The Austerity Campaign Turns Ambivalence about Our Own Nature Against Us

By Michael Hoexter

The success of the austerity campaign in capturing the American and European political process is remarkable considering that it prescribes exactly the opposite of what factually grounded economic analyses would recommend.  Leading politicians and their advisors are pushing governments to curtail spending at a time of economic weakness and doing so in the post gold-standard monetary era where currency-issuing governments have no affordability constraint on spending.   The focus on public debt is leading the political process away from economic growth and full employment, despite the fact that all major actors in this process claim that their preferred policies are the way to lasting growth.  In the current American “fiscal cliff” negotiations, the leadership of both sides of the negotiation are pushing for different forms of austerity, with no effective organized force in government working against this economic madness.

Austerity is claiming victims around the world as we speak, with many of the economies of the Euro-zone now in a self-induced recession because of the politics of austerity.  Spain, Portugal, the Netherlands, Slovenia, Czech Republic, Hungary, Ireland, Greece, Great Britain, and Italy are in recession and even Germany appears to now be suffering the effects of the austerity of which its politicians were so enamored.

The only economic rationality that austerity seems to serve is to bolster the political-economic position of large creditors and financial institutions, in the United States represented by Wall Street, as they hope to dismember the assets of the social welfare states of the industrialized world and find new “markets” for their speculative financial products and services.  These wealthy groups have sponsored front organizations and think tanks that push for austerity and their wealth has enabled them to bombard legislators and government leaders with analyses and propaganda.  But their push has also taken advantage of “a fifth column” within the ranks of their would-be opponents and victims. The austerity campaign has utilized a series of misunderstandings about how economies work and about human nature that stretch back many years, with roots in the most powerful of social sciences, economics.

The would-be opponents of austerity from parties of what once was the Left have shared in many of these unrealistic ideas about humanity, hamstringing their opposition to this campaign of economic destruction, as well as participating in the destruction of the ideological basis of their own Parties.  Because they have in recent years endorsed what might be broadly called a “neoliberal” vision of the economy, they have become fatally compromised and unable to resist the push towards austerity effectively.

The Energy-Economics of Life

One of the most important books of the 20th Century is the physicist Erwin Schroedinger’s 1944 “What is Life?”, in which he sketched out the basic thermodynamic organization of living things.  Schroedinger’s work pioneered an approach to a wide variety of natural and social systems that later came to be known as complexity or “chaos” theory, an interdisciplinary approach to the natural and the social sciences rooted in understanding complex systems and their non-linear dynamics.

The fundamental question that Schroedinger was trying to answer in “What is Life?” was how can life exist if the Second Law of Thermodynamics also holds, which states that systems always tend to greater disorder.  In Schroedinger’s account, the basic plan of the energetic systems of living things is that they take in energy (called “negentropy” by Schroedinger) which enables them to maintain a high level of internal organization, while at the same time dissipating energy and increasing overall entropy through their waste products.  The ultimate source of energy for living system on earth is solar energy, especially the energy captured by the primary producers (mostly plants and other organisms that use ).  Eco-systems have evolved so that living things reciprocally “trade” what to them is “waste” enabling the earth’s systems overall to maintain a more complex level of organization and to sustain more life with the existing primary source of energy, the sun.

Living organisms and eco-systems more generally thus “defeat” temporarily the Second Law by being, in physical terms, “open” systems that bring in usable energy that enables them to live before succumbing to relative physical disorder towards the end of their lives.  The temporary defeat of the entropic tendencies of the 2nd Law is enabled by the “negentropy” of usable energy, often in the form of food.  In thermodynamic terms, living things belong to a larger class of “dissipative structures” within which energy is used to do some form of physical work or to enable a form of self-organization as contrasted to simpler “conservative systems”.   A conservative system is an “ideal” system in which all quantities are conserved and in which processes can be reversed, while dissipative systems are characterized by irreversible processes, which means they are time-bound.

While the above would appear in part to be incredibly obvious, banal observations, people seem to have great difficulty keeping them in mind when they think about themselves, when they devise personal or social ideals, or when they draft various theories about living things, including in the social sciences.  Ultimately it is often the ideal of a “perfect”, closed system that conserves all energy and inputs which distracts people from grasping the somewhat more complex reality of human life.

Dissipative Systems and the Desire to Consume

One of the features of dissipative systems is that they need a source of energy to function, they are “open” rather than “closed” systems.  In the case of animals, which have mobility or motility, they have drives to push them to seek out and incorporate sources of energy, usually through their mouth which of course is the entry to their alimentary canal.   Freud’s word for classification of this type of drive, as an “oral” one, is as good as any a description of the primitive but necessary drive of animals and human beings to incorporate sources of energy as well as the pleasure, experienced or inferred by an observer, attached to the experience of ingestion and satiation.  Freud’s linking orality necessarily with sexuality is perhaps a product of his repressed 19th Century imagination rather than an analytically helpful classification of all oral or incorporative drives.  The experience of satiation, of having consumed enough, keeps animals under most circumstances from consuming too much.

In Freud’s account of how the human personality emerges from the experience of having a body, the “oral stage” is the first stage and in his model of personality development, the later stages can sometimes “repress” the experience of the earlier stage.  No stage is ever entirely closed or superseded in the personality, each is built on top of the other.  “Orality” by itself is associated with very young babies and very early experience but also words like “sucker” used in adulthood suggest the vulnerability of being a baby and the dangers of being dependent.  Subsequent stages of development, according to Freud, may tend to paper over the anxieties and vulnerabilities that are associated with the oral stage.  In Freud’s model of how the personality works, multiple conflicting drives, fixation points, and “complexes” can lead to conflicts and divisions within a person’s own experience of their life, limiting the effectiveness of rational thought and action.

The “Protestant” Ideal of the Self as Self-Sufficient

The ideal portrait of the human being that has emerged in post-Protestant Reformation culture that dominates in Northern Europe and North America, is that of each human being self-sufficient and self-reliant.  The divide between Northern and Southern European cultures reproduces this divide between societies where individual autonomy is prized versus societies where people accept their interdependence with other family members and other members of the community.  Austere Northern Europeans sometimes flee, on vacation or otherwise, the post-Reformation culture of the North for an experience of more relaxed interpersonal boundaries that one finds in cultures around the Mediterranean and in the less-developed world.  You could say that one of the features of the “Protestant” ideal of the self is that it repressed the “oral” dimension of life, or in the case of Weber’s view of the Protestant capitalist, channels oral drives into the accumulation of monetary units, i.e. money savings.

Ideals of Self-Sufficiency and Economics

While consumption and the interdependence implied by the division of labor are important categories within economics, economic theorists have tended to paper over or bowdlerize the reality of our dependency on external energy sources and each other.  The dominant model of “Economic Man”, emphasizes “utility maximization”, which suggests a degree of control or mastery over the environment by each economic actor, without mentioning the need for intake of supplies from others or from the environment.  The tendency of the dominant neoclassical economic school to focus on markets and market transactions has also obscured the degree to which production of goods and services and reproduction of fully competent market participants have required energy and material inputs from the outside, as well as subsidy from natural systems.

Keynes’s contribution to economics was in part to establish the interdependence of parts of the economy on each other in a relatively holistic manner.  Keynes’s reintroduction of the ancient idea, for instance, that one person’s cost is another’s income via the Paradox of Thrift, works against the assumptions of neoclassical economics and the “Treasury View” that somehow all economic actors could save and increase their economic self-sufficiency at the same time.  The 80 year opposition to the relatively mild observations of Keynesianism in its various forms may stem from an attachment to the ideal of self-sufficient saving as a sacrosanct ideal.  This attachment when taken to extremes also might be considered a sign of a neurotic fixation of anti-Keynesians, especially those from the “Austrian” school.

Despite these tendencies, economic orthodoxy is “ambivalent” about dependency, as it also promotes as a matter of dogma free trade, which suggests that nations should depend on each other more rather than strive to achieve national economic self-sufficiency.

Austerity Economics Re-Energizes the Protestant Ideal of Self-Sufficiency to Provoke Shame

Austerity economics, similar to the “Treasury view” against which Keynes fought, tilts the balance of the ambivalence of economists and the public in favor of the ideal of self-sufficiency and against our “need to feed”.  The need for injections of spending to feed economic growth are denied by austerity advocates, like Pete Peterson and others, who claim that an inward-turned struggle with one’s own needs will yield economic growth and success.  Recalling Weber’s austere Protestant businessmen, austerity economics holds up as ideal a withholding or delay of consumption, supposedly to enable individual, organizations and governments to save money.

Holding themselves up, implicitly, as ideal because they have already achieved personal wealth by various means, the austerity advocates from the financial sector are presenting a view that somehow by cutting the supply of funding from government, that the economy, and in particular the lower and middle classes, will be “forced” to become self-sufficient.  They hold up the unachievable ideal that every economic sector, the public sector, the private sector, and the rest of the world can run a surplus at the same time, somehow each magically generating its own monetary units to add to its bottom line.  In their economic fantasy world, absorbed among others by the credulous President Obama, no one will run a net deficit, because each economic actor will auto-generate spending, money, and demand.

From this stance, deficit hawks conveniently overlook that most people’s incomes and wealth holdings have decreased, reducing their abilities to buy goods and services from either corporations or their neighbors.  From the comfort of their plush offices, they assume that everybody has or could easily gain an adequate income for even the bare necessities of life, that it is a matter for all of a voluntary choice to consume less and to save more.

In parading this ideal before the public and on multiple news programs through paid and semi-paid proxies, many in Protestant-dominated cultures and elsewhere will tend to feel shame about their own consumption and dependency on others.  In contrast to the ideal of the self-sufficient, bootstrap-pulling figure that austerity advocates parade before them, the average consumer and worker feels insufficient and inadequate.  Whatever excesses that some consumers may have indulged in during the time of the (finance-led) consumer boom of the period 2002-2007, become particularly sore spots, which may lead to more feelings of shame and inadequacy.  When shamed some tend towards withdrawal and inaction, while others tend towards projection onto others outside their sphere of acquaintanceship of the shameful feeling of being dependent and a “sucker”.  These ethnically or economically different others are then pilloried and scapegoated in discourse or via government policy.  The nurturing or caring aspects of the welfare state become a target of this scapegoating, as these are seen by some as the protector of less fortunate in society.

The austerity campaign thus artfully distracts the public and policymakers from the role of the financial sector in the economic misfortunes of the past several years by focusing political leaders on the issue of public debt and the supposed culpability of poor and middle-class people in their own misfortune for, from the perspective of these ideologues, consuming too much.

Modern Money Theory Recognizes That Economies are Open Systems

Among existing economic theories, those in the Modern Money School are the some of the very few economists to acknowledge that the economy is an open system that requires sustained input of new “energy”, new spending, in order for the desired economic growth to occur. The new spending can only in a sustained fashion come from monetarily sovereign currency-issuing governments spending more money than they collect in taxes, as non-governmental actors will over time face bankruptcy if they continue to give out more money than they take in.  If on a worldwide basis, economic growth is to occur, there must be net deficit spending by governments, even as some countries run trade deficits while others run equally large trade surpluses.  Unlike the nonsensical view of austerity advocates, not everybody can be a net saver or run a trade surplus.

Warren Buffett has recently recommended that the US should run permanent budget deficits, though he suggests that these be held constant and at a level that was too small for our current circumstances (3% of GDP).   In this striking admission by a well-known business figure, there is the acknowledgement that public deficits and debt are not a fundamental problem for the solvency of the US government.  However the arbitrary number that Buffett recommends would in budget year 2013 or in the foreseeable future still mean a very severe regime of austerity and lead to deep recession for the US.   In contrast to Buffett, MMT recommends targeting a budget deficit that would yield full employment and economic growth rather than rigid adherence to an arbitrary number.

Without the acknowledgement of our own nature as open, energy-seeking systems, and of our economies as sharing this characteristic as open systems, governments and societies more generally will be caught in a “low level equilibrium trap” with regard to economic policy.   We will not be able to formulate rational economic policies because we continually will be chasing the unreal ideal of a self-sufficient market economy, individually self-sufficient economic actors, and for that matter the unrealistic idea of a society that can float undisturbed above the endangered ecological systems upon which it rests.

 

36 Responses to The Austerity Campaign Turns Ambivalence about Our Own Nature Against Us

  1. Whether a system is “open” or “closed” is merely a matter of where you draw its boundaries, how you define the system. MMT defines an economy in three sectors, and identifies a sectoral financial balance that always sums to zero. The three sectors (government, foreign, and domestic non-government) comprise a closed system, no inputs or outputs from the outside. The 2nd law of thermodynamics refers to the universe, which is also a closed system. The earth by itself is open, but the earth and the sun considered together exhibit mainly the characteristics of a closed system, because influences from the rest of the universe are negligible for most earthly purposes.

    Any domestic economy is an open system, but the economies of the world, taken together, are a closed system.

    The mistake of the austerians is not that they confuse open and closed systems, but that they do not comprehend monetary sovereignty. They think that governments are like households. Some governments are like households: Greece, Germany, and California are examples. They are not monetarily sovereign. The US, Great Britain, and Japan are monetarily sovereign, and are not like households. Monetarily sovereign governments are able to create money (financial assets) from nothing, without limit, and without inputs from within or outside whatever system you define them to be a part of.

    As for Buffett, if he understood that deficits and debt were not a solvency problem for monetarily sovereign governments, he would have had no reason to limit the deficit to 3% of GDP. That limit is an effort to make the debt “sustainable”, because he thinks rising debt as a % of GDP is unsustainable and will lead to insolvency.

    • Golfer1John,
      The yearly analysis of flow of funds when taken as a “snapshot” is a closed, conservative system. However over time,, for growth to occur, the dynamic inflow of money must occur (as well as real economic factors like desire for goods and services) from the side of government. It is the difference between “comparative statics” and dynamics. The year-by-year comparative statics points to a real dynamic and in reality an open system.

      • It’s only “open” if the inflow from government is defined to be from outside the system. If the system includes government, then it is closed. The government’s deficit is the other sectors’ surplus. The net of all flows in the system is zero, and financial assets are conserved.

        • Golfer,
          I think I’m going to have to disagree with you here. If you designate something as a closed system there are no inflows over time. If you are defining the monetary economy with its three sectors OVER TIME as being “closed” you are re-writing the definition of “closed” if you are saying that it grows in size without inputs. Yes, the stock-flow consistent analysis of flows of funds on a yearly basis needs to assume a closed system but these snapshots of the system do not account for the fact that the system (usually) grows in size from year to year, due to fiat creation of money by sovereign currency issuers.

          • Can a closed system not “grow” over time as a result of its ability to create money from within the system?

            If I have a spreadsheet on my computer, and I put more data into it, does it not grow, and am I and my computer not still a closed system, considering the spreadsheet and the data in it?

            Government creates money from nothing, the same way I created data from nothing in my spreadsheet. I required no external inputs, only my thoughts directing my actions.

            If you are going to say that I (and government) expended some energy in the course of typing, and thus require an input of food or electricity from outside the system, then you are picking nits.

            • No, a closed system cannot grow…matter/energy is just shifted around in it. That is why living things (that grow) are open systems. Unless you want to invent your own definitions of “closed” and “open” system for your own use…

              • When one sector is in deficit and other(s) in surplus, it is a shift, not a growth, to use your terms. The total does not grow. The total financial assets in the system still sum to zero. That is true for stocks as well as flows. Things are shifted around. Shifting around does not contradict your idea of a closed system.

              • No, one of the main points of MMT is that government’s issue more money year over year leads to growth of the system (an enlargement of the amount of money). The year by year ACCOUNTING makes it look like it is simply shifted around but without more money in the system economies would not grow. This is a problem of the representation of the data. The flows of funds analyses are simply snapshots in time where it looks like the money is simply being shifted around. But over time, there is a virtual “inflow” of money from government spending. That is why the Public DEBT (the addition of all government deficits over time) is the total contribution of the government to the monetary holdings of the private sector plus the rest of the world. The problem is that flows of funds analyses are just large spreadsheets which are not dynamic presentations of data over time.

              • If you define a system to include MMT’s 3 sectors, one of which is government, and the money that makes the economic activity in that system grow comes from government, which is defined to be part of the system, then what is the input from outside the system that makes it “open”?

              • In terms of the physical players involved, no but in terms of the accounting and calculations , yes. If it were a closed accounting system, the government would have to get its money from one of the other players. It would be a zero-sum game. The vision of the “closed” monetary system is how the Right and “hard money” liberals think of government finance: that it must get its money from “China” or from members of the private sector. MMT seems the monetary system as, in terms of accounting, “open” that more money is injected into it by government or taken out of it by government.

              • Also, in terms of the actual physics, it can never really be closed because all players are in physical terms open systems (but this is not necessarily reflected in their analysis of the monetary system itself)… physics is about matter AND energy.

              • One really needs to precisely define “closed system” and “open system” and how they apply to finance for this discussion to have real content, for I think you are both right in some ways, but imho Golfer1john has it more right. It is “zero-sum” over the whole economy, the whole nation (taking a “closed economy” like the USA, pretty much, in the old days, decades ago), or the whole world. The government does need to have someone to tango with to really create money – someone willing to accept it! But the first George W. solved that for Uncle Sam a long time ago. The point is that money, currency, debt, credit is always a relationship with two ends and if one combines all the balance sheets, one must get zero.

                Also, one needs to distinguish “money” (which anyone can create saith Minsky) and “currency” (base money) which only Uncle Sam can. Do everything right, and everything will always add up to zero. It’s just the things we are adding or subtracting or cancelling that are non-zero: like the budget deficit / private surplus or the National Debt / Private NFA Savings. And these things certainly can grow, subject to accounting identities. And you can get somewhat stable economic growth for a long time with most of the increase coming from the increase of private debt / bank money, not government currency / NFA as we all well know.

  2. Yeah – I like that analogy, of the gov’t as the economic equivalent of the sun – the “external” source of “energy” needed to make the system work. Methinks it has definite possibilities …. “taxes” maybe being the equivalent of when the sun don’t shine :)

  3. “Despite these tendencies, economic orthodoxy is “ambivalent” about dependency, as it also promotes as a matter of dogma free trade, which suggests that nations should depend on each other more rather than strive to achieve national economic self-sufficiency.”

    The dogma of “free trade” is for public consumption, behind the curtain lies an intricate framework that makes trade in a “deregulated” environment quite constrained by politically determined structures. Fortunately for us, when you begin to believe your own bullshit in politics, you’re poised to lose. The austerians are cutting off the oxygen flow to the economy that’s already enriched them.

    This passage also bolsters the notion that the elite presentation of “libertarian capitalism” is stratified so that free market discipline is reserved for the weaker market participants while there is a respite in the socialization of monetary backstops. There is nothing “natural” about any of this, it is not determined by economics of any sort, it is all determined according to political arrangements and strutures.

    As relates to MMT, when monetary sovereignty is outsourced to middlemen who are themselves players in economic games, then the resulting ethical conflict of interest comes to dominate policy calls. “Ending the Fed” is being debunked in the waters of conspiracy theory to defang any efforts to reclaim monetary sovereignty. Language needs to be chosen thoughtfully to convey what is going on and to outline solutions.

    Whether central banking as is instantiated in the Federal Reserve was an appropriate policy response a century ago is best left to economic historians better grounded than I. But as the nature of money has gone through its various phases, gold backed, pegged, floating, fiat etc, the nature of the central bank and international institutions that have arisen to support them have remained relatively fixed, operating under many assumptions that clearly no longer hold. This conservative attachment to “the way things are done” again is politically determined.

    The divorce between fiscal and monetary policy is now maintained based on outdated assumptions with a renewed intent to suck mass resources up via rent seeking and crony capitalism. Given the clear and present danger of the Austerians deploying the Fed who are hostile to anything approaching a leisure society, and with the absence of any other well thought out and defensible alternative, synthesizing a holistic economic policy by integrating fiscal and monetary policy seems to be the way to go.

  4. Alex Seferian

    I agree that austerity is a problem in the current environment, and consider myself a strong supporter of MMT (among my friends and family, for I am not an academic nor a commentator beyond this blog). However, I think that the manner in which some MMT arguments are framed is not ideal, and I’d like to run a simple thought exercise in order to help drive home this point.

    Assume a simple “island” economy that is peaceful and requires no international trade to properly function. Assume also that this economy does not need to grow in a first instance; its inhabitants are content with the amount of food and shelter, and services (including healthcare) currently provided. Let’s call this Assumption #1. Since there is no foreign sector, the Financial Balances equation is simplified as follows: (S – I) = (G – T).

    Assume further that the sole role of the public sector is to clean the streets. Lets call this Assumption #2. To the extent no streets are cleaned, then S = I, which means that the economy invests whatever it saves; this is similar, I understand, to stating that the economy consumes whatever it produces.

    Assume then that the Government issues some currency in order to spend (e.g., to pay the wages of the sweepers), and it taxes some of that currency back. If G = T, then the net effect is that, at the end of a period, there will be no change in private sector savings; simply, some real resources will have been diverted away from the private sector, and towards the public sector in order to provide the cleaning services.

    Alternatively, assume that G > T (e.g., the same level of cleaning services are provided, but less money is taxed back), then the private sector will start accumulating savings/money. Assume no other changes (reminder: this is initially a no-growth, yet content, society), the level of “Debt-to-GDP” will grow. Run this yearly exercise for long enough (say 100 years), and eventually the ratio will reach infinity. Public debt levels are the mirror image of private sector savings levels. Savings are good. However, at some point in time, perhaps even gradually, the value of the currency will become worthless given inflation: too much currency chasing the same amount of original goods and services.

    If all of the above is consistent with MMT (albeit within a very confining set of initial assumptions), then we can all conclude that government budget deficits cannot be maintained for ever… inflation will eventually destroy the simple model outlined above. However, the US has been running deficits for most of its history. Therefore, the simple model is too simple… it must be necessary to revise the above Assumptions #1 and #2. Perhaps the conclusion is that public sector deficits can be run persistently, and their size may be almost irrelevant, if and only if, those deficits generate either: a) additional economic growth, and/or b) much needed social service (for people to be “content”).
    If the above thought exercise does not break down because of something I may have overlooked, then it is perhaps fair to say that MMT would do well if it were to frame its arguments as much as possible around the real economy and the allocation of real resources. More specifically, the focus has to be on convincing people that there are real projects or initiatives (e.g., infrastructure, education, healthcare) that are best carried out by the public sector and that will lead to increased growth and/or a more harmonious society. Once that convincing is done, MMT would just provide the “coup de grace”, evidencing that there is no affordability issue. In the end, it will have to be a political debate, in terms of what projects are more important than others, and how resources should be allocated amongst a society (e.g., “the top 10% versus the rest” sort of arguments).

    I think MMT is a tough sale because it’s a very powerful weapon. If it ends up in the wrong hands, as I would argue it did in Latin America for many decades, then it is potentially destructive. Similarly, the austerity mindset is also potentially destructive, for it too if in the wrong hands (or minds) can cause a great deal of harm, as I would argue it is currently doing in much of the Western world.

    • Alex,
      Very interesting comments. I’m in agreement that just discussing monetary aggregates only goes so far. I am very much for discussing the qualitative use of the awesome power of a fiat currency to address real social, economic and ecological challenges. I am planning some posts on these matters in the coming weeks.

      I also think your concerns are real that this power can be misused and that it is very dependent upon the quality of governance in a society, what type of political regime is in place to direct funds in a manner that is in the long run sustainable.

    • Maybe a professional economist can comment on the S-I thing. As I understand it, I is defined as spending (by business only?) on goods that are not consumed in the period under study. Plant and equipment, and other stuff like that. I know it makes sense in microeconomics, to take the expense over time as depreciation, but as a macro concept, it is still spending by one company that is income to another, and through it to its employees, just like any other spending, by business or by households.

      Savings, by contrast, is income that is not spent. It is a leakage that must be made up by someone spending more than his income. Government, for instance.

      But what on earth is the significance of subtracting one from the other?

      • I never understood why savings must be made up by govt. deficits.

        I earn $100. I save $50 in my savings account and spend another $50. Why is this leakage ?

        • Consider an economy in equilibrium with trade in blance, and the government budget in balance. If the people create 100 units of output and buy only 50 units, saving the other 50, what will happen? The producers will produce only what they can sell, so they lay off half the workers, until they can sell all they produce. That’s a characteristic of a monetary economy, as opposed to a subsistence economy where all possible output is necessary to support the people. In a monetary economy, sponsored by the monetarily sovereign government, the government’s responsibility is to create enough aggregate demand (by spending more than it taxes) to absorb all of the potential production of the economy: what the people want to consume, plus what they want to save.

          If everyone is employed, and people want to save some of their income, the government (and/or the foreign sector) must consume the output that they produce, but do not wish to consume.

          And I think maybe I get the S-I part now. If some goods are produced and purchased but not consumed, that is I. (Or even inventory increases of unsold goods.) Government doesn’t need to offset that, it is output that is produced and maybe sold, but is not consumed all right away, it will be consumed in future periods. The economy can continue that way indefinitely, if S=I, without government or foreign sector deficits (although without growth). Only the excess of full-employment production over (consumption plus investment) has to be offset by a trade surplus or government deficit.

  5. Technically, nuclear energy is a valid example of a non-solar energy source, though everyone knows how difficult the hazardous waste problem is. Other than that, I agree with all of this. But it isn’t hard enough on the academic economists, (in my opinion, of course). I’ve been reading Steve Keen’s material lately and liking it a lot. I don’t think “…a series of misunderstandings about how economies work” is nearly strong enough.

    Professional economics, as a profession, has sold out whatever was scientific in it after Keynes, and replaced it with religious dogma and ideological drivel. We need to attack these people and, ultimately, take them down. The ones who won’t recant should be drummed out of higher education altogether, and forced to make a dishonest living at some miserable right-wing propaganda shop. I refuse to call them “think tanks”. The only things they think up are new ways to scare and confuse people.

    The movie “Inside Job” made a good start at exposing how several top academic economists are literally for sale. Glenn Hubbard, late of the Mitt Romney campaign, was called out in the movie for blatant undisclosed conflicts of interest in which he took huge sums of money from people he was supposedly analyzing – and never disclosed it. This, along with absurdly inflated “speakers’ fees” are the common ways professional economists sell their reputations and prostitute the search for scientific truth.

    If MMT has another historical task in addition to recommending good policy and explaining the valid economic principles which undergird it, that task is to take on these pseudo-scientific jerks and expose them – shame them – make fools of them – and see to it that none of their rotten ideas gain traction in the name of Economics ever again.

    Or does that seem harsh?

    Cheers

    • Dale,
      There are certain basic data collection functions in economics that are working pretty well and should be preserved…the Fed collects some great data, for instance. Some conventional mostly Keynes-influenced analysts come to some reasonable conclusions about local phenomena based on these data. Krugman is right in relative terms when he points out that his right-wing opponents are entirely ignorant of conventional macro, which would lead them to something like his position. However when they get to the big picture, including Krugman, I agree that most lose their way because of the theoretical bunk they feel forced to reiterate to remain part of the neoclassical club. Steve Keen has been doing some great work in exposing the nonsense that passes for economic theory and reasoning.

  6. Mark Robertson

    Everything that Mr. Hoexter writes about in the above post (including the “ambivalence”) refers only to the lies of the 1%, not to their actions.

    All the values, beliefs, assumptions, and rationales behind the push for austerity are not “mistakes” or “misunderstandings. ” They are part of the 1%’s propaganda, which is designed to increase the gap between the 1% and the 99%.

    The 1% and their puppet politicians do not believe their own lies. For example, when they speak of self-sufficiency and self-reliance, they refer only to the middle and lower classes. They mean that regular people should not rely on each other, or on the government, but instead should rely on the 1%, who are the ultimate parasites, with the lower classes as their hosts.

    Mr. Hoexter writes, “Economic orthodoxy is ‘ambivalent’ about dependency, as it also promotes as a matter of dogma free trade, which suggests that nations should depend on each other more rather than strive to achieve national economic self-sufficiency. ”

    “Economic orthodoxy” and “ambivalence” refer only to neo-liberal propaganda, not the actual practice of the 1%, who are not ambivalent. Quite clearly they want supreme power. For them, “free trade” means the freedom to build monopolies, the freedom to pursue the race-to-the-bottom in wages, and the freedom to use puppet politicians to kill free trade.

    Mr. Hoexter writes, “Pete Peterson and other austerity advocates deny the need for injections of spending to feed economic growth. They claim that an inward-turned struggle with one’s own needs will yield economic growth and success.”

    Again, austerity advocates only apply this propaganda to the middle and lower classes; never to themselves. Utter parasites like Pete Peterson with his Blackstone Group are totally dependent on bank loans for the leverage they need to buy a company, fire all its workers, strip it of assets, and move on to the next target company, like mindless locusts.

    Mr. Hoexter writes, “Holding themselves up, implicitly, as ideal because they have already achieved personal wealth by various means, the austerity advocates from the financial sector are presenting a view that somehow by cutting the supply of funding from government, that the economy, and in particular the lower and middle classes, will be ‘forced’ to become self-sufficient.”

    Again, this only relates to the propaganda, never to the reality. In practice the 1% do not want the 99% to be self-sufficient. Instead, the 1% want the 99% to become wholly reliant on the 1%. The parasite (the 1%) wants to be revered by the host (the 99%). Hence, the parasite continually inveighs against government spending. For example, in falsely claming that Social Security is “broke,” the parasites want the government to give Social Security to the parasites. That is, privatize it.

    Mr. Hoexter writes, “They hold up the unachievable ideal that every economic sector, the public sector, the private sector, and the rest of the world can run a surplus at the same time, somehow each magically generating its own monetary units to add to its bottom line.”

    Only in their propaganda. They KNOW they are lying, and they use their lies to shame the lower classes into groveling subservience.

    Mr. Hoexter writes, “In their economic fantasy world, absorbed among others by the credulous President Obama, no one will run a net deficit, because each economic actor will auto-generate spending, money, and demand.”

    Their economic fantasy world only exists in their propaganda. The 1% know that no such world can ever exist. As for Obama, he is not “credulous. ” He is owned by the 1%, and must obey their orders. Anyone who thinks that Obama “just doesn’t get it,” or is “simply misinformed” is in denial. Such naïve people are part of the reason why the depression continues.

    Mr. Hoexter writes, “Deficit hawks conveniently overlook that most people’s incomes and wealth holdings have decreased, reducing their abilities to buy goods and services from either corporations or their neighbors. From the comfort of their plush offices, they assume that everybody has or could easily gain an adequate income for even the bare necessities of life, that it is a matter for all of a voluntary choice to consume less and to save more. ”

    I disagree. The 1% make no such assumptions. They know they are rich, and they want to increase the gap between themselves and the poor. Therefore they tell the 99%, “If you are not rich like me, it is your fault. ” Again, this is mere propaganda. The 1% themselves do not believe it. Most of them became rich by luck or by theft.

    Mr. Hoexter’s last sentence reads, “We will not be able to formulate rational economic policies because we continually will be chasing the unreal ideal of a self-sufficient market economy, individually self-sufficient economic actors, and for that matter the unrealistic idea of a society that can float undisturbed above the endangered ecological systems upon which it rests.”

    Let’s simplify this to: “We will not get out of this depression until the public stops believing the lies of the 1%, their puppet politicians, and the corporate media.”

  7. Michael, this is one of the most brilliant articles that I have read on this site. It ties the human natural condition to the defacto human experience. I love the defense of Keynes, and his natural extension in the MMT world. Sadly, I am very cynically disposed to believe that what we see in global economic politics is the simple coming to an end game in human occupancy of our beloved planet. We may see this in everything from the world’s love of warlike conflict to resolve issues (like the Old World ideal of the duel, or a fight to the death), to economics favoring individual wealth over social well-being, to the placing of retrogenerated polical “ideals” over a reliance on human creativity and cooperation, and especially “social responsibility.” As the battle over the “Fiscal Cliff” threatens us with even greater pain and human sacrifice, the Nero’s in Washington obviously seem to prefer fiddling over solution finding. If the world of policial “ideals” could simply be held in abeyance for the elected representative’s term of office, we could make great progress. After all, I accept the our elected leaders are all at least bright and motivated, so, if they apply their intelligence and drive to governance rather than defense of useless ideals, we can make actual progress. How many are actually willing to do so? Only time will tell.

  8. All ‘systems’ are recycled.

    From the dust of a universe, a universe is born.

    The Energy that drives this is known as the great ‘Breath’. Something that always Was, Is, and Will Be. (From nothing, only nothing can come)….

    When Breath enters a ‘system’ then existence is possible; when it leaves, the system is recycled. While it pulses, certain laws are evident within the system.

    One list I know of is from Dwahl Kuhl (A Treatise on Cosmic Fire – A.A.Bailey). Law of Economy, Attraction, Synthesis in the Cosmos; Law of vibration, cohesion, disintegration, magnetic control, fixation, love, sacrifice and death (restitution) in the system.

    The microcosmic energy unit man is subject to these macro Laws: human ‘laws’ are child’s play in this context.

    Best law we could have for ourselves is: ‘do nothing to harm another human being’. Lying, cheating, manipulating, murder and deprivation all harm other human beings. No other laws would be necessary after that would they?

    You cannot fix a ‘system’ that is an expression of yourself without changing yourself!

  9. with many of the economies of the Euro-zone now in a self-induced recession because of the politics of austerity.

    The so-called “politics of austerity” were a response to a recession, which was the condition before any mention had ever been made of austerity as a remedy for the failing euro-economies.

    this divide between societies where individual autonomy is prized versus societies where people accept their interdependence with other family members and other members of the community.

    The glorious state can allow no competition for allegiance, which is why the “advanced” countries have done all in their power to eliminate the influence of the smaller divisions of society. Clans, moieties, tribes and even families must be subordinate to the all-powerful state, not to enhance individuality but isolate the individual in its relationship with the state. This is an obvious goal of the welfare state, to replace the normal interlocking reciprocal relationships of individuals related by blood, heritage or affinity, with a single attachment to the state, that supplies every need in exchange for absolute loyalty. Fortunately, there are “savages” still unexterminated by the state that can carry the social genes of normal humanity and hopefully supply them to a better future.

    • Chuck M. , you may not realize, but many MMTers are sympathetic to this point of view. But the main point is do the accounting right; that’s all that MMT is. Just saying that the state should not impose financial burdens on any clan, moiety, tribe, family or individual which it does not provide the means to satisfy. Because, that = unemployment, is insane. So Kafkaesque, it is in Kafka.

      And it is just an empirical fact leading to welfare states that the state does do a lot of things, better, more efficiently and effectively than private, profit seeking enterprise. Health care, old age retirement, defense ( you really want to have roving mercenary armies? ) , scientific research, many kinds of education, infrastructure, utilities like water, power, sewage etc, roads…

      SO why should not the clans, moieties, tribes and even families not band together to do these things together? And if you are going to have a state at all, it is practically automatic that even the most laissez-faire state is going to be in charge of the monetary system. IMHO that is the best economic definition of the state – “the guy” in charge of the monetary system. The guy with the most valued liabilities, which are so valued that they are tradeable, so valued that the total is not ever settled and decreased in the ordinary course of business.

      • “the most valued liabilities, which are so valued that they are tradeable, so valued that the total is not ever settled and decreased in the ordinary course of business.”

        Lots of others are tradeable, too, from AAA corporate bonds down to liars’ loans. But the rest is of the essence. Most valued (risk-free), and therefore never need to be settled. And can grow without limit. Only a monetary sovereign can claim those characteristics.

  10. “The success of the austerity campaign in capturing the American and European political process is remarkable considering that it prescribes exactly the opposite of what factually grounded economic analyses would recommend. Leading politicians and their advisors are pushing governments to curtail spending at a time of economic weakness and doing so in the post gold-standard monetary era where currency-issuing governments have no affordability constraint on spending. ”
    __

    I read this blog every day (I am a HUGE Bill Black fan). And, having read a breadth of authors on the topic (of late Yves Smith, Nomi Prins, Michael Lewis, Reinhart & Rogoff, David Graeber, Neil Barofsky, but also going WAY back to “Predators Ball” and beyond), I love it.

    My concern, though is that this is a bunch of PhD’s running dog cognoscentis preaching to the aggregate Choir. Billy Bob and Bobbie Sue ain’t gettin’ it.

    “It jes’ don’t make no common sense, sheeee-it…”

    I wrote on my REC blog last week:
    __

    We’re “broke,” right? We must cut government spending, right? Drastically, right?

    Well,

    – the latest nominal U.S. unemployment is still around 8%;
    – the current Fed discount rate is 0.75% (that’s not a typo);
    – current 30 year Treasuries only pay 2.8% (think about that);
    – The U.S. is a sovereign currency issuer;
    – U.S. industrial capacity is not quite 78%.

    What’s wrong with this picture? Painted over by the fevered spectres of Greece, Invisible Bond Vigilantes and Inflation-Hedge Bogeymen Gold Bugs?

    __

    Also too upscale of an audience.

    Dunno. If I didn’t have kids and a grandson, I’d quit giving a crap.

    • Bobby,
      I’m sorry if the tone of this seems too high flown to you. Fortunately or unfortunately what pointy headed academics or intellectuals write about sometimes does in fact have a lot of influence. On the other side of the equation there are many people influenced by that 18th Century pointy-head Adam Smith (in a misreading I think) to suggest that government has no place in the economy. Hayek was a philosopher who influenced Margaret Thatcher and Reagan to attack the Keynesian successes of the post war era.

      I think we’re kidding ourselves if we dismiss the importance of ideas, even if at first they are not presented in a way that is accessible to everybody.

      • “Thomas Carlyle, the eminent Scottish essayist and sometime philosopher, was once scolded at a dinner party for endlessly chattering about books: ‘Ideas, Mr. Carlyle, ideas, nothing but ideas!’ To which he replied, ‘There once was a man called Rousseau who wrote a book containing nothing but ideas! The second edition was bound in the skins of those who laughed at the first.'”

        -Benjamin Wiker, 10 Books That Screwed Up the World and 5 Others that Didn’t Help, (2008), Regnery Publishing

  11. “The only economic rationality that austerity seems to serve is to bolster the political-economic position of large creditors and financial institutions, in the United States represented by Wall Street, as they hope to dismember the assets of the social welfare states of the industrialized world and find new “markets” for their speculative financial products and services.”
    __

    And, who, precisely, will comprise the large enough rube market for this garbage?

  12. Hi Michael, here’s my lengthy commentary on this very interesting piece.

    I agree that “Neoliberalism Kills!”

    Next:

    Schroedinger’s work pioneered an approach to a wide variety of natural and social systems that later came to be known ascomplexity or “chaos” theory, an interdisciplinary approach to the natural and the social sciences rooted in understanding complex systems and their non-linear dynamics.

    Chaos Theory and complexity theory are not the same things. Chaotic systems are deterministic systems whose course can’t be predicted only because small changes in initial conditions create widely variant outcomes and we are unable to measure those initial conditions with enough precision to distinguish different dynamic paths of these systems. So the relationship between the fluttering of a butterfly’s wings and a tidal wave in Japan, for example, is, theory, deterministic, but we don’t know enough about the initial conditions surrounding the process to be able to predict the tidal wave from the precise fluttering of the wings and the interaction with the atmosphere.

    As for Complex Adaptive Systems, there are varying definitions and characterizations of these. I’ve offered my own here (Ch. 2), most of which is too lengthy to reproduce in this comment, but two key points: first, such systems are profoundly non-deterministic, and path-dependent, in principle. And second, human-based social CASs, are characterized by concentrations of authority, power and influence relations, and of the resources that are at the basis of them. They are a natural occurrence, an emergent reality affecting CAS interaction. The existence of such relations, moreover, is an important factor distinguishing social CASs from other types of CASs.

    Specifically, social CASs are subject to human attempts to change the patterns of interaction and outcomes that the CAS is predisposed to produce. In fact, management (political leadership) is frequently about attempting to treat organizations (social systems) as though they were mechanical systems, subject to determinate cause-and-effect relations, rather than as CASs whose global behavior results from self-organization and distributed knowledge processing. Such attempts produce continual conflict and oscillations between system predispositions produced by interacting agents within self-organizing processes, and other predispositions produced by the efforts of the powerful and influential to realize their own visions of the future through command-and-control interventions. Thus, social CASs constitute a type we will call Promethean CASs or PCASs, because, in a manner of` speaking, their normal predispositions toward behavior and distributed knowledge processing patterns are subject to the “god-like” intervention of the powerful and the influential.

    In stating the above, we do not intend to make the point that human efforts to purposefully change organizations and social systems through management (political/governmental leadership) are always and everywhere negative in their implications. Instead, we are simply pointing to the issue of analyzing, understanding, and predicting the impact of managerial (political/governmental) interventions on existing self-organizing behavior and knowledge structures in organizations and society. Because they are PCASs, social systems cannot be understood solely in terms of CAS theory and models developed to account for biological phenomena at the cellular level or in animal behavior. Instead, we need new models that will account for the impact of the interaction of predispositions toward self-organization arising out of distributed behavior and knowledge processing, and predispositions to new goal states introduced by hierarchically organized agents with disproportionate power and influence in commanding or otherwise influencing agent behavior.

    The task of any CAS system is to maintain itself at “the edge of chaos.” This task is difficult enough in the face of environmental influences that tend to transition CASs either to chaotic dynamics, or to closed systems inexorably driven toward a sterile mechanical equilibrium. It is even more difficult in the context of continuing management interventions that frequently may amplify the strength of tendencies toward one extreme or another by changing the internal environment affecting self-organization. Management (political/governmental leadership) in the context of the Open Enterprise (or Open Society) is about implementing policies and programs that will support self-organization in distributed knowledge processing and problem-solving by maintaining openness in problem recognition, developing alternative solutions, and error elimination, as well as openness in communicating and diffusing new solutions across the enterprise.

    The ideal portrait of the human being that has emerged in post-Protestant Reformation culture that dominates in Northern Europe and North America, is that of each human being self-sufficient and self-reliant. The divide between Northern and Southern European cultures reproduces this divide between societies where individual autonomy is prized versus societies where people accept their interdependence with other family members and other members of the community.

    I think this generalization is overdrawn. First, there’s a big difference between post-protestant reformation culture in areas where Calvinism was important, as compared to area where Lutheranism and Catholicism predominate. In addition, the nations of Northern Europe and also Canada are much more communitarian than the United States, even if those of Southern Europe are more communitarian than either.

    Second, Italy is a really complex case. Edward C. Banfield, a Professor and conservative political thinker did a Ph.D. thesis studying a poor village in Southern Italy called The Moral Basis of a Backward Society, (1958) His major finding, which he claimed was typical of southern Italy and Sicily, was that social structure had broken down in this part of Italy, and that primary form of social organization to be found was “amoral familialism,” a form of organization in which people gave their primary loyalties and identification only to their families, and recognized no other form of obligation. Admittedly that’s not isolative individualism, but it is far more atomistic than the social organization prevailing in Northern Europe either then, or since.

    Third, I wonder whether the people of Greece, Spain, or Portugal really feel or ever felt shame, over their condition, but just a desire to stay in the Eurozone! Anyway, I’d need empirical data before concluding that they’re ashamed of themselves because they haven’t been self-sufficient enough.

    Austerity Economics Re-Energizes the Protestant Ideal of Self-Sufficiency to Provoke Shame

    This may hold in the United States to a degree, among some portions of the population; but I don’t think the polls show much support for austerity or shame about what has gone on. There seems instead to be great anger at the 1% and the politicians.

    Modern Money Theory Recognizes That Economies are Open Systems

    MMT recognizes that the monetary system is open since Government has a vertical relationship to the system of money flows in the private sector. There are also relationships between the money system and the system of real wealth production. But I don’t see much emphasis in MMT on Complex Adaptive Systems theory or on CAS models based on MMT theory. We have system dynamic models. But they are not either agent-based CAS simulations coming out of the Santa Fe approach; or simulations of the emergence of new global properties based on the dynamic process interactions of other properties that we see in the Maturana-Varela school. The system dynamic models are, instead, based on the systems engineering tradition established by Jay Forrester and the Limits to Growth Modelers.

    Next, on Buffett:

    Warren Buffett specified a 2.5% deficit target, less than specified by the Eurozone which allows deficits of 3% of GDP. You also said:

    MMT recommends targeting a budget deficit that would yield full employment and economic growth rather than rigid adherence to an arbitrary number.

    I think I disagree here. As I understand it, MMT thinkers recommend not targeting any deficit number; but instead striving for full employment and price stability and allowing the deficit to float. Even in cases where demand-pull inflation is threatening or beginning, I think MMT favors either targeted taxation, or targeted spending cuts to bring price stability. Not targeting the level of the deficit or the debt-to-GDP ratio per se.

    Without the acknowledgement of our own nature as open, energy-seeking systems, and of our economies as sharing this characteristic as open systems, governments and societies more generally will be caught in a “low level equilibrium trap” with regard to economic policy. We will not be able to formulate rational economic policies because we continually will be chasing the unreal ideal of a self-sufficient market economy, individually self-sufficient economic actors, and for that matter the unrealistic idea of a society that can float undisturbed above the endangered ecological systems upon which it rests.

    I very much agree with this, especially the last sentence.

    And btw, I also very much agree with the comments by Mark Robertson and Marcos.

  13. Will Richardson

    Great piece.

    Economics focuses on the gains from specialisation and trade, ignoring national boundaries but this means that we are incredibly interdependent; the myth of the individual heroic entrepreneur is nonsense when in reality people work in teams and it’s the sporting example of heroic teamwork, together with personal performance, that should be a more vaunted leitmotif for us all.

    Contrast the sucker/toddler/narcissistic adolescent behaviour of the corporate whore FIRE sector and n%’s sense of entitlement! These people are very far from the ascetic capitalist protestand work ethic and much more baronial baroque conspicuous consumption combined with contempt and condescension for their fellow beings aka plebs, in their self-loathing projections on ALL the rest, never mind the weak, vulnerable people.