Dichotomies of binary thoughts

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By FERNANDO NOGUEIRA DA COSTA*

The “third included” implies, instead of dividing the world into just two categories, recognizing the presence of a third element or level capable of integrating and transcending these categories

Cartesian dualism, a method developed by René Descartes (1596-1650), is an approach that separates the world into two distinct and independent categories: the mind (or thought) and the body (or matter). This binary is reductionist.

Simplifies the complexity of the world by dividing everything into just two categories: rationalism or materialism – dialectical or historical before la lettre. It is an oversimplification of reality because many phenomena and aspects of human experience cannot be adequately explained by a binary division.

Cartesian dualism limits our understanding of complex phenomena emerging from interactions between different rationalities and historical circumstances. For example, issues related to the mind, such as consciousness, emotion and cognition, are intrinsically linked to brain and bodily functions.

We question how economic thoughts and practical decisions with financial considerations interact, if they are considered independent categories. This dualistic approach is challenging for scientific research, especially in areas of knowledge such as Economic Science and Finance, where understanding different rationalities and the psychology of investors/rentiers, studied in Behavioral Finance, is fundamental.

The “third included” implies, instead of dividing the world into just two categories, recognizing the presence of a third element or level capable of integrating and transcending these categories. For example: (i) Marxist thought adopts “us against them”, whose “included third” is made up of “mediates” between poor and rich; (ii) the alternative to the conflict between workers and capitalists is to remember the middle class or the oldest social stratification between different castes and outcasts; (iii) neoliberal thinking opposes State or market – and the criticism appeals to the existence of the community, that is, the predominance of society; (iv) opposes the reductionism “non-banking public” versus “bankers” by highlighting that everyone is a participant in the banking system (individual and corporate clients, public banks, national and foreign private banks, digital banks, fintechs etc.); (v) in the same way, against the binary option between a debt economy or a capital market economy, the economy has credit with free, targeted resources and external transfers, debentures and shares, etc.

The “included third” approach seeks to integrate seemingly opposing or separate elements into a more comprehensive understanding. See how they interact and influence each other, rather than seeing them as separate entities.

Recognizes the complexity of reality not being adequately explained by a simple binary. Economic science must overcome the limitations of dualistic thinking and open itself to a more holistic and integrated understanding of reality.

The disruptive innovation of economic thought in the XNUMXth century – Keynesian/Kaleckian macroeconomics – faced the neoclassical dichotomy, in which the “real” and “monetary” aspects of the economy are analyzed separately from each other. The problem was that the bastard Keynesians made a link between total expenditure and the level of domestic activity and left the general price level on the “other side” of the dichotomy.

Regarding macroeconomic policy, in the context of the Keynesian dichotomy, two corollaries emerged. The first is that the level of total expenditure, at a given moment, does not correspond to a desirable level of activity, given by the level of production, relative to the growth trend, or by the level of unemployment, recorded for the economy as a whole. The second is that the rate of change over time in costs does not correspond to the desirable rate of change over time in the price index.

Therefore, it is no surprise that advocates of a Keynesian approach to public finances are also in favor of price and income policy as a means of combating inflation. The Keynesian dichotomy is divided between production being determined by aggregate demand and prices being determined by costs.

For Keynesians, the price level is governed primarily by the level of nominal wages. Demand pressure would not make any difference to the price level.

The “hydraulic principle” is incorporated into the Keynesian IS-LM-BP model. The “principle of mark-up” (including profit margin) is incorporated into theories of inflation based on “cost pressure”, in particular, “wage pressure”.

The anchor of money in the traditional Keynesian system is the money wage, as the value of money is anchored to the general price level. This, in absolute terms, is given by the weight of the aggregate nominal salary.

Variation in this nominal wage will cause changes in costs and in the consumer demand function, and then in various prices and the general price index. Because it is practically the only cost element whose variations directly affect all costs, and because it explains the majority of purchasing power, the increase in wages can constitute both a cost shock and a demand pressure.

However, the nominal wage is considered an exogenous variable, in the traditional Keynesian model, because it is established not through “market forces”, but rather at “negotiating tables” or by government decree. Its downward rigidity, in nominal terms, implies that any change in relative prices turns into an increase in the general price level. The price index is a weighted average of all base prices.

In fact, therefore, not only the expansion of cost is the cause of inflation. Without an increase in purchasing power and demand, rising costs would lead to unemployment and recession, but not inflation. Ultimately, wages are costs and wages are aggregate demand.

All of this, however, is unsatisfactory because it makes no mention of money or finances. Creating dichotomies as analytical procedures only makes it easier for the limited human brain adapted to binarism, but is not consistent with the analysis of the complex capitalist system.

Without the endogenous supply (created by market forces) of sanctioning currency, there would be no continuous increase in prices, due to the risk of market loss. The interest rate set by the Central Bank acts as a monetary “brake”.

The analytical function of “dichotomies”, in general, is to drastically simplify. To this end, the complex capitalist system is usually decomposed, that is, thought of as two subsystems, each with a certain degree of autonomy: the productive and the financial.

The analysis of interactions within each subsystem is usually carried out separately from the analysis of interactions between the two subsystems. The analytical procedures involve the time scale over which the various modes of interaction are believed to operate, distinguishing “short-term effects” – perhaps explainable – and “long-term effects” – they do not matter because we will all be dead…

Focusing at a distance began to be seen as mistaken and obsolete, because it would have been surpassed by the close-up. Narcissists of self They don’t understand a complex system…

Integrating productive analysis (“real” subsystem) and financial analysis (“monetary” subsystem) is essential for a comprehensive understanding of the performance of an economic-financial system. It aims to improve operational efficiency, optimize resource usage, maximize profit, etc.

The relevant data, updated and related to the same analysis period, for both analyzes, involves information on production, production costs, sales, revenues, expenses, cash flow, investments, among others. It is necessary to identify causal relationships in the connections between production data and financial data. For example, how variations in production affect revenue or costs and then how production operations affect the financial environment, including quotes.

Performance indicators to assess operational efficiency include metrics such as labor productivity, resource utilization, capacity utilization rate, etc. With them, the profitability of operations is evaluated with calculations of profit margins, return on investment (ROI) and other financial metrics.

Based on integrated analysis, it is possible to develop strategies and plans to improve production efficiency and financial performance. This includes decisions about resource allocation, investments in production, product pricing, etc.

With continuous and integrated monitoring, strategies can be adjusted if conditions change. Sharing information and interdisciplinary collaboration between those responsible for production and finance facilitate the understanding of mutual impacts.

Ultimately, the integration of production and financial analysis requires a holistic approach and allows for a deep understanding of the operations of all organizations – and of the macroeconomy! It overcomes the simplistic binarism so assumed by lazy minds.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/3r9xVNh]

Excerpt from the book – available for download - Fernando Nogueira da Costa – Macroeconomists compared Keynes vs. Kalecki.


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