An Explanation of the Current Condition of the American Economy
Adil H. Mouhammed
University of Illinois at Springfield
The purpose of this paper is to clearly demonstrate that the current economic problems facing the US economy are grounded in the wars in Afghanistan and Iraq. These wars have been increasing government spending on militarism, which generates a higher rate of inflation and a lower exchange rate of the dollar. The two wars are increasing the prices of oil, which contribute toward the increasing cost of doing business. For their own survival, businesses have to increase prices and cut cost. All these private and public actions cumulatively generate stagflation and ...view middle of the document...
The simple reason for this economic slowdown is the transfer of domestic actual economic surplus to other places; hence, the occupied country is deprived from the use of its national saving in the process of capital accumulation.
It follows logically that a need is rising to analytically investigate some of the negative economic consequences of the permanent wars, and this paper aims at providing such an objective and an honest analysis to the phenomenon. Section two provides the theoretical framework of this paper, a framework that is grounded in Veblen’s theory of the business cycle. Section three provides evidence to substantiate the conclusions of the theoretical framework. A summary and conclusion is provided in the last section.
The Theoritical Framework
Many theories of the business cycle are available and can be used to provide an explanation for the current economic performance of the US economy. In this paper, however, an explanation which is fundamentally grounded in Veblen’s theory of the business cycle is used. Veblen (1904, 1923, and Mouhammed 2003 and 2005) provides a provocative analysis for the theory of the business cycle in a capitalist economy, an analysis explaining the recession and expansion according to the principles of increasing (decreasing) cost and reducing (increasing) revenue.
For an economic expansion (or prosperity), Veblen suggests various causes for the reduction of the cost of restricted output. He (1923: 97) contends that a “ceaseless advance of the mechanical technology has...the effect of lowering the production cost of the necessary equipment, as also the (physical) cost at which raw materials may be had.” So, a reduction in prices of capital goods and raw materials such as oil generates a lower cost of production for business enterprises. A reduction in the cost of production will increase the aggregate supply curve.
One of the initial effects of introducing technology is to replace workers and reduce wages to keep production-costs down (Veblen 1923: 220 and 287). In the same context, Veblen thinks that the business community intends “to buy the industrial man-power as cheap as may be, and to sell the means of living ...as dear as may be.” (1923: 200). This statement clearly means that profit inflation is augmented at the expense of the community. Moreover, lower wages that are associated with increased productivity cut the cost of labor per unit of output.
This behavior of raising productivity and of as cheaply as possible paying workers implies a lower share of labor in the Gross Domestic Product (GDP) and an inequality in income distribution in favor of the business community or absentee owners. This inequality creates output that cannot be sold domestically, as working people have less income to spend, an idea that was originated by Thomas Malthus. Therefore, a tendency to go globally by peace and force to sell the output is created, and governments have to make that tendency a reality....