I really can’t do better than Yves does in introducing this piece other than to mention I am a trained Historian and as such Economics was never presented as an independent discipline, but always in the context of Political Philosophy. Thus for me Smith, Malthus, Hobbes, Locke, and Marx; Feudalism, Merchantilism, and Industrial and Political Revolution.
When we talked about Keynes we talked about his fiscal policies to increase aggregate demand and not obscure macro indicators and marginal growth of the private sector. For example–
(W)hat most mainstream economists had inferred as principal lesson from the Great Depression was that wages and prices had just not fallen sufficiently to get real wages down to ensure a return to high employment and to generate sufficient positive wealth effects as A.C. Pigou had defended in 1943. Consequently, the culprit was wage and price rigidities and what was needed was a strong dose of deflation. But since the market mechanism was just too slow to get wages and prices to adjust downward, some form of New Deal fiscal policy was required to reduce unemployment.
While this argument still remains today, and, in a curious twist, actually came to be described as the textbook “Keynesian” explanation of involuntary unemployment (characterized by sticky wages resulting from workers’ money illusion), there was also another explanation that one finds discussed as early as in 1937 in Hick’s IS-LM analysis, which was subsequently developed by Patinkin in 1948. The problem was also one of downward price rigidity but, in this latter case, it was because of nominal interest rates being stuck at their lower-bound (or in a so-called liquidity trap). The culprit now became interest rate rigidity in preventing the self-adjustment of the product market. While pointing to the lower bound in his analysis at the time, Patinkin rescued the Pigouvian prescription against Fisherian and Kaleckian criticisms that the wealth effects must also have as counterpart debt effects that would negate the former. Patinkin built a more-focused argument in his defense of Pigou and the need for deflation in periods of recession. He did so by erecting a policy framework that rested on the dubious significance of a particular type of wealth effect, normally described as the real balance effect, which pointed to the existence of central bank base money (or so-called “outside” money). In this case, much as with the Pigou effect, the real value of these money balances would rise as prices fell and thus, as long as prices fell sufficiently, households would feel wealthier, thereby stimulating household spending and eventually pulling the economy out of the recessionary trap. Essential reliance on these wealth effects and/or real balance effects still form the core of the explanation nowadays in traditional macroeconomics textbooks of the all-important downward-sloping aggregate demand relationship in price level-real output space.
If we now jump forward some seven decades to the recent Great Recession the arguments have changed very little within the mainstream story. There are some, especially the neo-Hayekians, who would rely on a strong dose of deflation to “cleanse” the system of mal-investment; and there are those, especially some of the modern neo-Wicksellians, who argue that the problem is that, even with a deflation, you will not be able to get real rates of interest sufficiently into negative territory to induce investment, because of the very low negative Wicksellian natural rate of interest.
Yeah, that’s really what Economics textbooks look like, and this is an easy one. Oh and there are a lot of fictional equations and graphs which are supposed to “model” reality but in fact never produce any quantifiable results because there is no data in them, just variables.
Yves provides a helpful bit of translation-
(Y)ou’ll still notice the requirement of economists, even left-leaing ones, speak in code. For instance, “wage rigidities” translates as “workers will not accept less than starvation wages even when conditions are desperate.” And even though this post does not use the expression “structural reforms,” their purpose is to reduce those supposedly deleterious labor market rigidities, which include anything that resembles labor bargaining power.
Another high-level frame for reading this post is that that neoliberal economics at its core believes that every problem can be solved by price, which then leads you to simple-minded “get out of the way and let the market do its work” approaches. This post explains why it is not so simple. Or to quote that great philosopher Yogi Berra, “In theory, there is no difference between theory and practice. In practice, there is.”
To distill it even further, Mainstream (Conservative) Economists deny that there was any stimulus at all from FDR’s fiscal policy and the only thing that worked was to increase misery so much by starvation, starvation wages, and the destruction of middle class prosperity that capital accumulation was unprofitable. Interest rates must be pushed below the zero lower bound.
Well, there’s another way to put that wealth to productive use and that’s tax the hell out of it and have the Government spend it. Not that according to Modern Monetary Theory you necessarily need to have it before you spend it, you only need taxes to enforce your currency as the preferred means of exchange.
In any event an economist who denies the Government spending added to Aggregate Demand and after World War II (along with the G.I. Bill and other benefits) led to the greatest increase in middle class prosperity the world has ever known is in complete and utter denial of reality.
They are morons or liars, there’s no other way to put it.
Yves cuts right to the chase here too–
(This is an) interview with Chris Hedges that focuses on one of (Michael) Hudson’s favorite themes: the way that central messages of classical economics have been airbrushed out of the current economic orthodoxy, or worse, turned on their head. Classical economics was concerned with eradicating the vestiges of feudalism, which led to concerns about deadweight costs like rent extraction as well as distortions caused by monopolies and oligopolies. While it does not come up in this talk, another concern of classical economics was the productive use of lending. Classical economists favored usury ceilings because lenders otherwise would fund speculation (in those days, gambling by the rich) as opposed to funding commerce.
Junk Economics by Junk Economists.