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The Journey of 10,000 Neoliberal Smackdowns Begins with a Single Bitch-Slap

June 7, 2012

There are a number of different ways to look at economics, certainly. In one sense economics is the most humanly important of the sciences; in another very real sense it isn’t a “science” at all. Because most of us suffer from a lack of historical perspective – which is to say that even if we are aware of historical facts, we don’t generally have any kind of coherent economic story tying it together – because we lack that perspective, we are easily duped. Neoclassical economics is an article of faith; and like flaming eyed fundamentalists, the more evidence supplied by reality that their position at least needs massive modification, if not outright revision, the more vehemently they preach that hell awaits those who step outside the faith’s confines… But real scientists, natural scientists, even social scientists shake their heads when examining the underlying assumptions and testing procedures of modern economics.

Don’t get me wrong, there are indeed scientific minded people within the profession. Over half of the last 10 years or so worth of Nobel Prizes have gone to people who in some way directly challenged the neo-classical framework – usually at fundamental levels. Unfortunately, little changes, at least at the attitude shaping and lower levels of, what I have to call “indoctrination” points – the madrasahs of micro and macro intro courses and the tight integration with modern political thinking and world economic policy. This is a failing of such magnitude, and with so many highly regarded members of the community calling attention to it… It violates such basic scientific principles that if it were not for strong countervailing forces, surely structural change would have ensued by now. We can speculate as to what those forces are, but the results are what matter.

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Here is Michael Hudson giving one anti-orthodox perspective. We could supply at least a dozen more, but the simple point remains: all of the Republican party and most of the Democratic party believe with full faith and fervor in a decidedly unscientific and hugely disadvantageous (to the population) brand of economics, even when and how they disagree falls largely within the same context. It is scary.

“Wealth creation” by debt leveraging – that is, asset-price inflation – was celebrated as a post-industrial economy, as if this were a positive and natural evolution. But in reality it is a lapse back into a rentier economy, and even into a kind of neofeudalism. The post-2008 bailouts have vested a new rentier elite to lord it over the 21st century, thanks to the fact that most gains since 1980 have gone to the 1% – mainly the financial sector, not to the 99%.

In the end this shrinks the economy – and that means that more and more loans will go bad, until crisis levels are reached at the point where lenders realize that there is no more room to extract more, and stop lending. But in the absence of government budget deficits, bank lending is the only support for demand – so the financial rug is pulled out from under the economy. That is the point at which banks demand bailouts – giving them the money, rather than giving the economy the revenue to spend and pull itself out of depression. So government debt is increased by giveaways to the banks, not by spending into the “real” economy.

Economics textbooks teach supply and demand curves. Every marginal increase in supply lowers the price of what is being supplied. For the job market this means that the higher the unemployment rate, the lower wages will fall. Conversely, the more workers you hire, the more you have to pay to attract workers. Government officials and bankers are indoctrinated in these textbooks and conclude that the less employment there is, the more wages will fall – thereby presumably leaving a wider profit margin, assuming that the goods can still be sold at a steady price. So employers seek to earn more by keeping employment low enough to prevent wages from rising. This maximizes the power of wealth over labor.

Economists conclude that to make economies more competitive, they need to keep wages low so as to undersell other countries. So a race to the bottom develops. But what seems to help countries compete actually hurts their domestic market.

Back in the 19th century this was called the reserve army of the unemployed. Unemployment keeps labour down. And even more important, to the extent that incomes do rise, they are paid out as debt service. A dynamic is put in place in which debt keeps labor down – not only by eating up its wages in debt service, but in making workers suffer sharp increases in the interest rates they have to pay or even risk losing their homes if they miss a payment by going on strike or being fired. Alan Greenspan explained that unemployment was not needed to keep labor down these days. All that is needed is to traumatize and disable them politically by debt leverage.

This is why, despite the fact that productivity has risen so dramatically, the real economy and its wage levels have tapered off in an S curve. The magic of compound interest has increased debt (and the savings of the 1%) to more than absorb the productivity gains. And this financial overgrowth has accrued to the 1%, not to the 99%.

Hudson is certainly not without his detractors, but he does offer a rather intuitive historical counter-explanation to current policies. If I were to be chipping away at the foundations of neo-classical dogma, especially as you hear it out of the cultural consensus trance, in a chorus of hallelujahs, it would be to say something like this: “Markets are not magically efficient. In fact, markets have all kinds of distortions in them. We have ways to analyze these distortions. Some very big distortions should be steered towards society’s benefit. Anytime industries or businesses tend towards monopoly status – or duopoly or whatever shared “big 3” –  towards market domination positions, government must step in in order to even preserve the pretense of enough market competition for the underlying “efficiency of markets” to function. This isn’t even heresy. It is within your very own articles of faith.”

Bigger challenges to come.

The News Makes Me Crazy.

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From → Economics

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