This piece is the latter part of Chapter 6 (2) of The Declaration of the Age of Physical Economics (Yoon Jong-won, Yoon So-ri, Yoon Jun). It is an academic exposition presenting the authors' physical economics hypothesis, and the body, figures, and citations follow the manuscript as written.
Supply-Side Economics: It Did Not Look at the Discharge Path
Supply-side economics is a school that reached its heyday during the era of President Reagan in the United States in the 1980s. Its core claim is that if taxes are lowered and regulations are eased, businesses will produce and invest more, and so the economies of Korea and the United States will grow. The curve formalized by the American economist Laffer, through the fact that once tax rates exceed a certain level tax revenue actually declines, provided the logical grounds for the idea that lowering tax rates could increase tax revenue.
This prescription has logical consistency, but it has a structural limitation in that it looks at only one path. It was the result of looking only at the supply path, that is, the way nutrients and resources are supplied through the arteries, while not looking at the discharge path, that is, the way waste is expelled and circulation is completed through the veins.
In the human body, the arteries and the veins form a single circulatory system. Oxygen and nutrients are supplied through the arteries, and carbon dioxide and waste are discharged through the veins. Both paths must operate smoothly for circulation to be maintained. What would happen if only the arteries were dilated and the veins were blocked? Nutrients would be supplied, but waste could not be discharged, so toxins would accumulate in the tissue, and in the end uremia would occur.
Supply-side economics succeeded in widening the supply path through tax cuts and deregulation, but it missed the fact that discharge paths such as consumption, the return of taxes, and regional circulation were blocked. It gave tax-cut benefits to businesses, but if the benefits flow into share buybacks or shareholder dividends and do not lead to wage increases or expanded employment, then the arteries have widened but the veins are still blocked. The analysis published in 2017 by the American economists Montecino and Epstein showed with data that quantitative easing widened income inequality. It is evidence that the arteries were dilated but the veins were narrowed.
The same thing was repeated at the shops of the self-employed. Many of the tax cuts and deregulations announced in Korea were concentrated on large corporations and export firms, and they had almost no effect on the sales of back-alley self-employed people. The channel for large-corporation funds, which corresponds to the arteries, was widened, but the channel of the back-alley shop, which corresponds to the microvasculature, grew narrower and narrower. The logic that a supply-side prescription revives the entire economic system worked on macro statistics, but it did not work in the bank account of the self-employed person's shop. Supply-side economics increased the quantity of supply, but it did not look at the speed at which funds pass out through the discharge path and rejoin circulation. Flow is the product of quantity and speed, and when the speed of one channel becomes 0, the entire flow also becomes 0.
The Common Blind Spot of the Five Schools: They Saw the Quantity but Did Not See the Flow
It compresses into a single proposition. A national economy is not a total quantity but a flow, and collapse is the simultaneous blockade of flow. The quantity that the five schools saw was, in every case, merely one cross-section of the flow, and the fact that flow can be blocked in two places at the same time was not seriously dealt with by any of the five schools.
When the five schools are placed side by side, a pattern becomes visible. Keynesianism looked at the quantity of demand, Monetarism at the quantity of money, Modern Monetary Theory at the quantity of debt, the Austrian school at the quantity of liquidation, and supply-side economics at the quantity of supply. The prescriptions of the five schools differed from one another and were sometimes diametrically opposed, but in that they all tried to measure quantity and to regulate quantity, they were all alike. And they all missed the same thing. It was the result of not asking through where the quantity flows, where it becomes blocked, and where it is deposited.
The Common Blind Spot of the Five Schools: Every School Saw Only the Quantity and Missed the Flow
| School | Core Prescription | What It Saw | What It Missed | Patient Analogy |
|---|---|---|---|---|
| Keynes | Expanding fiscal spending | The quantity of demand | The blockage of the path | Increased only the amount of the nutrient drip, ignored the digestive tract |
| Monetarism | Controlling the money supply | The quantity of money | Velocity and the state of the vessels | Looked only at blood volume, ignored blood flow and vessels |
| MMT | Permitting fiscal deficits | The quantity of debt | The deposition site of debt (loan interest) | Looked only at the total amount of calcium, ignored where the calcification is |
| Austrian | Leaving the market to liquidate | The necessity of liquidation | Management of acute hemorrhage | Trusted only natural healing, refused to stop the bleeding |
| Supply-side economics | Tax cuts and deregulation | The quantity of supply | The blockage of the discharge path | Dilated only the arteries, ignored the veins |
| Common blind spot | · | Quantity | Flow | Counted only the total amount and ignored circulation |
The fact this table conveys is simple but decisive. The theories that economics has developed each captured an important aspect of the national economy, but every one of them had a common blind spot. It was the result of not seeing the economic system as a system of flow. They were excellent at measuring how much demand there is, how much money there is, how much debt there is, and how much supply there is, but they could not analyze through where those things flow, where they become blocked, and where they are deposited.
Seeing the same fact from a different angle makes it clearer still. The place where flow becomes blocked is called a bottleneck. If we throw three questions at the five schools, where did it become blocked, why did it become blocked, and how far did it narrow, the fact that none of them answered becomes visible at a glance.
The Three Bottleneck Questions Put to the Five Schools: None of Them Answered
| School | Where Did It Become Blocked | Why Did It Become Blocked | How Far Did It Narrow |
|---|---|---|---|
| Keynes | The path of reach from the government to the back alley | Diluted at the large-corporation and subcontracting stages | Not measured |
| Monetarism | The lending path from banks to shops | Funds detour due to creditworthiness asymmetry | Not measured |
| MMT | The path by which loan interest drains from household accounts | Fixed loan interest vs. variable sales | Not measured |
| Austrian | The time path along which liquidation proceeds | Absence of a distinction between acute phase and chronic phase | Not measured |
| Supply-side economics | The path from businesses to wages and consumption | Detoured into share buybacks and dividends | Not measured |
| Common | Absence of diagnosis of the bottleneck location | Absence of analysis of the bottleneck cause | Absence of measurement of the degree of the bottleneck |
The result of entrusting crisis diagnosis to schools that have no answer to the three questions is 250 years of stagnation. If one does not know where the bottleneck is, one cannot widen the channel, and if one cannot widen the channel, the flow is not restored. The prescriptions of the five schools, which did not reach the shop of the self-employed, were all prescriptions that failed to answer the three questions.
There is one more decisive blind spot. It is the fact that all five schools used only a single threshold. Keynesianism took the single signal of demand shortage, Monetarism the single signal of the money supply, and the other schools each took their own single signal as the criterion for crisis diagnosis. Yet the result that this author verified with 690 months of data from Korea and the United States is clear. In the 3 cases of single blockade, where only a single signal was lit and the system then recovered on its own, the economies of both Korea and the United States survived. In the four Korea-U.S. cases of 2008 and 2020, where two signals were lit at the same time and dual blockade formed, the system collapsed (1997 and 2003 are cases in which a single-blockade advance warning of the signal blockade alone led into crisis). The limits of the single-threshold diagnosis of the five schools were, in effect, revealed by 690 months of data.
Medicine, which diagnoses the human body, has already accepted the lesson. In the past, it measured only the quantity of substances in the blood. It measured how much blood sugar there was, how much cholesterol there was, and how much calcium there was, and if the quantities were within the normal range, it judged the person healthy. But today's medicine looks not only at the quantity but also at where the substance is, where it flows, and where it is deposited. The same amount of calcium is health if it is in the bone, and disease if it is in the vessel wall. The same amount of cholesterol is normal if it flows inside the vessel, and arteriosclerosis if it is deposited on the vessel wall. Economics has not yet achieved the transition.
When we look at how the lineage of the six great economists examined earlier is positioned within the five schools, the fact becomes even sharper. Quesnay was the first to see flow, in 1758, but he did not answer how flow becomes blocked; Keynes saw only the quantity of demand; Friedman saw only the quantity of money; Minsky saw the fact that debt accumulates during periods of stability but did not see where it is deposited; Reinhart and Rogoff organized crisis patterns but did not formalize them into stages; and Brunnermeier formalized the multiplicative structure but did not extend it to cross-domain universality. The five schools accepted the partial insights of the six great figures, but there was no school that integrated those insights into a universal law of flow. The model established by this author is the result of synthesizing the answers of the six great figures, and it is the result of proving, with 690 months of data from Korea and the United States, that the quantity aspects the five schools each saw separately are all different aspects of the same universal law.
Change the Question and the Answer Changes
The fact confirmed so far is clear. Existing economic diagnosis had three limitations: the limitation of judging the whole by a single indicator, the limitation of diagnosing the present with past data, and the limitation of a prescription that fails to reach the affected part. And at the root of these three limitations lay a theoretical blind spot. It was the result of seeing the quantity but not seeing the flow.
A Paradigm Shift: From How Much Did It Grow to Where Is It Blocked
| Category | The Question of Existing Economics | The Question of Physical Economics |
|---|---|---|
| Core question | How much did it grow | Where is it blocked |
| Object of measurement | Total quantity (GDP, money supply, prices) | Flow (path, speed, blockage) |
| Mode of diagnosis | Single indicator + quarterly data | 59 gauges + real time + satellite |
| Object of prescription | The aorta (the macroeconomy) | The microvasculature (the back-alley economy, households) |
| Patient analogy | Looks only at blood test figures | Sees the blockage with angiography |
The shift in the question is the starting point of the book. If, instead of asking how much it grew, we ask where it is blocked, the diagnosis becomes completely different. Even if GDP is growing, if the shop in the back alley is dying, we must find where the flow has become blocked. If the money supply has increased but prices do not rise, we must trace where the money has stopped. In the case where debt has increased, we must analyze where the loan interest on that debt is deposited and blockading consumption.
Then what are the language and the tools that can answer the new question? The answer already exists. There is a field that is a vast complex system made up of about 37 trillion cells, a system with a circulatory path of about 100,000 kilometers from the aorta to the microvasculature, a field equipped with a diagnostic system accumulated over thousands of years. It is the human body. In the next chapter, we examine why the human body and one nation's economy operate on the same structure, and why this is not a mere metaphor but an academic isomorphic relationship.
Nowhere Among the Five Schools Was There a Tool to Save the Self-Employed
The prescriptions of the five schools examined above were all applied in turn over the 30 years of the self-employed. After the 1997 foreign exchange crisis, the stimulus measures of Keynesianism were announced; after the 2008 global financial crisis, under a Monetarist prescription, the policy rate was lowered to effectively 0 percent; and after the 2020 COVID crisis, in a form close to Modern Monetary Theory, government debt increased rapidly. Yet not one of the five prescriptions reached the shop of the self-employed. Korea's self-employed took a direct hit head-on every time, without prior warning.
The reason is clear. It is because all five schools saw only the quantity and did not see the flow. They saw how much money was released, but they did not see along which channel the money flowed, to where, and where it became blocked. They saw how much debt increased, but they did not see how the loan interest arising from that debt drained each month from the bank account of the self-employed person's shop. Nowhere among the five schools was there a tool to save Korea's self-employed. There was an empty seat.
There is a clearer fact that the five schools saw separately. It is the fact that they saw the quantity of supply, but none of the five schools seriously dealt with where the supply must pass out (the discharge path). A national economy maintains its flow only when both channels, supply and discharge, are alive at the same time. If only supply is increased and discharge is blocked, the funds are deposited somewhere and in the end become bad debt. There were scholars who saw the fact partially. The analysis published in 2014 by Wen and Arias of the St. Louis branch of the U.S. Federal Reserve Bank showed with data the fact that the velocity of money plunged after quantitative easing, and the analysis published in 2017 by the American economists Montecino and Epstein showed with data the fact that quantitative easing widened income inequality. Both studies proved as far as the fact that the flow breaks. But it was this author's academic research that first verified, with 690 months of data from Korea and the United States, the fact that the entire system collapses only when both channels are blocked at the same time, that is, the dual blockade proposition. The empty seat that the five schools failed to fill is here.
The equation that fills the empty seat is the story to be dealt with in the next chapter. The equation is the academic fact that the human body and the economies of Korea and the United States operate on the same physical laws, the fact that the medium, the channel, and the deposit correspond one-to-one across the two fields, and thus the fact that the tools of medicine, which diagnose the patient, can be applied directly to diagnosing the economic system as well. For Korea's self-employed to no longer take hits without prior warning, the equation must begin to become visible.
The core examined in this chapter is simple. One nation's economy is not a total quantity but a flow, and collapse is the simultaneous blockade of flow. This proposition supports every chapter of the book.
References
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