Market Discipline leads to a Better Economy

Discipline makes for better adults.

Paul Craig Roberts says, “All the discipline is gone.” (Boom-bust video at 8-minute point) He is referring to the corrupt environment of deregulation that led to larger and larger banks with “untouchable” power.  He gives the example of “National Branch Banking” that developed in the late 80’s. Banks were given incentives to siphon savings from local communities to use for speculation in other places. Banks grew large and communities suffered.


We see an article by Vox, The cleansing effect of minimum wage in China. The minimum wage in China used to be largely ignored. Then the government started to enforce it. The result was higher productivity. The authors say…

“In line with this intuition, our results show that in a fast-growing economy like China, there is a cleansing effect of labour market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to become more competitive, these two mechanisms boosting the aggregate efficiency of the economy.”

Raising the minimum wage increases net social benefits. Yet raising the minimum wage is an act of disciplining the labor market, where firms abuse their unbalanced power over labor. The government discipline brings balance to that power imbalance.

The Fed rate has been low for years giving low-cost funding for the carry-trade and speculative investments. The permanently low Fed rate reflects a lack of discipline. Firms grow accustomed to the easy money and generate more profits for themselves with less aggregate efficiency. They fail to share that profit with labor. Productivity suffers.  Effective demand weakens. It then becomes harder to raise the Fed rate without resistance from firms.

We have seen that unregulated international capital flows need discipline in order to protect vulnerable countries.

Firms need discipline. Banks need discipline. Markets need discipline… in order for the economy to serve society better.