Bridge over ocean
1 March 1983 Financial Analysts Journal Volume 39, Issue 2

Objective Economics: Will the Real Laffer Curve Please Stand Up?

  1. C. Ross Healy
  2. Verne Henry Atrill

Keynesians, monetarists and supply-siders argue that government can impose an “ideal” interest rate, money supply growth rate or tax burden that will impel the economy toward optimum levels of efficiency, output and distribution. All these schools of economic thought basically view economic activity subjectively—i.e., as the end result of the behavior of entities in response to various economic tradeoffs. What happens if we examine the end result—the flows of receivables and payables, receipts and payments—in the abstract?

An objective examination of the economy as mirrored in the Toronto Stock Exchange 300 reveals the existence of a natural order. The economy is dominated by U-shaped relationships characterized by a normal, healthy range and two tails trailing exponentially away into gross financial inefficiency. In particular, an economic entity can be viewed objectively in terms of its “state of solvency,” which can be measured off the balance sheet by its Liquidity Potential Ratio (LPR)—the ratio of positive to negative liquidity potential. In the aggregate, the entities comprising an economy tend to cluster in an LPR range that optimizes economic efficiency in terms of achieving the least cost of funds, the least stagnation and the maximum liquidity generation.

In other words, the economy tends naturally to economize—to use less to produce more. In this sense, economic activity should be seen, not merely as a growth process, but as a transfer process whereby resources flow from areas of low potential to areas of high potential. The problem with most Western economies today is that governments have usurped so much of these resources. The end result has been inflation.

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