

Plato also argued that a supreme (as he defines) group of human-beings should be the leaders who quickly learn and understand the absolute moral principle and overcome from the human nature (evolve from the real state to the ideal state). He also claimed that these leaders should guide the other inferior human-beings, who are difficult to evolve to the ideal state.


By contrast, Aristotle questioned if human-beings are able to find the absolute and permanent moral principle guiding how individual human-beings should be. Aristotle stated that the value of morality varies across the different time periods, places, and cultures. Aristotle also claimed that human-beings is naturally able to guide themselves to the optimum way of living in their community. "Human-beings are naturally social, and political-beings" is his famous quote which denotes that individual human-beings themselves should constantly discuss and evaluathe their moral decision, and then decide what is right and wrong at the current time, place, and occasion.

Aristotle contradicted Plato because Aristotle argued that human's characteristics constantly changes over time, place, and occasion. Therefore, even though some individuals have a strong enthusiastic altruism, ability to guide the other individuals to the principle, and a deligent hardworking spirit, these individuals can be corrupted when they start to hold a power to control over the others. Furthermore, Aristotle also clarified the fact that all the communities in the world have different needs, and all the individual human-beings' opinions have to be represented. Thus, there shuold not be a few number of individuals controlling over the others because there is no absolute measure to define which is better and worse.

Only the universal objective principle Aristotle mentioned was that "human-beings are naturally social". This quote states that, even though the moral value varies across time, place, and occasion, all human-beings in any parts of the world are essentially same. He affirmed that all human-beings must live together. Otherwise, human-beings turn up to become a beast (savage). This is the aspect that Aristotle was one of the first remarkable philosophers who put emphasis on the cosmopolitanism. As all human-beings can nagotiate each other to derive the optimum solution to be united, they can live together with peace and unity.

This philosophy states that the world is constantly changing, and human-beings can be unified when they nagotiate each other. The problem of this philosophy is that it does not clarify how the world changes, and restrict the possibility of new discoveries because humans' perspective to only focus merely on how the things surrouding them are. This problem disrupts human-beings discovering and inovating new things and thoughts and beciming sceptical about how the real world is formed. Furthermore, human-beings from the different culture may bring further conflict rather than unity. When both parties are considered equally right and wrong, they may never compromise their own wants and tolerate any negative feeling (E.g hatred, stereotpy, mis-understanding, and biological and emotional sense) about the others. Thomas Aquinas, who adapted Aristotle philosophy into the primative Christianity to reform Christianity be more familiar to the commoners, stated, on the top of the human-naturality, there is a God's divinity as the "unmovable mover" which is the principle, denoted by Aristotle, which is only a universal natural law but too abstract to define. Aqunas's philosophy developed Aristotalian philosophy to be more clear and judgemental. However, Aqunas's philosophy still restricted the possibility of descovery and inovation.

At this point, Platonian philosophy has a stronger advantage because Plato put emphasis on need of the absolute objective judgmental tool measuring which individual human-beings are right and wrong.

However, these classical philosophers had never answered to find whether or not it is possible to find an objective moral measure and principle within the human-nature. Plato and Augustine, the founder of Platonistic Christianity, definted an objective moral guideline is not able to be measured by natural human-beings so that it should be created by a non-natural supreme-being such as an idea or a God. On the other hand, Aristotle and Aquinas remained the political philosophy (ethics) to be very limitted on the world we can see now so that there is no place for deduction which forecasts the past and the future. Platonist focuses on the unreal world whereas Aristotlean only focuses on "now". Both philosophy lack the consistent and dynamic analysis of how humans and their community can change.

In addition, there is a question by some of the modern philosphers which asks whether or not it is possible expect human-beings to be virturous enough to keep themselves ethical and unified constantly. These modern philosophers criticised that both Plato and Aristotle were too optimistic about human-beings, and so contradicted there cannot be any universal objective moral (ethical) guide line like what both Plato's Idea (Augstine's God) and Aristotle's Social and Political Human-beings (Aquinas's Divine Law).

... to be contuned to Part 2:

Empirical evidence prooving Liquidity-trap: Lower interest rate does not stimulate economy

Why is the economic recovery not stimulated even though the central banks offer the sizably low interest rate which is close to zero? Many people imagine that if the interest rate is low, the economy should be stimulated. The reason is that the cost for companies paying the interest rate of their debt and for entrepreneurs planning to borrow money to start their new business is low.

However, this is only the microeconomic factor, which is a static analysis focusing on the individual economic agent's performance, and does not take account of the time effect and the environment interacting with this agent's performance. This means it ignores the macroeconomic factor which is the dynamic analysis taking account of the future expectation and the wide scale economic environment.

The problem is that, even though the interest rate, the cost of borrowing, is low, if the expected return from investing to economy is low, banks and the other forms of financial institutions are reluctant to lend their money. In addition, the entrepreneurs are discouraged from borrowing money to invest to their business if the future expectation is not good for their business due to the current economic environment.

This phenomenon is called the "liquidity-trap" which was originally mentioned by Professor John Maynard Keynes. During the world economic depression in 1929, many economists thought the economy would be eventually recovered if the central bank tried to increase the liquidity of money supplied by lowering the cost of borrowing money. However, this expectation did not happen. Keynes analysed this problem by explaining the liquidity of money was stuck in their flow due to the lack of confidence in investment. Keynes also put emphasis on need of the price inflation to increase the investment volume. If the price inflation is taking place, the real value of the money borrowed at a certain past time period goes down, and the nominal value of the revenue gained at each time period keeps increasing (the real value of the revenue is kept almost constant). By contrast, if the price deflation (i.e. the "minus" inflation) occurs, the financial economic situation is the opposite effect of the inflationary period.


This project assessed whether positive or negative the correlation between the interest rate and the investment share of GDP. London Interbank Offered Rate has been newly introduced by the IMF, WEO Database, Country Data recently so this newly introduced variable was used as the variable representing the interest rate. Although, there are only the US and Japanese one for London Interbank Offered Rate, the USA and Japan are the best candidate countries to assess the effect of the liquidity trap because they are experiencing now! In addition this variable is a very useful indicator of the interest rate effect on economy because this interest rate index takes account of the various money transactions between various banks and the other forms of financial institutions.

* "London Interbank Offered Rate" is denoted as "the interest rate" and "the nominal interest rate" in this project.

* There are two indicators of the investment share of GDP. One is "the percentage investment share of GDP times the (natural) log of GDP", and another is "the (natural) log of the GDP times the percentage investment share of GDP"

* All the logalisms used in this project is the natural log.

* These OLS regression analyses are based on the fixed effect model which involves the dummy variables (the binary variable) for the different units (countries).

* The variable called "Time" denotes the time trend whose valometer increases as the time passes.

First of all, the simple Ordinary Least Squares (OLS) regression analysis was run. The investment share of GDP is regressed on the logged interest rate. The result offered is shown in the figure below:


This OLS regression is the percentage investment share of GDP times the (natural) log of GDP:




This OLS regression is the (natural) log of the GDP times the percentage investment share of GDP:



These results show that the positive correlation between The investment share of GDP and the interest rate. It is really disappointing for those who trust the monetary policy of both the current US Federal Reserve Bank and Bank of Japan. It is also surprising for many microeconomic financial analysts because it indicates that the business grows when the cost of borrowing and the interest payment on company-debt is high. This contradicts the basic static ( = nominal) cost and benefit analysis. Thus, these results affirm that we certainly need a complex dynamic ( = real ) cost and benefit analysis.

Is it logical to say that "We should rather increase the interest rate to recover our economy?" No, this is not logical. It is not logical to say "Higher the cost for companies and entrepreneurs is, higher the confidence of consumption and investment is".

This aspect suspects that the interest rate is not exogenous (the condition to be a good explanatory variable not being controlled by any other factors (variables)) so that it can be endogenous (controlled by some other factors. This situation leads the analysis inconsistent if this endogenous variable is used as an explanatory variable).

There is an international financial economic theory stating that the interest rate is given by the exogenous factor we are hardly able to control rather than we give the interest rate to control the economic situation. This theory suggests that the interest rate is set according the price inflation rate to make the real interest rate (the nominal interest rate minus the price inflation rate) to as zero as possible. Therefore, this theory rejects the classical and the monetarist theory of the interest rate which states that the low interest rate lowers the cost for the entrepreneurs i.e. stimulating the economy. This theory claims that the interest rate is an indicator of the price inflation. It means that, when the interest rate is high, the expected rate of the price inflation, which increases the business opportunities, is high.

* This is the theory in the developed economies where the hyper-inflation risk caused by the mal-fiscal functioning tends to be low.

All in all, there is a room to assume that the inflation rate stimulates the investment share of the GDP. Therefore, it tested if the logged investment share of GDP is positively correlated with both the interest rate and the logged price inflation rate (In the later texts, the price inflation rate is written as the inflation) as follows:


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This proves that the inflation is positively correlated with the investment share of GDP. However, there is a concern that the interest rate and the inflation are correlated each other. If the explanatory variables in one OLS regression are correlated each other, it tends to disturb the OLS analysis result.

So, it suggests to assess the endogeneity of the explanatory variable. By following Keynes' theory and the theory claiming the interest rate is given, the interest rate is assumed to be positively correlated to the inflation. This inference also claims that the Two Stage Least Square (TSLS) regression analysis, instead of the OLS, to regress the investment share of GDP. The first stage regression, which is called the "auxiliary regression", to regress the interest rate, the candidate explanatory variable of the investment share of GDP, on the inflation, the instrument variable of the interest rate, the explanatory variable.

The other reason why the inflation is wanted to be used as an instrument variable and the interest rate is wanted to be used as an instrumented explanatory variable is that this project attempted to explain the whole mechanism explained by the theory and assess if this theory actually proves the real world economic situation. Because it assumes that the interest rate is highly controlled by the inflation. Therefore, the inflation had to be used as an instrument variables so that it cannot be used as one of the explanatory variables.


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These results proved that the inflation is positively correlated with the interest rate as the theories suggest.

The fitted value of the interest rate instrumented by the inflation rate (and Time if necessary) was saved to use for the second stage regression, which is the primary regression of the TSLS analysis.

There are two analyses because "the percentage investment share of GDP times the (natural) log of GDP" and "the (natural) log of the GDP times the percentage investment share of GDP" are assessed a little bit differently. The former one was regressed on the interest rate instrumented by both the inflation rate and the Time meanwhile the latter one was regressed on the interest rate instrumented by the inflation rate only.

Both kinds of regression analyses are based on the non-linear model because there is assumed to be the optimum interest rate affected by the optimum inflation rate which maximise the investment share of GDP. The positive but reasonable rate of the inflation is a indication of the circulation of economic activities running well and the economy is expanding not too fast. However, the positive and high inflation rate decreases the real value of individual economic agents' income, and discourages saving, the source of financial economy, and supply of the investment available (The net present value of the amount of money invested declines over time). In addition, as the (nominal) interest rate is determined by the inflation rate (in order to set the real interest rate (the interest rate minus the inflation)). Therefore, in order to find the optimum inflation rate and then the optimum interest rate (= The intercept + Coeff. x "The inflation" + error) are required to find out!


The regressions below are "the percentage investment share of GDP times the (natural) log of GDP" on the interest rate instrumented by the inflation and the time trend:


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According to the three criteria (denoting the smaller number shown by each criterion implies the better model), the regression above without including the time trend as one of the explanatory variables is a better model than the other with the time trend as one of the explanatory variables. This reason would be because the time trend is already included in the instrument variable of the interest rate.

The other sorts of models with various kinds of formulae, such as the liner model ( I = a + b x R + error) and the cubic formula ( I a + b_1 x R + b_2 R^2 + b_3^3 + error ), are regressed. Nonetheless, the square formula (The second degree formula) came up as the best model to demonstrate the correlation between the investment rate times the GDP. By observing the both models above, both formulae has the global maximum value. Therefore, this result indicates that the optimum interest rate instrumented by the inflation rate exists.

The figure below contains the matrix graph (the top one) showing what the interest rate given by the inflation and the year is, and the other (the bottom one) showing what "the percentage investment share of GDP times the (natural) log of GDP" given by the interest rate instrumented by the inflation and the time trend is:



These graphs indicate the following phenomena:

# The real interest rate (the gab between the interest rate and the inflation rate) tends to be minimised as the year (Time) passes.
(This could be considered because of the global financial liberalisation which has increased the degree of competitiveness of the global financial market. )

# The optimum interest to stimulate the economic activity is between 1.77 and 2.14.

# In 1980 (and possibly before), the high inflation is discouraged the economic activity level more than the low inflation.

# In 1990 and after, the lower inflation discourages the economic activity level far more than the high inflation.


The regression below assessed "the (natural) log of the GDP times the percentage investment share of GDP" with the same method as "the percentage investment share of GDP times the (natural) log of GDP" assessed in the previous regressions.



For "the (natural) log of the GDP times the percentage investment share of GDP", the interest rate is only instrumented by the inflation because this model needed to include the time trend as one of the explanatory variables. This reason is because the dependent variable "the (natural) log of the GDP times the percentage investment share of GDP" is increasing over time so that the regression model had to involve the explanatory variable explaining this factor. It also had to exclude the time trend from the instrument variable of the interest rate in order to avoid including one same variable for two different indicators.

The figure below contains the matrix graph (the top one) showing what the interest rate given by the inflation and the year is, and the other (the bottom one) showing what "the (natural) log of the GDP times the percentage investment share of GDP" given by the time trend (Exogenous) and the interest rate instrumented by the inflation is:



These graphs indicate the following phenomena:

# The optimum inflation rate stimulating the economic activity is 2.48, and the optimum interest rate is 1.5 then.

# Lower the interest rate is implies lower the economic activity level is.



Having observed these results given by the regression analysis (based on the fixed effect model), the sizably low interest rate is less likely to increase the liquidity of the money supply flowing into economy. As Prof. Keynes suggested, the USA and Japan may need to expect the exogenous shock in their economy, such as technological growth and finding a new natural resource and/or a brand new invention, and/or the strong positive planning policy intervention other than the monetary policy.

All in all, the policy makers cannot merely control the interest rate to expect the economic recovery. Hence, the current US and Japanese monetary policy seems to be very unreliable to stimulate the economic recovery.