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The difficulty lies not so much in developing new ideas as in escaping from old ones.
~ John Maynard Keynes

You must unlearn what you have learned.
~ Yoda


[W]e’re living in a Dark Age of macroeconomics.
~ Paul Krugman

[T]he Jedi Knights were the guardians of peace and justice in the Old Republic. Before the dark times, before the Empire.
~ Obi-Wan Kenobe

* All unidentified or unlinked quotes herein are from Paul Krugman, "How Did Economists Get It So Wrong?" Additionally, even when not directly quoted, significant portions of the following essay are paraphrased from Professor Krugman's article.

I was painfully ignorant of economics when the economy crashed in 2008. Being a progressive, I knew a bit about the evils of neoliberalism and the Washington Consensus, but mainly what I knew was this: A Great Depression-style crisis was not supposed to happen again. And then, it did. Something almost no one thought could happen, happened: The market failed!

I, like everyone, was left to wonder: How did it happen? Why did we think it couldn't? And why haven't we been able to fix it?

                                           *                  *                  *

Let me start with a point that might seem obvious (it's actually not as obvious as people might think): Of the people currently trying to understand and/or fix the crisis, there is a major divide between people who think the present crisis is a demand problem and people who think the present crisis is a supply problem. As I'm using the term, supply-siders are not Laffer Curve, Reaganomics supply-siders. Instead, I am using the term supply-sider in a narrow sense - namely, to refer to people who believe that the present crisis is a problem of supply.

In broad terms, the supply/demand divide shakes out along both academic and political lines. First and foremost, the supply/demand divide is academic: Saltwater (New Keynesian) economists are demand-siders; freshwater economists are supply-siders (in fact, freshwater economists' models do not allow for a general shortfall of demand). But in addition to this academic divide, there's a general political divide: Democrats are demand-siders; supply-siders are Republican. There are some Republican demand-siders, but they were (at least initially) shouted down.

So okay, there's an academic and political debate that falls along the supply/demand divide, but how does the supply/demand divide relate to the crisis? Well, the answer to the supply/demand question defines the possible remedies. Specifically, if you believe the problem is a shortfall of demand, the remedies are government spending, inflation-producing stimulus and/or debt forgiveness. If, on the other hand, you believe the economy is being held down by insufficient supply, the remedies are supply-side reforms (deregulation, tax incentives for businesses, freer trade, etc.) In terms of the political debate, the question of whether the problem is supply or demand is a defining, threshold question.

However, the supply/demand divide doesn't necessarily distinguish Jedi from Sith: All freshwater economists are Siths, but saltwater economists are like a young Luke Skywalker, they have the potential to be Jedi, but they can be seduced by the dark side of the Force. So, for example, here's saltwater economist Greg Mankiw early in the crisis recommending a period of moderate inflation (recognizably Jedi); then, in the face of intense Sith resistence, he went silent; then he emerged recommending full-on supply-side (Sith) reforms, even though it's clear he knows better.  

A good start towards understanding this story is to understand where the supply/demand division comes from. And the central figure of the supply/demand story is undoubtedly Keynes: The supply/demand debate is really about the ongoing battle between Keynesians and neoclassical economists. And it starts where all stories about economics start, with Adam Smith and the "invisible hand."

A NEW HOPE

There are still many people in America who regard depressions as acts of God. I think Keynes proved that the responsibility for these occurrences does not rest with Providence. ~ Bertrand Russell

The idea behind Adam Smith's metaphor of the "invisible hand" is that the market is self-regulating. This idea was the foundation of both classical economics and its 19th and 20th century predecessor, neoclassical economics. It's important to understand that the idea that the markets are self-regulating isn't just a piece of the neoclassical model, it's the foundation. To question this idea is to question the entire edifice.

Perhaps then, we shouldn't be surprised that many adherents to the model, even when faced with the horrors of the Great Depression, could not bring themselves to question the market. The idea was too foundational to be questioned, even in the face of overwhelming evidence that came in the form of human suffering. These die-hard neoclassicists' faith in the market was so unshakable that they argued the Great Depression was, at a minimum, necessary and some went so far as to see it as a force for good. Thus, Treasury Secretary Andrew Mellon advised Hebert Hoover to:

liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

The market, in Mellon's view, wasn't broken. The market was doing God's work: "purg[ing] the rottenness out of the the system" and rewarding the "enterprising." To Mellon, market failure operated on the level of Biblical floods and plagues, smiting the wicked and rewarding the virtuous. And the Biblical analogy is apt: If you start with the assumption that God is all powerful and just, floods and plagues cannot be senseless tragedies; similarly, if you have an unshakable faith in the market - if that is your starting point - the Great Depression must be necessary, or even good. Thus, as late as 1934, neoclassical economist Joseph Schumpeter insisted that “Depressions are not simply evils,” they are “forms of something which has to be done.”

Fortunately, John Maynard Keynes was around to say: Poppycock! We created the market for our convenience and it's broken. We shouldn't stand around and moralize like a Bronze-Age shaman who believes hurricanes and earthquakes are signs from God (oh wait!), we should figure out what's wrong and fix it:

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge.

I love that quote from Martin Wolf. I think it's exactly right and I think of it every time I hear freshwater economists prattling on about workers who don't want to work. In my opinion, Keynes had it right - moralizing about the economy is superstitious hooey, not fit for modern civilization. For Keynes, market failure wasn't analogous to a Biblical calamity, it was analogous to mechanical failure:

[T]he resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life...and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.

For Keynes, the Great Depression wasn't a Biblically-inspired morality tale; we had "blundered in the control of a delicate machine." We didn't have weak morals; we had "magneto [alternator] trouble." In the Keynesian, and I would argue scientific, world, the Great Depression wasn't moral retribution, it was a mechanical malfunction. The corollary to this approach, of course, is that depressions are fixable.

Keynes diagnosis was that the malfunction that had crippled the economy was a general shortfall of demand (Keynes was the original demand-sider). This was a refutation of Say's Law, the principle that supply creates its own demand. According to Keynes, the fix for this particular malfunction - a general shortfall of demand - was government spending. The government had to spend enough to compensate for the lack of private spending in order to keep the economy from shrinking. The efficacy of the Keynesian approach was vindicated when the United States engaged in the colossal public works program known as WWII and the country was restored to full employment.  

So what happened? We're in a recognizably Keynesian crisis, a crisis we know how to solve. Why are we divided and paralyzed? Part of the answer is that almost the entire economics profession forgot how. And that forgetting started with Milton Friedman.

THE EMPIRE STRIKES BACK

It’s possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as “moderately conservative in its implications.” But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge. When William Buckley wrote God and Man at Yale, one of his key complaints was that the Yale faculty taught – horrors! – Keynesian economics. ~ Paul Krugman

The policies adopted in the wake of the Keynesian revolution produced the most equal and prosperous society in the history of our country. But, as Paul Krugman noted in the above-quoted passage, Keynesianism and movement conservatism were always at odds. Thus, it was perhaps inevitable that as soon as the pain of the Great Depression receded from memory, a neoclassical revival would begin. The leader and great populizer of that revival was Milton Friedman.

Milton Friedman and Monetarism

To fully exorcise Keynes, Friedman had to confront the problem of recessions generally and the Great Depression in particular. To the enduring chagrin of free-market purists, Friedman conceded the key point - namely, that government intervention was necessary. But Friedman confined government intervention in the economy to activities of the central bank - the Great Depression, Friedman argued, could've been prevented by increasing the money supply, fiscal stimulus was unnecessary. "Thus, Friedman recognized the potential for recessions and the necessity of government intervention, but he attempted to confine that intervention to the tinkering of central bankers:"

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

Although Friedman's neoclassical conversion was complete by 1953, Keynesian, demand-side policies were the norm for both political parties:

A while back, a commenter led me to a Life Magazine article from 1954 where President Eisenhower’s top economists discussed their plans for a slowing economy.  Here’s how they were thinking about dealing with it:
Anti-depression planning by the Administration includes plenty of stop-gap measures just in case the experts prove wrong and the expected moderate decline turns into full-scale recession. On the shelf are $15 billion of public-works projects [that’s about $100bn today] already blueprinted and approved by Congress, which can quickly be set in motion. Plans have been made to speed up state and local public-works projects, if need be by buying up their bond issues. The “tight money” policy, which has already been liberalized, would quickly be switched to fast expansion of credit by decreasing Federal Reserve margins, resuming the price-pegging of government bonds, and stimulating installment buying. Taxes would be cut still more, the building industry would get special inducements to expand. The republicans say they will spend money faster than the New Deal if they have to.

But the Keynesian consensus would come to an end with the stagflation of the 1970s. For Keynesians of the 1970s, high inflation and high unemployment were considered to be mutually exclusive. However, both occurred simultaneously in the 1970s and the phenomenon was dubbed stagflation. The prescription for stagflation - a situation of simultaneous high inflation and high unemployment - is to stimulate the supply-side, a remedy that eluded the demand-oriented Keynesians. Although stagflation is a limited phenomenon, it effectively ended the Keynesian consensus and accelerated the neoclassical revival.

The Great Moderation

The Great Moderation - a period that ran from 1985 to 2007 - was a period of relative financial stability, in which the fluctuations in the business cycle were successfully controlled by the actions of the central bank. Thus, in 2003, Nobel laureate Robert Lucas confidently proclaimed that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” As one might expect, the economic models developed during this period were not particularly helpful when it turned out Lucas was wrong.  

~ Freshwater Macro: Perfect Markets and Perfect Rationality

"Freshwater economists are, essentially, neoclassical purists," who believe "that all worthwhile economic analysis starts from the premise that people are rational and markets work." For freshwater macroeconomists - who assume perfect markets and perfect rationality - a general lack of demand isn’t possible because prices always move to match supply with demand. But what about recessions?

In the 1970s, freshwater macroeconomist Robert Lucas argued that recessions were caused by temporary confusion wherein workers and companies had trouble distinguishing overall changes in price levels and therefore, supply and demand were temporarily out of sync. For Lucas, any attempt to fight such a slump would just add to the confusion.

By the 1980s, Lucas’s approach was taken a step further as a new group of freshwater economists, known as Real Business Cycle (RBC) theorists, argued that price and demand fluctuations were not related to the business cycle. Instead, these economists argued, the “business cycle reflects fluctuations in the rate of technological progress.” In this model, unemployment was seen as “the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable.” In other words, “[u]nemployment is a deliberate decision by workers to take time off.”

Bottom line, that's the freshwater theory of unemployment: "The Great Depression [was] really the Great Vacation." Although Krugman believes this view is “silly” - and it is patently silly - he explains that the assumptions regarding recession and unemployment were a small part of an otherwise impressive, sophisticated and useful model. But freshwater economists don't see the model as merely useful; they believe it's true. And by the time of the crisis, whole generations of freshwater economists weren’t even taught an alternative. In fact, as early as 1980, economist Robert Lucas said that when Keynesian theorizing was presented at research seminars "the audience starts to whisper and giggle to one another."

And the return to neoclassical assumptions about perfect markets and perfect rationality, had a predictable corollary - namely, any unwanted effects are the result of human failure, not market failure. Thus, even though we all watched 750,000 jobs a month being lost following the Lehman shock of 2008, freshwater economist Casey Mulligan insists unemployment is the result of workers who don't want to work. Similarly, for freshwater economist Robert Lucas, inequality is not the result of an imperfect system, it is the result of human vice:

Now, is there too much inequality? I don’t see it. I think people who drop out of high school, take drugs and so on are going to be poorer than the guys who worked hard. It doesn’t bother me at all. Why shouldn’t they be poor? It’s hard to work!

This moralizing appears to be baked into the neoclassical model: If you start from the assumption of perfect markets and perfect rationality, all failure is human failure and all market results are necessary, if not good. And this is only a suspicion at this point, but "Confidence Fairy" policies and beliefs may represent a similar phenomenon: If markets are perfect and government intervention is useless, policy-makers are reduced to sacrificing the elderly and infirm on the alter of the market Gods in the hopes of restoring confidence (perhaps they should throw in a virgin or a goat for good measure). And I'm only half kidding about this - the freshwater faith in markets is so strong and the resulting GOP-backed policies are so out of touch with reality, it's difficult not to see it as magical thinking:

Theirs is a magical world in which the gulf oil spill and the Japanese nuclear disaster never happened and there was never a problem with smog, polluted rivers or contaminated hamburger. It is a world where Enron and Worldcom did not collapse and shoddy underwriting by bankers did not bring the financial system to the brink of a meltdown. It is a world where the unemployed can always find a job if they really want one and businesses never, ever ship jobs overseas.

~ Saltwater Macro

Despite the wholesale rejection of Keynes at inland, freshwater universities, at coastal, saltwater universities Keynes was still taught - in fact, the saltwater economists came to be known as the New Keynesians. However, even the saltwater economists accepted the core of the freshwater project and only deviated from the assumptions of perfect markets and perfect rationality to the extent necessary to incorporate the Keynesian notion of demand-driven recessions. Because only these minimal deviations were permitted, "there was no room in the prevailing models for such things as bubbles and banking-system collapse."

Additionally, "New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions." Instead, they adhered the the Friedmanite notion that "monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed." Thus - at the policy level - the primary division in macroeconomics "was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed." To return to the original metaphor, when the crisis hit, freshwater economists could only become Siths (their fate was sealed), but saltwater economists were not automatically Jedi. In fact, only a very small number of economists were really in a position to understand the nature if the crisis.  

~ Japan and the Jedi

Although bubbles and banking system collapse were not a part of freshwater or saltwater models, they did occur in the real world. Such crises were generally limited to developing countries and banana republics and therefore, did not garner much attention. But then, something happened in Japan - namely, a commercial real estate bubble burst and Japan slid into a recession from which it could not escape. The Bank of Japan reduced short-term interest rates to zero and the slump persisted - it was a situation that looked like a Keynesian liquidity trap (i.e. a situation in which monetary policy, action by the central bank, is unable to stimulate the economy).

Most paid little attention. Some thought it was something specific about Japan. Others thought the Bank of Japan just wasn't trying hard enough. But there was a group of economists - primarily at Princeton - who started to worry about Japan. Those Japan worriers included Paul Krugman, Ben Bernanke, Lars Svensson, Mike Woodford, Gauti Eggertsson and Adam Posen. And then, of course, there were economists - such as Richard Koo - who were directly involved with the Japanese crisis and had spent more than a decade thinking about the problem and developing policy responses.

What Japan showed was that the Keynesian liquidity trap, which had long since been rejected by economists of all stripes, was real. The freshwater economists - who believed a demand-driven recession wasn't possible - were definitely wrong. But so were the New Keynesian, saltwater economists; there were, in fact, situations where monetary policy was not enough.  

Japan really was a dry run of precisely what the first world is currently experiencing and there are a handful of economists who have been thinking and talking about these issues for well over a decade. However, as the above-summarized history illustrates, the freshwater economists were intellectually unprepared for even the possibility that such a crisis could occur and the saltwater economists were unprepared for the possibility that central bankers couldn't fix it. The result has been widespread confusion and policy response ranging from inadequate to disastrous.

The Crisis

Of course, this is a story told in hindsight. We know freshwater economists didn't understand Keynes because of their response to the crisis. Specifically, they started making the precise arguments rebutted by Keynes in the 1930s, but they presented these arguments as if they were brand new. Thus - right on cue - freshwater economists Eugene Fama and John Cochrane espoused what was known in the 1930s as the "Treasury View;" namely, the view that "debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed." And, of course, the ideas that recessions are good and that the unemployed don't want to work weren't far behind.  

According to freshwater economists, the problem isn't a shortfall of demand (in fact, that was decided ahead of time). The problem is fill-in-the-blank social program, fill-in-the-blank regulation and fill-in-the-blank tax. Businesses don't want to hire because they're uncertain about the effects of Obamacare, environmental regulations, etc. But why now? All of a sudden business owners have decided it's too much? Does 9% unemployment have anything to do with it? What about the massive overhang in household debt created when the housing bubble burst? But it can't be those things because if it was, their model is wrong.

[T]here’s a good reason Lucas won’t even consider the obvious explanation in terms of a shortfall in demand. More than 30 years ago, in a burst of radically premature triumphalism, Lucas and his colleagues declared the “Death of Keynesian economics”. . . .

[T]o even consider the possibility that we’re in a demand-shortfall slump of the kind Keynes diagnosed, would be an incredible comedown for Lucas.

In current policy debates, freshwater economists and GOP politicians are concerned about "uncertainty," "confidence," soaring interest and out-of-control inflation. And, with rare exceptions, they seem unfazed by the fact that interest is at all-time lows and that deflation, rather inflation, continues to pose the greater threat.

I'm convinced the crisis is a Japan-style crisis and that those with the best grasp of the situation were those involved with Japan. In my opinion, the clearest explanation of the crisis is contained in this 10-minute video featuring economist Richard Koo, who coined the phrase balance sheet recession. Paul Krugman also views the present crisis as a balance sheet recession (although he and Koo have minor differences of opinion regarding the efficacy of monetary policy - Koo thinks it's useless, Krugman thinks it's almost useless).

The opposition to balance sheet theorists is not solely from freshwater purists who can't even conceive of a shortfall of demand; as was noted at the outset, the Sith/Jedi divide is not strictly a matter of supply-siders versus demand-siders. Perhaps the most dangerous opposition comes from those who recognize the problem as demand-driven, but nonetheless recommend austerity. As Richard Koo has noted, the biggest counterpoint to his policy advice - debt-financed fiscal stimulus - comes from conservative saltwater economists Kenneth Rogoff and Carmen Reinhart:

Causal link between national debt and economic growth is not one-way

A source frequently cited by the Republicans in the fiscal consolidation debate is Carmen Reinhart and Kenneth Rogoff’s This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009), which presents research showing that countries with national debt exceeding 90% of GDP have growth rates averaging 1.3ppt lower than economies with less debt.

That finding was based on a study of financial crises over the past 800 years, but—as Paul Krugman has noted—the causality is not necessarily one-way.

There are cases in which growth rates have fallen because of large fiscal deficits, but there are also instances in which fiscal deficits have increased because growth has slowed. In the former cases, excessive government deficits crowded out private investment and depressed growth rates, while in the latter, governments administered fiscal stimulus to prevent further declines in the growth rate as the private sector paid down debt during a balance sheet recession.

On the surface, the two patterns appear similar since they are both characterized by large deficits and low growth rates. What sets them apart is yields on government debt, which are high in the first case and low in the second.

The three countries in which the most clamor has arisen over fiscal deficits—Japan, the US, and the UK—are all characterized by record low yields on government debt, and their private sectors are engaged in deleveraging on a massive scale.

The conclusion we should draw from this is that all three economies are in a balance sheet recession and that fiscal deficits should be used to prevent growth rates from falling any further.

Inasmuch as deficit reduction efforts in Japan, the US, and the UK will have a greater (negative) impact on growth, the fiscal consolidation programs being pursued by governments in these nations will have exactly the opposite of the desired effect.
Support for fiscal consolidation will continue until economy suffers.

Over the past year I ran into Mr. Rogoff twice and Ms. Reinhart three times at economic conferences. In each case, it was the organizers’ intention for us to present our very different views and let listeners come to their own conclusions.

However, my theory—which holds that fiscal stimulus is essential during a balance sheet recession—has yet to gain the widespread acceptance of their very mainstream view that “deficits are bad.” Consequently, it continues to have only a limited influence.

As Joe Weisenthal has noted, thus far in this crisis, "Koo has been dead on." Where austerity has been tried - Greece, the UK, Japan - it has failed. In fact, it has failed miserably - in each of these countries growth weakened and "deficits didn't even go down!" And this was Koo's prediction; attempts to cut deficits will have the opposite effect. So, in a balance sheet recession, austerity really is an all pain, no gain strategy. In fact, worse than no gain - it actually produces tremendous pain and social instability while increasing deficits. It's the worst possible policy and therefore, of course, it's all the rage.

RETURN OF THE JEDI

Now the Jedi are all but extinct. ~ Obi-Wan Kenobe

This will all be sorted out in the long run, but we know what Keynes said about the long run. Later generations will wonder why we didn't act more boldly. Our economists had a similar reaction to Japan in the 1990s: Why didn't Japan take aggressive action to keep their crisis from becoming a lost decade? Now some economists think a lost decade is optimistic.

Although he doesn't explain why it is the case, economist Richard Koo has noted that peace time democracies have a difficult time mustering the political will for fiscal stimulus. This has definitely proven to be the case. In 1930s United States, in 1990s Japan and now throughout the first world: The political instinct is towards austerity and when stimulus is attempted, it's invariably half-hearted and insufficient.

This may owe to the Alice-Through-the-Looking-Glass nature of liquidity traps. It is a situation that is riddled with paradoxes: There's the paradox of thrift, the paradox of toil and, indeed, the paradox of austerity (attempts to reduce deficits by cutting government spending actually increase deficits). But even at its best, economics is technical, difficult and often counter-intuitive.

A more likely (but still probably not the most likely) explanation is that policy response hasn't been equal to the task because economists are hopelessly divided and therefore, politicians can pick and choose in accord with their prejudices. Unfortunately, those divisions are not likely to be resolved among the present generation of economists. In his seminal work, The Structure of Scientific Revolutions, historian of science Thomas Kuhn explains that when a new, superior theory is presented, the old guard is never persuaded by it; in fact, scientists "subscribing to different paradigms end up talking past one another." However, the up-and-coming generation of scientists adopts the new theory immediately.

Probably the most likely explanation for austerity's popularity at home and abroad is that the Rentier class has been able to exert undue political influence:

What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.

With persistent, mass unemployment and policy-makers hell bent on austerity, it's difficult to find even a glimmer of hope. But at some point, no one - not even rentiers -  can benefit from an anemic world economy. As austerity policies continue to fail - and they clearly are failing - there's hope that better policies will prevail.    

Cross-posted at Plutocracy Files.

Originally posted to PlutocracyFiles on Sun Sep 11, 2011 at 10:22 PM PDT.

Also republished by Keynesian Kossacks and Community Spotlight.

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Comment Preferences

  •  Tip Jar (121+ / 0-)

    Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

    by PlutocracyFiles on Sun Sep 11, 2011 at 09:05:58 PM PDT

  •  Earlier, I was reading your (4+ / 0-)

    excellent diary and it suddenly went down. I thought perhaps you had suddenly joined the boycott movement.

  •  Anyway, you say the following: (18+ / 0-)
    With persistent, mass unemployment and policy-makers hell bent on austerity, it's difficult to find even a glimmer of hope. But at some point, no one - not even rentiers -  can benefit from an anemic world economy. As austerity policies continue to fail - and they clearly are failing - there's hope that better policies will prevail.

    In the past, increased equity values in consumers' homes have afforded them sufficient confidence to buy things on faith or on credit (like they did in Japan during the late 1980's) and save less for a rainy day; and that helped keep the economy humming. Now consumer home equity has taken a big hit and continues to do so; and correspondingly, consumers are buying less and less. Meanwhile, Wall Street companies are doing very well, in part because of higher production levels and worker downsizing (both of which are great balance sheet enhancers).    

    Yet we haven't even begun to fix the devastated real estate market. Instead, we've just been hiding it from public view.

    Furthermore, as the consumers (who are the engines of our "Demand Economy") purchase even less as a result of continued austerity programs, Wall Street will eventually get hit very hard; at which point all hell will break loose. Then only the most extreme Keynesian economic policy initiatives will be able to save us. So until that day...if it is our well deserved economic fate.    

  •  wow... this is a huge amount of information (15+ / 0-)

    that must have taken a huge amount of time to write and assemble!  

    I don't have time to read it now, but I am bookmarking it for the future.  I am a big fan of Krugman, so I have a feeling I will learn a lot and find a lot of common ground with your post.

    "For coal to be 'clean,' it must magically float out of the ground" - RL Miller

    by Hopeful Skeptic on Sun Sep 11, 2011 at 11:29:28 PM PDT

  •  Keynesian policies are relics of a bygone era, (10+ / 0-)

    elegant tools of a more civilized age.

    I changed by not changing at all, small town predicts my fate, perhaps that's what no one wants to see. -6.38, -4.15

    by James Allen on Sun Sep 11, 2011 at 11:45:04 PM PDT

  •  Nice job of using the Star Wars analogy to (9+ / 0-)

    illustrate a complex issue to those of us who know so little about it.  I haven't read the Krugman article yet but I have bookmarked it for tomorrow.

    Thanks for reposting this tonight, I'm sure I would have missed it otherwise.  I do wish there was more reason for optimism.

    •  Good to hear the analogy was helpful+ (5+ / 0-)

      It was actually really helpful as a literary device because I could Act break the story; but also it gave me a way to explain the demand/sully divide, but then also the divide amongst divide-siders.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 01:23:20 AM PDT

      [ Parent ]

  •  You have written an excellent discussion (12+ / 0-)

    of these economic theories - so clear that even I as a novice can begin to understand more about what is happening.  I've only had vague ideas, based on quick readings of Paul Krugman's columns, but your diary has helped get me to a little higher level of understanding.  

    My question and biggest worry is whether any of these economists, on either side, have factored in the political gridlock that seems to dominate our lawmakers today.  When I mention this to my adult children, they tell me that Congress is always this way, but I perceive the paralysis to be much worse than usual.  To my mind, no economic theory can be helpful if our lawmakers have no will to take action.  But, in that case, if I understand your diary, the remedy falls, by default, to the central bank and the freshwater theory, since it can take action and is not so subject to the whims of Congress.  

    You have given us lots to think about.  Thanks!

    •  The gridlock is way worse! + (5+ / 0-)

      PK in particular writes about it a lot. His theory - from his book Conscience of a Liberal - is that income inequality (which is at historic highs) produces political polarization (also at historic highs). This was true in 1929 and it's true today.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 10:57:35 AM PDT

      [ Parent ]

  •  Keynes wasn't that great (12+ / 0-)
    Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge.
     This is where I have a very big problem.
       Classical economics was created for a very good reason - to help make the world a better place. Adam Smith, David Ricardo, etc. wanted to identify productive wealth versus unproductive wealth, and encourage the former while discouraging the latter.

      It made perfect sense then, and it does now too. Without a moral purpose to economics, a supposed "science" in the study of human behavior, then the economics is less than worthless.

      Looking at today's economists, they are all technocrats, just like the above quote wanted. They all justify everything with mathematical models.
       That's why they fail to see the problems with widening income gaps. Someone driven by morality would see the problem immediately. Technocrats are blind to it.

      Keynes had a lot of good ideas, good ideas that have been twisted and corrupted by the current economists. But like all great scientific breakthroughs, he didn't just invent a new field. He built upon the greatness of those who came before him.
       We should learn from ALL of them, not just one.

    "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

    by gjohnsit on Mon Sep 12, 2011 at 06:37:47 AM PDT

    •  So true! (6+ / 0-)

      If we don't use our wealth to make us more educated, more healthy, to provide ourselves with security - freedom from the fear of poverty in our old age, i.e. universal healthcare, education and social security for the elderly and disabled, then what the hell good is it?  If we don't understand that it's more important to feed our children, and I mean all of them, in a healthy manner than it is for rich people to build bigger houses with more useless space and vast collections of crap, then we aren't thinking clearly.  If we think it's OK to squander our national wealth on pointless wars then we haven't got much of a future.

    •  bullshit. (4+ / 0-)
      Recommended by:
      MKinTN, salmo, ferg, jellyyork

      Nontechnical economists are like TV preachers . . . they all have an opinion.  That is precisely the greatness of Keynes . . . HE DID THE GODDAM MATH.

      Looking at today's economists, they are all technocrats, just like the above quote wanted. They all justify everything with mathematical models.
         That's why they fail to see the problems with widening income gaps
      .

      MORE BULLSHIT.  Being able to do the math allows a REAL economist to understand consequences.  As Keynes said in 1919:

      The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,--abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.

      But without the math, economics is no better than reading entrails for signs from the invisible hand . . .

      I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

      by bobdevo on Mon Sep 12, 2011 at 06:57:43 AM PDT

      [ Parent ]

      •  Re: (5+ / 0-)
        Nontechnical economists are like TV preachers .
         There are no non-technical economists out there.
        That is precisely the greatness of Keynes . . . HE DID THE GODDAM MATH....
         MORE BULLSHIT. Being able to do the math allows a REAL economist to understand consequences.
         They all do the math. Every single one of them.
          They all have mathematical models for everything.

           You don't seem to understand how economists function today. Nothing matter EXCEPT for the math to today's economists.
           If you can prove it with math, then that is all that is required of you.
           People with an agenda of making the world a better place are rejected and marginalized.

          THAT IS THE PROBLEM!
        Economics is not a hard science. A hard science means you can create a repeatable, predictable test. That doesn't exist in economics.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Mon Sep 12, 2011 at 07:10:35 AM PDT

        [ Parent ]

        •  You don't seem to understand . . . (2+ / 0-)
          Recommended by:
          MKinTN, Mr MadAsHell

          the non-Keynesian models don't work.  So, sure, they can play with their math . . . to no avail.

          And I would posit the greatness of Keynes is that he did create a repeatable, predictable test given the constraints  . . . making Keynesian economics is better able to explain the economic events than its principal intellectual competitor, new classical economics.

          I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

          by bobdevo on Mon Sep 12, 2011 at 07:24:19 AM PDT

          [ Parent ]

          •  A suggestion (3+ / 0-)
            Recommended by:
            ozsea1, Mad Season, 3goldens

            A good breakdown of economics today is the book Debunking Economics by Steve Keen.
              He's an economist from Australia and he's a fan of Keynes. But he also recognizes the limitations of economics, including Keynesian economics.

              My other favorite economist is Michael Hudson, an economist from Missouri.
               He's a fan of classical economics and Keynes, but is a huge critic of the neo-classical economics that are popular today.

              Please read them when you get a chance. They are brilliant economists that think outside the box. Most importantly, they take into account historic lessons.

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Mon Sep 12, 2011 at 07:31:28 AM PDT

            [ Parent ]

            •  And you're saying Keynes doesn't? (0+ / 0-)

              Or Krugman?  Or Stiglitz?

              I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

              by bobdevo on Mon Sep 12, 2011 at 07:56:54 AM PDT

              [ Parent ]

              •  That's not what I am saying (7+ / 0-)

                And your tone suggests you want a confrontation.

                 But since you brought it up, no, I don't believe that Krugman thinks outside the box. I think he's pretty traditional. I don't think his economic ideas are very new or original.
                   That's not to say I disagree with everything he says. Only that he is operating within a very small area.

                  As for Keynes, he was without question thinking outside of the box in his days.
                   But that's the qualification you must consider, "in his days". His days were a very long time ago. I don't believe that anything that claims to resemble a science should ever "stop" and claim to be the ultimate "truth".
                   Economics should have moved on and improved decades ago. Instead it has regressed.

                 Stiglitz I don't know enough about.

                "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

                by gjohnsit on Mon Sep 12, 2011 at 08:30:24 AM PDT

                [ Parent ]

                •  Geeze, that's like saying Einstein thought (0+ / 0-)

                  outside the box for his day.

                  Until someone else comes up with a better analysis (as opposed to tweaking what Keynes provided) then I'll go with Keynes . . .in the same way that Newtonian physics works pretty fucking well until you get down to the quantum level.

                  I think he's pretty traditional.

                  I don't give a fuck if Krugman's traditional or not . . . is he accurate?  And you should maybe give Stiglitz a try. But here's the capper:

                  Economics should have moved on and improved decades ago. Instead it has regressed.

                  It's not the economics . . . science always progresses . . .  it's the fact that REPUBLICANS DON'T GIVE A FUCK WHAT SCIENCE SAYS, IF SCIENCE INTRUDES UPON THEIR GRAVY TRAIN.

                  The Keynesian model tells us what would work . . . but it doesn't matter if we refuse to try it.

                  I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

                  by bobdevo on Mon Sep 12, 2011 at 02:36:46 PM PDT

                  [ Parent ]

              •  It's a conflict not a problem. (1+ / 0-)
                Recommended by:
                bobdevo

                Adolph Reed calls Obama one of those guys who wants all the smart people to gather in Martha's Vineyard and solve the world's "problems".  He calls that idea a fallacy.

                You can refute saltwater economists empirically.  Great.  But understand that they just carry water for the wealthy and you MUST win a moral conflict.  After all, neoliberalism does "work" -- just not for most of us.

      •  Math is simply the language of precision (1+ / 0-)
        Recommended by:
        ozsea1

        As you rightly note, mathematics is the language by which precise thinking and communication is possible.  It is not the problem.

        •  If that's the case (1+ / 0-)
          Recommended by:
          ozsea1

          then why are economists wrong more often than not?

          "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

          by gjohnsit on Mon Sep 12, 2011 at 08:31:56 AM PDT

          [ Parent ]

        •  Not always. (0+ / 0-)

          Remember two sayings as it applies to math:

          1.  "There's lies, damn lies, and statistics."
          2.  "Don't assume.  It only makes an ass out of you and me."

          Math is only as precise as the assumptions made; one can structure the assumptions so that it creates a precise - but false - answer.  Assumption are the means by which all kinds of biases can be introducted to support ones economic philosophy.

          The most violent element in society is ignorance.

          by Mr MadAsHell on Mon Sep 12, 2011 at 11:44:11 AM PDT

          [ Parent ]

    •  I understand the point . . . (12+ / 0-)

      . .  . you are making, and to that extent I agree with it.  There is a moral component to the economic system as a whole such that we are much better off when that economy is generating true wealth (more goods, services, etc., at lower costs) as opposed to mere profit.

      But I think you misapprehend the use of the phrase "morality play" here.  I think what the diarist is suggesting is that for any given instance of the economy breaking down it is more helpful to consider that breakdown as a technical malfunction that can be fixed than to consider it the just reward for having engaged in some prior economic "sin," which - because the breakdown is then perceived to be in some way "deserved" - tends to discourage us from taking any action to solve the problem.

      Politics is the never-ending story we tell ourselves about who we are as a people.

      by swellsman on Mon Sep 12, 2011 at 07:22:58 AM PDT

      [ Parent ]

      •  Morality (3+ / 0-)
        Recommended by:
        swellsman, ozsea1, Boris49
         for any given instance of the economy breaking down it is more helpful to consider that breakdown as a technical malfunction that can be fixed than to consider it the just reward for having engaged in some prior economic "sin,"
         OK. I see what you are saying. But I would go so far as to say that morality can indeed be part of the "fix".
            Vast inequality is a sign of injustice. Cure the injustice and the inequality problem goes away. And that is not to mention the fact that vast inequality creates economic problems as well (and political ones).
          It can be approached from an economic point of view.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Mon Sep 12, 2011 at 08:39:33 AM PDT

        [ Parent ]

        •  Vast inequality is caused by unemployment (0+ / 0-)

          For the 14 million unemployed, morality is very simple - they are being impoverished everyday.

          Waiting for wealth redistribution is just Waiting for Godot.

          •  that's not the whole story (3+ / 0-)

            For example, the underemployed have virtually the same problem as the unemployed.
               And then the inequality problem goes beyond that with the fact that CEOs get something like 400 times the pay of employees.

              There are much more fundamental problems with the economy that deficit spending could never hope to address.

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Mon Sep 12, 2011 at 10:12:27 AM PDT

            [ Parent ]

            •  You forgot to mention (0+ / 0-)

              that pro sports stars make even more than CEOs.

              So what?  If you are one of the 14 million unemployed or 10 million underemployed, you need a good job with good wages.  The fact that somebody makes 1000 times what you do is irrelevant to your ability to eat with a roof over your head.

              •  Inequality (0+ / 0-)
                The fact that somebody makes 1000 times what you do is irrelevant to your ability to eat with a roof over your head.
                 Inequality has all sorts of implications that I am surprised you are ignorant about.
                    From just the top of my head:

                1) Outrageous wealth accumulation at the top will keep prices from falling for the poor. Thus preventing stabilization of consumer prices and rebalancing.

                2) Vast accumulations of wealth at the top mean enormous amounts of capital sloshing around in speculative ventures rather than satisfying basic supply and demand functions. This destabilizes economies.

                3) Huge inequality of wealth is politically and socially destabilizing for obvious reasons. This, of course, has economic consequences.

                  And this is just the most obvious.

                "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

                by gjohnsit on Mon Sep 12, 2011 at 01:15:24 PM PDT

                [ Parent ]

                •  Inequality of wealth is very bad (0+ / 0-)

                  As Keynes pointed out, it severely diminishes the propensity to consume because the wealthy consume much less of their income than middle class or poor people.

                  Since consumption is critical to demand, especially in the U.S., wealth inequality is definitely reducing economic expansion and job growth.  

                  But, redistribution of wealth is a long term issue while unemployment must be addressed right now without waiting for new tax schemes or other measures to equalize incomes, e.g., strengthening unions.

                  •  Also+ (1+ / 0-)
                    Recommended by:
                    docmidwest

                    Economists really puzzled over why inequality was increasing, but so was consumption. We now know the answer - debt. So, as money was being taken out of the economy (and stock piled by the rich), consumption had to be fueled by debt, which led to huge over-leveraging and then, a balance sheet recession.

                    Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

                    by PlutocracyFiles on Mon Sep 12, 2011 at 01:35:23 PM PDT

                    [ Parent ]

                  •  I agree on everything except... (1+ / 0-)
                    Recommended by:
                    Champ Summers

                    I also believe that the fixes must also be addressed now.

                      I don't believe that you can have a real solution to unemployment without having real fixes to the economy.

                      We've already tried the method you listed above (i.e. spend money now and fix the problems later). Well, the money was spent (i.e. wasted) and the problems weren't fixed.
                       They didn't wait to fix the problems under FDR, and I don't see why we should wait now.

                    "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

                    by gjohnsit on Mon Sep 12, 2011 at 01:54:51 PM PDT

                    [ Parent ]

                    •  Cash-4-Clunkers was money well spent (0+ / 0-)

                      Obviously, it did not fix income inequality but it did revive the auto industry so that tens of thousands of workers did not lose their jobs and it worked to benefit thousands of workers who were rehired.

                      Auto sales went from 9 million before C-4-C to 12 million today.  That was a real solution to unemployment without fixing the underlying economy by fixing wealth disparities.

                      FDR had large majorities in Congress so he could attack the wealthy.  Obama is going to have to fight the long war, but he is trying and ultimately may succeed.  Meanwhile, millions of workers need jobs.

        •  You'll certainly get no argument from me . . . (2+ / 0-)
          Recommended by:
          gjohnsit, ozsea1

          . . . on that count.  Just yesterday I wrote a little thing about the appropriateness of keeping at least a minimal leve of economic parity in the system, using (of all things) the NFL's league rules as an example/analogy.

          If you are interested you can check it out here.

          Politics is the never-ending story we tell ourselves about who we are as a people.

          by swellsman on Mon Sep 12, 2011 at 08:52:07 AM PDT

          [ Parent ]

        •  The problem is that.. (1+ / 0-)
          Recommended by:
          Mad Season

          ...different people have a different concept of morality.

          "Capitalism has defeated communism. It is now well on its way to defeating democracy."
- David Korten

          48forEastAfrica - Donate to Oxfam

          by basquebob on Mon Sep 12, 2011 at 09:13:10 AM PDT

          [ Parent ]

        •  and you might want to consider (3+ / 0-)
          Recommended by:
          ozsea1, gjohnsit, 3goldens

          how "morality" is defined.  Defined by authoritarians who believe the worst of humanity and human nature, it becomes just punishment for those who are economically hurt.  For those who are liberal in their thinking, it becomes a moral imperitive to help those that are hurting, since human beings are basically good, and deserve to have that help.

          An interesting and informative take on the authoritarian versus liberal views of human beings I recommend reading Thom Hartmann's Cracking the Code, which I just finished.  I suspect his other writings address the implications of this difference as well.

          "... a disciplined minority of totalitarians can use the instruments of democratic government to undermine democracy itself." -- Hannah Aredt, regarding the behavior of the National Socialist (NAZI) Party in the Reichstag in the Weimar Republic.

          by billlaurelMD on Mon Sep 12, 2011 at 10:31:27 AM PDT

          [ Parent ]

          •  there is some value (1+ / 0-)
            Recommended by:
            billlaurelMD

            In the authoritarian view, as long as it isn't taken to extremes.
              For instance, the wealthy who speculated on the real estate bubble should have been hurt. That was the moral thing to happen.
                The bailouts prevented that from happening, thus we are back in the same position three years later.

              If you really want to get to the bottom of this: separating morality from economics is just as bad of an idea as separating morality from justice.
               What is the point of this civilization if we don't incorporate morality into it? We are dooming ourselves.

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Mon Sep 12, 2011 at 01:20:26 PM PDT

            [ Parent ]

            •  I don't disagree with you (1+ / 0-)
              Recommended by:
              gjohnsit

              ... and I don't think Thom Hartmann would either.  Laws should accomplish maximizing the public good without too much constraint on productive endeavors.  It's so clear to me, however, that those awash in money seduce themselves into behavior harmful to the vast majority (American or otherwise). Rather than be productive with their wealth, they want the return on "investment" that their financial casino provides for much less effort, and then get bailed out by the government.

              Talk about a moral hazard!

              "... a disciplined minority of totalitarians can use the instruments of democratic government to undermine democracy itself." -- Hannah Aredt, regarding the behavior of the National Socialist (NAZI) Party in the Reichstag in the Weimar Republic.

              by billlaurelMD on Mon Sep 12, 2011 at 03:45:05 PM PDT

              [ Parent ]

    •  I agree with the general idea that (7+ / 0-)

      moral values have a role to play in economics, but I think you've misread part of this post.  As the author writes:

      Thus, even though we all watched 750,000 jobs a month being lost following the Lehman shock of 2008, freshwater economist Casey Mulligan insists unemployment is the result of workers who don't want to work. Similarly, for freshwater economist Robert Lucas, inequality is not the result of an imperfect system, it is the result of human vice:

         

      Now, is there too much inequality? I don’t see it. I think people who drop out of high school, take drugs and so on are going to be poorer than the guys who worked hard. It doesn’t bother me at all. Why shouldn’t they be poor? It’s hard to work!

      This is the kind of moral "judgment" we have been seeing from the freshwater crowd.  What I find particular repugnant about it is that as myopic freshwater types like Lucas are dismissing the unemployment problem with ridiculous comments like that it is the greed if not complete moral bankruptcy of the financial industry that got us to this point.  

      I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

      by Satya1 on Mon Sep 12, 2011 at 08:07:17 AM PDT

      [ Parent ]

    •  Keynes had a real moral compass (4+ / 0-)
      Recommended by:
      gjohnsit, basquebob, ozsea1, Mad Season

      Keynes understood very well the moral imperative of economics and the market economy or "individualism" as he called it:

      But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

      The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.

      The General Theory of Employment, Interest and Money, p. 380-81.

  •  Who the heck is arguing supply-side right now? (0+ / 0-)

    Where did you come up with that?

    Even very conservative analysts/economists will admit there is a demand problem.

    As a matter of fact, most of the criticism of Obama's jobs bill last week was found in conservative financial mags and journals.  These articles were filled with lots of quotes from industry leaders saying the problem is demand.  And, that Obama's temporary job credits won't influence their decision to hire - demand needs to increase.

    You have created an imaginary argument/debate.

    You seem to have a lot of book knowledge, but are lacking in real-world experience.  Maybe the Obama admin will hire you!

    •  Disagree. (11+ / 0-)

      Many conservative analysts continue to advocate lower taxes, less regulation and austerity cuts as the economic package to lead us out of financial disaster.

      I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

      by bobdevo on Mon Sep 12, 2011 at 07:25:39 AM PDT

      [ Parent ]

      •  Well, to put a fine point on it (0+ / 0-)

        I believe they are arguing for stability.  All of these temporary measures are just not doing it for the business community.

        The current spending trajectory is leading us into a debt problem that will be hard to get out of without higher future taxes.  This uncertainty certainly has kept businesses sitting on their cash.

        Regulations are definitely a big part of their argument.  I guess I hadn't considered that part of the supply-side equation.  But you are correct, it is.

        Energy regulations are really hurting us right now, so that is something I can agree with.

        •  Stability? Are you serious? (7+ / 0-)

          How does anything being argued for by Republicans and other conservatives in any way, shape, or form, point to a more stable economy, let alone society? Businesses are not uncertain about the future--and you assume they are able to read it perfectly, I might add--they are reacting to a lack of demand for their goods/services. That is how capitalism works in this country (or at least, it had until deregulation began hitting it in the very late 1970s and accelerated by Reagan and his followers); demand stimulates supply. Sometimes businesses have been able to innovate and create a supply for a new product that people then began to demand, but the vast bulk of revenue has always been generated by supplying already known products and services.
          Modern American capitalists do not care one whit for stability if they can make a buck off of instability, and they've already shown they are more than happy to blow up the world to make that buck. Those concerned with stability pay them off (S&L bailout, TARP, bank bailouts, etc.) at every turn, and we all get taken down another notch on the civilized nation ladder.
          We do not have a spending problem, we have a revenue problem combined with a destructive lack of concern for native manufacturing. All of our money goes offshore because we don't have any remaining products being made here. Maybe those businesses plow some money back into our economy, but they sure don't do enough of it to keep our economy humming properly. And since they don't have to, why should they? No government agency is forcing them to repatriate that revenue. You think there should be less regulation? That's simply insane, and belongs on the "conservatism can't fail, it can only be failed" trash heap. We've done nothing but deregulate for 30+ years, and here we are. Our air is dirtier, our water is more poisonous, our economy is dying/dead, our manufacturing base has been virtually eliminated, our gluttony for oil has only increased, etc. etc. etc.

        •  You say... (2+ / 0-)
          Recommended by:
          sentinalnode, ozsea1

          ...

          Energy regulations are really hurting us right now, so that is something I can agree with.

          And it could easily be argued that under-regulation is hurting us even more. Just as an example: what percentage of disease is due to smog and other pollutants that are driving medical costs through the roof? You can not argue that the big "deal breaker" in long term projections of budgetary increases is Medicare costs at present levels. You can not dissociate disease from environmental factors. You can not deny that poor energy policy and regulation is hurting the environment and therefore making people sick.

          Some also talk about "uncertainty certainly has kept businesses sitting on their cash" as if in the past there was a long period of static "certainty" Nirvana that caused the economy to grow miraculously. Can you cite when this/these period(s) was/were? Try and I will find you tons of unsettling events in those periods and yet economies kept growing. The certainty argument is a red herring.

          "Capitalism has defeated communism. It is now well on its way to defeating democracy."
- David Korten

          48forEastAfrica - Donate to Oxfam

          by basquebob on Mon Sep 12, 2011 at 09:31:44 AM PDT

          [ Parent ]

          •  Marginal improvements can indeed hurt (0+ / 0-)

            the economy.

            For instance, the new clean air standards the EPA was pushing and were recently cancelled by Obama would have put 90% of the counties in the US below compliance.  That's simply ridiculous.  Our air is cleaner than ever - a recent Scientific American article:

            Lung-gevity: Longer U.S. Life Expectancy One Benefit of the 1970 Clean Air Act

            Air quality across the United States has improved dramatically since 1970 when Congress passed the Clean Air Act in response to growing pollution problems and fouled air from coast to coast. According to data from the U.S. Environmental Protection Agency (EPA), levels of all major air pollution contaminants (ozone, nitrogen oxides, carbon monoxide, sulfur dioxide, particulate matter and lead) are down significantly since 1970; carbon monoxide levels alone dropped by more than 70 percent.

            There are still some areas of the country that need a lot of work.  These are high-population centers and affect about half of Americans.  But why hurt economies in Iowa and Nebraska instead of targeting these areas?

            Industrial centers in many counties of the USA would have been at risk of becoming non-compliant by even adding one new manufacturer.  This indeed stifles business.

            Address the problem in a pragmatic approach.  First, start converting all the dirtiest coal plants to gas.  Where was that in Obama's jobs plan??  

            His CAFE standards for autos will help incrementally also.

            Affecting business growth with a broad regulation like that, in this economy especially, was dumb and Obama was right to cancel it.

            •  Marginal improvements you say. (1+ / 0-)
              Recommended by:
              bobdevo

              Is that why the American Lung Association is going to sue? It might be marginal to you and your ilk but not to those dying terrible painful deaths and obviously not so marginal as proven by rising medical costs associated with this type of diseases.

              And you say:

              But why hurt economies in Iowa and Nebraska instead of targeting these areas?

              So what are you saying, the wind does not blow in these places? The pollution is static and stays there? Or is that to much thinking for you? Remember acid rain and how it was greatly abated? Remember the trees dying in the Appalachian mountains and where a lot of the pollution that caused that acid rain was coming from? Have you ever heard of the term downwind?

              Ah, I see, the pragmatic approach. Look let me tell you about pragmatism. Pragmatism requires being coherent. On the one side you argue that not dealing with the debt will hurt this country in the long term. Yet on the other side you advocate policies that will only worsen the debt situation by exacerbating the problems that are some of the main drivers of the debt. In other words, you are all for short term profits at the expense of long term and perhaps what will be other generation's problems. I got mine so who cares. Perhaps you don't see or don't dare to say what some people that use the same talking points you are repeating here say. In other words, if people die for the greed of others, too bad.

              I know that caring about people and environment is not "pragmatic" in some circles. Call me an idealist if you wish, but pragmatic ain't the right word either to describe people that spouse the ideology of the Koch brothers. In my book they are criminal, amoral and of genocidal tendencies. Yeah I know, how do I dare. "Socialist fuckstick" that I am.

              "Capitalism has defeated communism. It is now well on its way to defeating democracy."
- David Korten

              48forEastAfrica - Donate to Oxfam

              by basquebob on Mon Sep 12, 2011 at 11:41:13 AM PDT

              [ Parent ]

            •  Fox News talking points much? (1+ / 0-)
              Recommended by:
              basquebob

              That's like the REAL Victor Laslo apologizing for singing La Marseillaise and interrupting those nice German fellows . . .

              I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

              by bobdevo on Mon Sep 12, 2011 at 01:22:50 PM PDT

              [ Parent ]

        •  Energy regulations are hurting us?? (0+ / 0-)

          WTF are you talking about?  Which energy regulations are "hurting us"?

          I tremble for my country when I reflect that God is just; that his justice cannot sleep forever. ~Thomas Jefferson

          by bobdevo on Mon Sep 12, 2011 at 01:20:25 PM PDT

          [ Parent ]

    •  Obama and the Dems. (0+ / 0-)

      Well, most of the Dems.

      For the past 18 months, they've been sounding like a Lee Atwater playbook to me--circa 1983.

      Cut spending, cut taxes and we will have prosperity for all?

      Nowhere do I understand that national security is a substitute for the law.---Thomas Drake You cannot tell from appearances how things will go.--Winston Churchill

      by SouthernLiberalinMD on Mon Sep 12, 2011 at 12:27:33 PM PDT

      [ Parent ]

    •  OK, I'm not sure why I'm responding...+ (1+ / 0-)
      Recommended by:
      swellsman

      I named names in the essay. So, I'm not sure how re-naming those names would help, but let's give it a go: Robert Lucas, Eugene Fama, John Cochrane. Also, anyone advocating supply-side reforms assumes the problem is supply. Now, if you can find quotes where those economists - the ones named - say this is a problem of demand, I'd be happy to take a look.

      Also, I'd love to see the quotes from "industry leaders" in conservative mags saying this is a demand problem. There are certainly businessmen who have said as much (Bill Gross from Pimco comes to mind) and also some conservative saltwater economists (like Rogoff and Mankiw) - but, of course, this doesn't conflict with what I wrote (you may want to read a bit more closely re: the supply/demand divide vs. the Jedi/Sith divide).

      However, without cites, I just don't know to whom you're referring.  

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 05:29:06 PM PDT

      [ Parent ]

  •  It would be helpful (2+ / 0-)
    Recommended by:
    semiot, ozsea1

    to include the perspective of Marxists and other economists who point to what they consider to be the inevitable breakdown of a capitalist economy in a world of finite resources.

    While the neo-classicists believe that capitalism is a natural phenomenon best left "unsullied" by direct intervention and Keynesians believe far more accurately that capitalism is a machine invented by man, and as such is prone to breaking down and needing a mechanic's touch once in a while, I would argue that Marxists are pointing to the exhaust coming out of the machine and saying "You might want to turn that shit off, on account of it's making it hard to breathe."

    By their fruits shall ye know them, not by their roots. ~ William James

    by chipmo on Mon Sep 12, 2011 at 07:36:04 AM PDT

    •  I addressed this below+ (2+ / 0-)
      Recommended by:
      chipmo, swellsman

      I agree, but don't personally have the expertise. I will eventually make it a priority to get a better handle on Marx (and it's not like I know NOTHING, just not enough to write about it very effectively) and when I do, I'll try to round this story out better.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 03:06:37 PM PDT

      [ Parent ]

  •  You are, without a doubt, (8+ / 0-)

    the best non-FP writer here.

    There's ample reasons as to why you regularly get Rescued.

    If the Wrecks List had historically shined a light on diarists such as yourself, we Rescue Rangers wouldn't be needed.

    Fantastic diary.  I'm familiar with most of the material but you've basically distilled a semester of intro economics down into a diary, oops, post. :)

    "I'm not writing to make conservatives happy. I want them to hate my opinions. I'm not interested in debating them. I want to stop them." - Steve Gilliard

    by grog on Mon Sep 12, 2011 at 07:42:27 AM PDT

  •  Masterfully Done, As Always (7+ / 0-)

    Thanks for this.  I had heard, of course, the GOP leaders talking about "uncertainty," and "confidence," and "the private sector being crowded out," etc., etc., but in my naivete I had thought this was just typical Republican BS intended to provide them cover to do what they always do: cut taxes and deregulate private industry.  I had no idea there was actually a group of economists promoting these junk ideas.

    Also, while reading your diary two things jumped out at me immediately (well, actually quite a bit more, but these are the two I thought I'd mention).

    The first:

    "Freshwater economists are, essentially, neoclassical purists," who believe "that all worthwhile economic analysis starts from the premise that people are rational and markets work."

    I've never had a problem with believing that market participants are 'rational' if that word is defined to mean they tend to do what they think will generate the most profit for them.

    But where I think the assumptions of the freshwater economists fall down is when they try to argue that the rationality of the economic actors necessarily leads to the proper functioning of the market.  It doens't.

    When CEOs can get personally rich off of stock options by artificially bumping up their stock's value they'll do so, even if it weakens their own company in the long run.  When banksters can get rich selling mortgage-backed securities based on worthless mortgages they'll do so, even though the underlying mortgages' eventual default will wreck the financial system itself.  Simply stated, mere rationality obviously does not translate to a "perfect market," and to continue to believe it does so because that is what one's model tells you to believe is to have faith but not knowledge.

    Second, it also occurred to me that our current political climate makes it even more difficult to do anything to help the economy -- whether we're talking  about the current dire situation or one further down the road.  

    This is because the Conservative/Libertarian economic true believers don't believe in either fiscal stimulus or Friedman's idea that recessions can be dealt with by monetary policy.  As we all know, Rick Perry -- current GOP frontrunner -- recently asserted that "printing money in this economy is treason" and that if Ben Bernanke were to do so they'd "treat him ugly" down in Texas.  This, unfortunately, is how a lot of the American public sees things; I have had to bite my tongue in the past when clients tell me in the course of a rather routine meeting about how we got into all this trouble because "people in Washington keep printing money."

    Couple this with the Fed's traditional hesitancy to do anything that might have the slightest inflationary effect anyway -- which, as you point out, would be great for the rest of us but bad for that very, very small part of our population that belongs to the Creditor Class -- and the government is effectively prevented from doing anything that might alleviate economic hard times.

    Oh, and finally -- loved the point about WWII being a government stimulus program that was finally large enough to lift us out of the Great Depression.  If you haven't seen it already, you may want to check out this post by Kevin Drum over at MotherJones.  The post itself doesn't say anything  that you haven't already discussed here, but it does contain a really great graph showing the effect of deficit spending during WWII and how it helped us economically.

    Politics is the never-ending story we tell ourselves about who we are as a people.

    by swellsman on Mon Sep 12, 2011 at 07:59:54 AM PDT

  •  Very clear - excellent explanation (3+ / 0-)
    Recommended by:
    basquebob, ozsea1, PlutocracyFiles

    Good job, and hopefully a good beginning point for arguments about what is clearly a tragically flawed consensus holding our economy and our nation back.  Now, how do we develop the shorthand that could put all that on a bumper sticker?

  •  If I had my way, at Daily Kos there would (1+ / 0-)
    Recommended by:
    ozsea1

    be an ongoing list of the top 20 posts that every Kossack should read.  As entries on the list rotated on, they would stay there for 6-12 months.  This post would be on that list.

    Sure I have some minor quibbles, but we've needed this here for a long time.
    Excellent!   Rec'd, tipped, and followed.

    I've known for a long time that there are some economists who have worked to synthesize Keynesian with neoclassical economics.  It's been difficult for me to find concise treatments of that, but your diary did.

    I've been looking for a long time for a clue to what economists are discussing remedies to our current problems that make sense.  Your diary did.

    And it filled out all the background history of economics very well.

    I've tried reading Krugman but he writes as much about politics as he does economics I think.  I think if he were to use his pulpit and write something once a week along the lines of this post, many more people would be better served by him.

    Thank you SO much and thanks to the Community Spotlight.  I'm off to read more from Richard Koo now...

    I'm not liberal. I'm actually just anti-evil, OK? - Elon James White

    by Satya1 on Mon Sep 12, 2011 at 08:16:24 AM PDT

  •  Our Problem Now Is the Same as Japan's in 1990's (1+ / 0-)
    Recommended by:
    ozsea1

    Japan always depended on exports, as opposed to domestic consumption, to provide the necessary demand for its economy.  In 1985, near the peak of Japan's economic power, the yen was worth less than one-third of its value against the dollar today.  Given that the value of the yen has more than tripled in value against the dollar, Japan's exports are no longer competitive in world markets and therefore demand for the products of its domestic industries has collapsed.

    Likewise, in the U.S. today, demand for the products of our domestic industries has also collapsed.  For example, auto sales are 25% below where they normally are and demand for new housing is less than a third of what it normally would be.  

    Because consumer demand makes up 70% of total demand in our economy, the collapse of U.S. consumer demand is the main cause of our unemployment.  Pres. Obama has tried to substitute government spending on infrastructure for this collapse of consumer demand, but it has been grossly inadequate and Congress will not permit anymore infrastructure spending.  

    Yet, the solution is clear, as Keynes said in 1936:

    If it is impracticable materially to increase investment, obviously there is no means of securing a higher level of employment except by increasing consumption. . . . I should readily concede that the wisest course is to advance on both fronts at once. Whilst aiming at a socially controlled rate of investment with a view to a progressive decline in the marginal efficiency of capital, I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume.

    The General Theory of Employment, Interest and Money, p. 325

    We simply must increase consumer spending in the U.S. or we will continue to have massive unemployment and a permanent recession forever.

    •  The difference is (1+ / 0-)
      Recommended by:
      ozsea1

      that the Japanese, at the time, did not run up the massive consumer debt that most Americans are saddled with.

      I think that needs to be part of the "math." Crushing debt is eating up people's money. When times are bad, the debt becomes more frightening, and people scramble to get it paid off. So incentives, tax cuts and the like end up not being spent on goods and services, but spent to service debt.

      "YOPP!" --Horton Hears a Who

      by Reepicheep on Mon Sep 12, 2011 at 08:31:37 AM PDT

      [ Parent ]

      •  No to Tax Cuts; Yes to Tax Incentives (3+ / 0-)
        Recommended by:
        Reepicheep, ozsea1, sargoth

        You are correct in saying that general tax cuts are either hoarded as savings or spent on reducing debt by most consumers.

        OTOH, tax incentives to spur consumption are highly effective, e.g., Cash-4-Clunkers, sales tax holidays, home buyers tax credit.  Give consumers a "deal" and they will spend their money, as every retailer in America knows.

        •  Tax incentives have not been not that effective. (1+ / 0-)
          Recommended by:
          Justanothernyer

          Case in point, Cash-4-Clunkers provided a temporary stimulus to the auto industry but sales dropped back to their previous levels, or even slumped a little, as soon as the program ended. It didn't jump start the auto industry much less the rest of the economy. A deal for a relatively small number of automobile and home buyers (many of whom would have made their purchases anyway but timed them to coincide with the "deal") has not translated into a deal for the American taxpayer or the long-term economy. The "deals" the government has provided so far have been like a retailer offering blue jeans at below cost in the hopes that the losses would be made up for in sales of shirts and shoes but  finding  people are only buying the jeans. Not a winning long term business strategy. Reepicheep was correct insofar as Americans will not return to a spending mode overall until consumer debt drops further.

          Also, any stimulus we provide now will have to be paid back later (witness Greece now having to pay the piper following years of "stimulus"). Stimulus can be desireable but we are already carrying a large federal debt load. We simply have limited room to stimulate further without guaranteeing a large drag on the prospects of future generations, either through additional recessions or high levels of inflation as the government prints money to service the debt it is incurring now.  

          •  Sorry Blubba (1+ / 0-)
            Recommended by:
            ferg

            Cash-4-Clunkers achieved exactly what it was designed to do: rescue auto sales and the auto industry.

            The Facts: Before C-4-C, GM and Chrysler were both bankrupt and the collapse of the North American auto industry was imminent.  After C-4-C, all auto companies became profitable, rehired thousands of workers and opened factories.  Sales NEVER returned to levels before C-4-C and are now several million higher than 2 years ago.

            any stimulus we provide now will have to be paid back later (witness Greece now having to pay the piper following years of "stimulus")

            You are wrong here too.  Unlike Greece, which cannot print Euros, the U.S. can print dollars in unlimited amounts at any time, so the stimulus never needs to be paid back.  But it probably will be anyway once the economy gets back to full employment and tax revenues rise.  Greece is suffering because of austerity programs, not stimulus programs.

            The federal debt load is not a debt at all because it never comes due and we can print money to pay it at any time.

            •  Nope. (0+ / 0-)

              The facts: Before the $80 billion in loans and bailouts given to the Big Three in 2008 (before the 2009 $5 billion Cash 4 Clunkers program) american automobile makers had a lot of gas guzzling SUVs and similar cars in their lineups that were poorly positioned for consumer tastes at the time. It was the bailout money that bought the car companies time to retool and put out cars that people actually wanted to buy. As for Cash 4 Clunkers, car sales after the program were depressed for the seven months that followed. There was no net or lasting increase in car sales that can be attributed to the program.

              Yes, the US can print unlimited amounts of dollars...and the result would be high inflation and a decrease in purchasing power. Greece is suffering because it spent money like a drunken sailor that it didn't have. There is nothing, in theory, preventing Europe from printing piles of euros to pay off Greece's debt. But as with the US printing money, there would be grave economic consequences, which is why it won't do it (and why America won't either).

              •  Oh really? (0+ / 0-)
                It was the bailout money that bought the car companies time to retool and put out cars that people actually wanted to buy.

                What cars were those, exactly?  GM and Chrysler did not bring out any significant new vehicles between late 2008 and C-4-C in August 2009.  So you are just BSing.

                As for Cash 4 Clunkers, car sales after the program were depressed for the seven months that followed

                Let me dumb this down for you:  the car dealers were out of inventory thanks to C-4-C.  Can't sell what you don't have.

                Yes, the US can print unlimited amounts of dollars...and the result would be high inflation

                So is 2-3% inflation high by your standards, because that is what we have now after the Fed printed $2 trillion over the past 3 years.  Sorry to confuse you with the facts.

                •  Um, (0+ / 0-)
                  GM and Chrysler did not bring out any significant new vehicles between late 2008 and C-4-C in August 2009.

                  That would explain why all of the top 10 vehicles traded in during the program where from the Big Three and only two of the Top 10 vehicles sold during the program were from American companies (the Ford Focus at #4 and the Ford Escape at #10 - Ford was in the least rough shape going into the bailouts). Thanks for allowing me to prove my point.

                  Let me dumb this down for you:  the car dealers were out of inventory thanks to C-4-C.  Can't sell what you don't have.

                  It doesn't take seven months to rebuild inventory for new vehicles. When the deal went bye-by so did the customers. Also the program reduced inventories of used cars as a result of scrapping the trade-ins. This jacked up their prices and put a hurt on lower income families trying to replace their truly clunky autos.

                  So is 2-3% inflation high by your standards, because that is what we have now after the Fed printed $2 trillion over the past 3 years.  Sorry to confuse you with the facts.

                  Printing money is a standard tool for combating deflation
                  , which is what the Fed was concerned we were facing. It isn't the right prescription for all ills.

    •  We have Tim Geithner (0+ / 0-)

      directing our recovery?

      Nowhere do I understand that national security is a substitute for the law.---Thomas Drake You cannot tell from appearances how things will go.--Winston Churchill

      by SouthernLiberalinMD on Mon Sep 12, 2011 at 12:28:18 PM PDT

      [ Parent ]

      •  I think so, yes + (3+ / 0-)
        Recommended by:
        SouthernLiberalinMD, ferg, 3goldens

        I think Mike Konczal at Rortybomb has been doing the most convincing writing about this. They appear to buy the Rogoff analysis and they also have this almost superstitious approach to market confidence. And then, of course, there's the Geitner "stimulus is sugar" quote. It looks very much like it's Geitner driving the economic policy.

        As for the long-term debt cutting coupled with short-term stimulus - Geitner seemed to believe that if you didn't assure the bond vigilantes that deficit spending would be short term, interest rates would rise and would wipe out your efforts. It seems incredibly wrong headed given that interest rates are, in some instances, negative. And also, if we look to Japan, their interest stayed low throughout. So, worrying about interest? Very wrong headed.

        Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

        by PlutocracyFiles on Mon Sep 12, 2011 at 12:36:44 PM PDT

        [ Parent ]

  •  A few additional observations and data elements (2+ / 0-)
    Recommended by:
    tacet, kutting

    First of all, economists are notoriously bad at 2 things:  Finance and Human Behavior.  The first problem: finance, (business capital: formation, allocation, etc.) can be overcome by forming an appropriate collaborative team: a monetary economist and a financial scientiest....but who might they be?

    Human behavior is much more difficult.  So difficult, in fact, that it is either excluded from models or injected as unchanging in certain ranges and held constant for entire populations.  We need a one world Hari Seldon Psychohistorian.

    Second, we are, I believe, at a nexus in Moore's Law (1 & 2).  Moore's Law, (oversimplified here) deals with the expected cost/performance improvement in computing density and increasing production cost for that density.  We have been tracking very well on the predictions for Moore's Law...in fact, I believe we are ahead of the curve, especially in factory automation.  

    My estimate is that the increasing automation of worldwide factories will continue to reduce the need for labor and that the labor surplus we have today will no longer be needed AT ALL in existing manufacturing sectors.  Therefore, our unemployment rate cannot be reduced without retraining to a new industry...but that industry is as yet to be defined.  The unfortunate thing I believe is that our unemployment rate, to a large degree, will be permanent unless we rapidly enter into nascent industries, such as alternate energy, or labor intensive projects ala the WPA.

    I know of no economist that is willing to admit to the problems yet, although it is probably being though of by a young lion with no audience or authority.  We need to find that young lion or lioness.

    Basically, what I'm saying is that I believe every model out there isn't worth a shit and the economists who are in authority don't have a clue how to deal with this  Nexus.  Anything presently being proposed in congress and any action undertaken by the Fed will not work.  The president's jobs plan is a good idea as a momentary stopgap, but someone needs to get on this soon.

    Eventually, the bond markets will figure this out and we will be in for the largest worldwide depression in history.

    Sorry for the negative news, but I can smell it.

    A little article on Moore's is HERE

    The Dude abides, now get off my lawn.

    by Boris49 on Mon Sep 12, 2011 at 08:38:17 AM PDT

  •  Important to understand (2+ / 0-)
    Recommended by:
    ozsea1, tacet

    We on the left (and on the center and even on the secular right) tend to pose economics on a left-right kind of spectrum that tends to balance market forces and government intervention.  We judge these based on how well they work in terms of overall prosperity.

    Modern conservatives (and the old, old conservatives that they channel) simply don't think of economics that way.  Your Andrew Mellon quote does a good job of illustrating this mindset: the goal is to make moral judgments and sort out the moral people (winners) from the immoral ones (losers).  Whether it's a good way to run an economy is irrelevant.  In the eyes of conservatives, Keynesian economics is a train wreck because immoral people not only go unpunished but might be successful in a secular society.  Whether it "works" in terms of economic output, efficiency, or even in how well it makes rich capitalists richer, is irrelevant.

  •  starve the beast (3+ / 0-)

    Such a brilliant piece--bookmark worthy.  I wonder if Krugman will read--though he may be busy fending off Bush-huggers

    What can't be discounted is the undercurrent, anti-conservatism strategy developed by Laffer and Wanniski that sold the country on the other supply-siders, the "Laffer Curve Reaganomics supply-siders".  As it turns out, strategy can be better than ideas.

    Realizing the lure of social programs and their popularity, these other supply-siders turned economic conservatism into a pure strategy.  Debt and deficits no longer mattered.  From Reagan on, debt, any kind of debt was no longer a bad thing--absolutely counter to fiscal conservatism.  Debt can be an effective tool in severe recessions or for defending the country, but it is not a tool to be abused as normal policy.  Debt can mask the effects of productivity exceeding wages, by filling the demand gap, only so long.

    We all know what happened to the U.S. debt from 1980 on, but we don't focus on how consumers followed their leaders only too well.  Now, with over 14.5T in debt, with the loss of the ATM machine with a roof, with the fox guarding the hen house and nest eggs swallowed whole, even those who believe in demand spending, are reluctant to pull the trigger on more.  

    Debt has become the new fear.

    Now, this "brilliant" strategy has truly starved the beast and the ultimate goal of "small government", which just means government without social programs, can come to be.

    Conservatives aren't dumb.  They just act that way to "rope a dope" the country.  

    (case in point, name the last Republican president to produce a budget with a surplus)

    (case in point two:  

    In 1932, the Debt to GDP was over  33%.  

    With the Great Depression, WW II, the scores of ABC New Deal programs, the Korean War, the Interstate Highway System, the Vietnam War, the Great Society, and even the environmental programs from Nixon,

    in 1980, the Debt to GDP was less than 32%.

    Something else besides social programs is the problem.)      

  •  One correction to your otherwise great overview... (1+ / 0-)
    Recommended by:
    ozsea1

    In your post, I wanted to note one significant matter which you might wish to consider correcting: You’re conflating Neo-Keynesian economics with New Keynesian economics. (The current administration is being managed by Neo-Keynesians, not New Keynesians. Krugman and Stiglitz are the most prominent New Keynesian thinkers in the U.S., with Stiglitz being considered the more senior of the two. In fact, I'd call him somewhat of the leader of New Keynesian thought, worldwide.) This conflation is something done quite frequently in the blogosphere and the MSM, and even the Wiki folks have pointed this out in their page on New Keynesianism (see introductory paragraphs right here):

    Not to be confused with Neo-Keynesian economics.

    New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.
    Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.
    Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would…


    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Mon Sep 12, 2011 at 09:38:04 AM PDT

    •  Rational Expectations is BS (0+ / 0-)
      Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations.

      The idea that consumers, businesses and government react rationally to changes in the economy is just ludicrous on its face.  The "New" Keynesians have corrupted the true Keynesian analysis that a major problem of recessions and depressions is the irrational fear that causes hoarding of money and massive risk aversion in markets.

      Anyone who watched the debt ceiling debate last summer saw fear on display throughout the crisis.

      •  Re-read the quotes herein... (1+ / 0-)
        Recommended by:
        ozsea1

        From the Wiki page on “(criticisms of) rational expectations”…

        …It is well known that assumptions about individual behavior do not carry over to aggregate behavior (Sonnenschein-Mantel-Debreu theorem). The same holds true for rationality assumptions: Even if all individuals have rational expectations, the representative household describing these behaviors may exhibit behavior that does not satisfy rationality assumptions (Janssen 1993). Hence the rational expectations hypothesis, as applied to the representative household, is unrelated to the presence or absence of rational expectations on the micro level and lacks, in this sense, a microeconomic foundation.

        And, the following from the Wiki page on “New Keynesian economics”

        ...Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.

        Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would.

        Bold type is commenter's emphasis.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Sep 12, 2011 at 10:24:47 AM PDT

        [ Parent ]

        •  Stock markets behave irrationally, in general. (2+ / 0-)
          Recommended by:
          ozsea1, foucaultspendulum

          But, also generally speaking, events are "priced in" to market prices, too.

          The use of the TERM: "usually is quite important here.

          At the same time, New Keynesians believe in intensive government intervention in society, in general.

          Also, another key New Keyenesian concept here is that markets fail on a REGULAR basis, as noted in the pages cited, in the comments above.

          "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

          by bobswern on Mon Sep 12, 2011 at 10:29:11 AM PDT

          [ Parent ]

          •  bob, Yes, a good question, why do markets fail on (0+ / 0-)

            a regular basis?  Could it be greed from the right, center and left?  Should we ask Greenspan?

            I know this comment has nothing to do with Keynesian  models.  It is my speculation, isolated from reality,  that we need a new economic model.

            Yesterday, is not a place to dwell.  There are many more places of beauty in the present.

        •  Markets are driven by fear and greed (0+ / 0-)

          which are hardly "rational" in any sense.  Right now, we are in the fear phase and everyone is risk averse which fits precisely with Keynes' analysis which was based as much on emotional factors as mathematical analysis.

          The genius of Keynes was to develop a comprehensive theory of economics that explains its dynamics instead of looking at equilibrium models that rational expectationists use.

      •  Question: Do you believe that improper... (1+ / 0-)
        Recommended by:
        foucaultspendulum

        ...(and/or laissez faire) government regulatory oversight and Wall Street greed caused the foreclosure/mortgage crisis? Or, do you blame the homebuying public for this?

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Sep 12, 2011 at 10:39:36 AM PDT

        [ Parent ]

    •  Yes I'm aware of the distinction + (1+ / 0-)
      Recommended by:
      foucaultspendulum

      It's not critical when distinguishing between freshwater and saltwater, but it could be important in distinguishing between saltwater and Jedi.

      Two things: 1) Krugman didn't make the distinction in his article "How Did Economists Get It So Wrong"; 2) I would've had to explain the whole DSGE models.

      But yes, there is a difference. And arguably that argument is different in terms of how economists are approaching the crisis (e.g. Greg Mankiw is a Neo-Keynesian I believe).

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 11:18:35 AM PDT

      [ Parent ]

    •  Here's an example of why categorizations+ (0+ / 0-)

      beyond just the freshwater/saltwater divide get kinda endless:

      http://economistsview.typepad.com/...

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 09:11:55 PM PDT

      [ Parent ]

  •  Excellent explanation (3+ / 0-)
    Recommended by:
    ferg, ozsea1, Boris49

    And how do you make rentiers no longer prefer deflation?

    Pitchforks and torches are the traditional means of persuasion.

    In theory, there is no difference between theory and practice; but in practice, there always is a difference. - Yogi Berra

    by blue aardvark on Mon Sep 12, 2011 at 09:41:17 AM PDT

    •  That's ultimately what it comes down to. (0+ / 0-)

      The rentiers must fear an overthrow to be moved to a "moral" position.  Unemployment around double what have now or a bad harvest should do it.

      God help us all.

      The Dude abides, now get off my lawn.

      by Boris49 on Mon Sep 12, 2011 at 01:04:27 PM PDT

      [ Parent ]

    •  I don't know + (1+ / 0-)
      Recommended by:
      swellsman

      But I did find the Naomi Klein article I cited had an interesting statistic - namely, that 90+ percent of rich people are worried about social unrest.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 03:30:37 PM PDT

      [ Parent ]

  •  Our Economic Worldview is Screwed (1+ / 0-)
    Recommended by:
    pat bunny

    As long as we value stuff over happiness this problem will not go away. Not that stuff will go away, but our fundamental relationship with material objects and our obsessive desires for them to fulfill emotional needs is what must shift.

    "Without LOVE in the dream it will never come true..." -Robert Hunter/Jerome John "Jerry" Garcia; -8.88, -9.54

    by US Blues on Mon Sep 12, 2011 at 10:18:08 AM PDT

    •  I always tend to think+ (2+ / 0-)
      Recommended by:
      foucaultspendulum, swellsman

      that any theory that sees the problem as a human problem and any solution which requires us to readjust human nature is problematic. People aren't different and aren't likely to be different. I like the Keynesian approach - people are the same as always (they aren't different now then they were when we were prosperous), our economy just broke down. But, not to worry, we created the economy for our convenience and, if we can think about it right, we can fix it.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 12:30:05 PM PDT

      [ Parent ]

  •  Is the geography of "Salt" and "Freshwater" (2+ / 0-)
    Recommended by:
    pat bunny, DBunn

    economic theory just a specific reference to the University of Chicago? Or is there a larger pattern of economic theory being influenced by locale, and the kind of money endowing the chairs and scholarships?

    It seems plausible that the theories promoted by coastal universities would be more favorable to finance, international trade and manufacturing. Government's large role in protecting trade routes, enforcing contracts and maintaining financial stability would be part of mindset of the successful local alumni who donate to university endowments.

    Economic theorists in the hinterland would be more likely be influenced by agriculture, timber, mining, oil & gas, and other industries where natural resources, land ownership and commodity pricing are involved. Government "meddling" is less welcome in these enterprises. This too, would be reflected in endowments and appointments to university boards of governors.

    Have you noticed?
    Politicians who promise LESS government
    only deliver BAD government.

    by jjohnjj on Mon Sep 12, 2011 at 10:21:02 AM PDT

    •  Well there was definitely U of Chicago+ (1+ / 0-)
      Recommended by:
      foucaultspendulum

      But there was also U of Minnesota (that's where Ed Prescott is who invented RBC theory).

      And then the salwater were Harvard, MIT, Berkely, Yale, Princeton.

      Not sure why at all - I just assumed it was an accident, but perhaps not.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 11:11:07 AM PDT

      [ Parent ]

  •  If you haven't already (0+ / 0-)

    explored this macroeconomic view which goes all the way to the fiscal remedy.  Give it a look Bill Mitchell

  •  Well done PF, T&R. Have you looked (0+ / 0-)

    or listened to any of Steve Keen's presentations. He seems to think that fiscal stimulus in insufficient, that it needs to be accompanied by debt destruction to get the economy back on track. I think it's interesting that we are hearing more and more about debt destruction, hell even Stephen Roach is calling for it.

    http://www.creditwritedowns.com/...

    •  I think that is an interesting development+ (1+ / 0-)
      Recommended by:
      foucaultspendulum

      And I think if you see the problem as a balance sheet problem, debt forgiveness is an obvious solution. I haven't look at Mr. Keen, but I will - certainly, the argument has an intuitive appeal given that the idea of stimulus is to allow the private sector to deleverage.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 12:26:10 PM PDT

      [ Parent ]

  •  Awesome work. n/t (2+ / 0-)
    Recommended by:
    foucaultspendulum, ferg

    Nowhere do I understand that national security is a substitute for the law.---Thomas Drake You cannot tell from appearances how things will go.--Winston Churchill

    by SouthernLiberalinMD on Mon Sep 12, 2011 at 12:21:03 PM PDT

  •  John Calvin, economist (2+ / 0-)
    Recommended by:
    goinsouth, Detlef

    Capitalism is divinely ordained. It is the means by which God bestows evidence of His favor on the predestined Elect, with whom He is well pleased, and the Fallen, who suffer deserved misery in this life, as a foretaste of the eternal punishment they face in the next.

    This being the case, and inarguably true, then to propose any significant change to the current economic system is to oppose the will of God. It is blasphemy, and deserves nothing but contempt and righteous hatred.

    I wish that were snark.

  •  Keynes was wrong. (2+ / 0-)
    Recommended by:
    foucaultspendulum, tacet

    First of all, fantastic diary laying out the "middle ground" of this debate.

    But as you point out, Keynes was "moderately conservative."  Despite his quip (?) that Capitalism was the system where the nastiest of men for the nastiest of motives are supposed to produce the best of all possible outcomes, his work was aimed at saving Capitalism from itself, and in that, he was wrong.

    The debate you outline is, in fact, widening by the moment.  Mentions of Marx, insofar as Marx was an analyst and critic of Capitalism, are becoming more and more commonplace and mainstream.  As in the 30s, people are wondering if this system actually offers more benefits than problems.

    There is a growing sentiment that Keynesian solutions will not work this time.  Paul Mattick offers that view in some detail in an interview.  One reason the Chicago boys gained ascendancy is that Keynesian solutions seemed to be failing in the 70s period of "stagflation."

    Why save what is broken and essentially obsolete?  The real debate should be about what comes next and how best to transition there.  Instead, we're likely to get one more round of worship of Holy Capitalism before the overwhelming mass of people are so disgusted and angry that few will dare mention Adam Smith's name again.

    •  My mother and I have this discussion a lot+ (3+ / 0-)
      Recommended by:
      3goldens, swellsman, goinsouth

      Marx is notably (and unrealistally) absent from this discussion. It's true that Keynes was the compromise and that Marxism was a real possibility at the time. It probably explains, in fact, why a Keynesian compromise was accepted.

      But, as I once told my Mom, inserting Marx into a debate between neoclassicists and Keynesians is like having an atheist in a debate between Protestants and Catholics. None of the details (is this demand? is it supply?) matter. For Marx, the system itself is hopeless.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Mon Sep 12, 2011 at 01:43:55 PM PDT

      [ Parent ]

  •  astronomy before the time of Galileo and Copernicu (2+ / 0-)
    Recommended by:
    Boris49, tacet

    sorry for the long post - but here goes.....

    we all need to remember that economics is a fledgling science - much as astronomy was in the time from when Ptolemy creates his geo-centric model to the time when Galileo and Copernicus blew that model to smithereens.

    Unlike Economics where variables cannot be fully quantified and mathematically controlled for, Astronomy has evolved over the past several hundred years.  

    Remember that Ptolemy's model with the Earth at the center and the planets orbiting the Earth in epicyclic orbits actually worked and was predictive of the location of the planets.  You could actually use it.  

    problem was - it was wrong.  

    And the key indicator that made Galileo and Copernicus question it was that it required unbelieveable complexity to operate.  some scientists simply didn't accept the dogma that was being preached for over 1000 years in the best schools from Greece to Europe, and asked the question - why does it have to be so complex?  

    While there are still areas of active debate in physics today, the principles of how planets orbit or where the earth is in the entire universe is hardly one - Galileo begat Newton/Leibnitz and the mathematics that followed quickly explained most of what had required the "invisible hand" of God in early work.

    In the days of Ptolemy and the centuries afterward - the guiding principle of astronomy was that the Catholic Church felt the Earth was divinely placed by God at the center of the universe.  If you start with that non-scientific assumption - you never get back to the truth.

    So we have to ask ourselves - what dogma is behind current economic thinking?  We keep using the bases for economic theories the same way astronomers used the geo-centric dogma of the church as a basis.

    let's be skeptical  - very skeptical -  of any policies that are based on current economic thinking.  We should be looking back at every model and every projection made by current economic experts and critically examining their accuracy.  What "religious viewpoint" is driving current economic thinking?  

    There is a chorus of differing economic opinion out there today - it's very dissonant.  We need to see this dissonance as a symptom of an emerging discipline and by no means a mature one.

    Our heads' of states use economists to help them make decisions that impact the lives of billions of our fellow citizens.  The words of these economists sound lofty and scientific, so we all take on faith that there is solid data behind it.

    ...just as people for over 1000 years believed that science proved that Earth was the center of the universe...

    "we are the peer review these economists need...."

    •  Very good point. (0+ / 0-)

      The ( human) behavioral aspects of governments, rentiers and international banks are not predictable.  Human behavior is dysfunctional and not based on data in many cases.

      I walked into the other room and got a chill....Glen Beck's George Soros New World Order.  I hate to say it, but a case could be made the a crippled Europe, U.S. campaigning and a local panic or war could take things an entirely different way.

      I was watching the news just before I came back to this.  Our government really has no frigging idea what their enmity is doing.

      The Dude abides, now get off my lawn.

      by Boris49 on Mon Sep 12, 2011 at 03:40:04 PM PDT

      [ Parent ]

  •  Supply side is snake oil (0+ / 0-)

    Pure and simple, a refusal to look at the facts.  Every recession in western history that was not a simple structural readjustment has been a case of overinvestment and underconsumption.

    The rich bamboozle people with supply-sidism because it cuts their taxes.

    A "moderate" in this environment is a person who splits the difference between half-assed government and a total shitpile.

    by Dinclusin on Mon Sep 12, 2011 at 02:32:14 PM PDT

  •  p.s. (0+ / 0-)

    A supply side recession would resemble what Gorbachev had in 1985.  People wanting to buy stuff that the stores don't have, because of underinvestment.

    A "moderate" in this environment is a person who splits the difference between half-assed government and a total shitpile.

    by Dinclusin on Mon Sep 12, 2011 at 02:38:37 PM PDT

  •  Very Nice Diary (1+ / 0-)
    Recommended by:
    Nice Ogre

    Even the "New Keynesian" models maybe aren't quite "Jedi" enough, in that they rely on wage and price stickiness to cause the market failures which cause recessions to persist.  But Keynes himself argued that persistent demand shortfalls could exist even in the face of efficient markets.  That is, even efficient markets can theoretically reach an "equilibrium" that is sub-optimal; there sometimes is no automatic adjustment.  

    In practice, New Keynesian models still end up producing a useful approximation for many purposes, but could still understate some of the problems we currently face.  And Keynesian approaches overall are generally the only thing we have which really matches real world economic data.  

    The freshwater approach is decidedly "supply side" in that they invariably believe that things like lower government spending, lower regulation, lower taxation, lower interest rates and inflation, will all encourage business investment, and that this is what produces jobs.  There continue to be calls from some of these quarters for a consumption tax (which they call the "fair tax"), for instance, which is exactly the wrong thing if the need right now is to encourage consumption or demand.  

    Again, there is no evidence for any of this.  The economic evidence in fact suggests that when consumption increases, investment increases more, and when consumption falls, investment falls even more.  Increasing savings does not increase investment, it lowers it.

    http://research.stlouisfed.org/...

    The above graph shows the ratio of investment to consumption for the last 60 years (blue line), graphed alongside 1 year interest rates.  It is plain as day that there is a tight correlation there, and it's the opposite of what supply-siders tend to think.  When interest rates are higher, then investment relative to consumption is higher.  When interest rates and inflation are low, nonresidential fixed investment relative to consumption is low.

    Ultimately, when the economy is doing well, you will have more inflation, higher interest rates, and more investment. When it's doing poorly, consumption and investment fall. The economic evidence suggests that investment is clearly driven more by demand than it is by supply.

    Most importantly, deliberately using monetary policy to slow the economy, in order to lower inflation and interest rates and increase "stability", as the Fed has done for nearly 30 years now, does not lead to a long term increase in business investment.  Net nonresidential fixed investment has fallen from around 5% of GDP in 1980 to about eight tenths of a percent of GDP today (and that's in an economy with depressed GDP).

    I guess I can claim to be a bit of an honarary Jedi, as I was arguing in January 2008, in the early stages of this crisis, 9 months before the Lehman collapse, that we would likely need $2 trillion in investment to close the gap in investment that had been created by these "supply side" policies taken to excess.  

    As I said then:

    With both inflation and interest rates very low, and talk even of a "savings glut" and even potential for a Japanese style deflation, we should be able to borrow all of the money we need quite cheaply.  All we seem to lack is the will, as even Democratic candidates are talking about "fiscal discipline" rather than "investing in America again".

    What I believe the above evidence demonstrates, is that business will not invest in a country that will not invest in itself.  If we can spend over a trillion dollars destroying Iraq, there's no reason we can't spend twice that rebuilding America.

     

  •  Nice Post! (0+ / 0-)

    This is a fairly accurate picture of the history and state of macroeconomics. I would say that RBC theorists believe that recessions are caused by negative technology shocks such as events that cause sharp drops in oil supplies. I believe that some of the RBC theories are well justified. However, I think demand theory better explains when the economy goes into deep and long economic downturns due to financial crisis.

  •  Great Post (0+ / 0-)

    Good analysis. However, I would think that the manifest failure of the Economic's profession to present a workable edifice capable of even the simplest of predictions argues that the varying world views presented by various economists falls considerably short of a science and perilously close to a religion. Perhaps we should scrap the edifice

    Keynes, appeared to me, to in his own way suggest that the preservation of the theory at all costs that infects macro-economic thinking, especially since Friedman, is troublesome at best and pernicious at its worst.

    Couple that with the evolution of the profession from a few academics to an army of guns for hire and you have the same self perpetuating mythos one finds in many religions.

    Marx's prescriptions may have been faulty, but his descriptions were sound sociology.

    We should remember that in a science a physical theory that is logically consistent may be considered true only until falsified. Unfortunately, in economics only too often (especially post Friedman) a sociological theory that is logically inconsistent remains true even if falsified.

  •  Marx Economic Philosophy: Capitalism (0+ / 0-)

    Please feel free to revise and then integrate with other postings as you see fit.

    First, the system descriptions should be viewed within the context of the era in which Marx described them.  There are additional subtleties and nuances when jumping to the 21st Century, so this is a very rough pass.

    At the time of his thinking, there were two primary economic systems in place on the continent:  Feudalism and Capitalism.  Feudalism generally had a serf/lord relationship or a servant/merchant relationship.  Let’s leave out the church and any upper level nobility for this purpose. Capitalism was a higher form of relationship between labor (tenant/landowner, tradesman/merchant, labor/owner) and the bourgeoisie and upper classes.

    Philosophically, Marx felt that all income derived from the worker’s activity should be owned by the worker.  However, society had been constructed unfairly so that, under both the feudal and capitalist system, the bourgeoisie and upper classes bled off the excess.  The main difference between the two systems is that under the feudal system, the serf class existed only at a subsistence level and had few liberties and none of the privileges of education, enlightenment, entertainment, etc. provided to the worker in the capitalist economy.

    That’s the basic observation.  Labor, which should own all transaction value, has an unjust tax on his services by the bourgeoisie and upper classes. Labor provides substantially all of the effort and, accordingly, should earn substantially all of the value.

    However, Marx felt that capitalism had value as an economic system since it was superior to the prior system of feudalism in the following ways:

    •    Labor received much better treatment under the capitalist system.  It could vary widely, of course, but depending on the nature of the relationship with the upper classes, labor could receive a significant share of the entire transaction value.
    •    Capitalism created value for improving processes, technology, the means of production and distribution.  Feudalism was a static process.  Change, if any, was at a very slow rate, with the price improvement fully allocated to the Merchant or Lord.
    •    On the downside, both systems were subject to market forces of price, supply and demand that caused cyclical dislocations, recessions or the collapse of each system.  However, under capitalism, a surplus value could be accumulated to buffer such recessionary periods.  Feudal systems could easily collapse with no possibility of rebuilding, which created dire results for labor.

    So, under the feudal system labor’s quality of life was extremely poor.  There was very little desire for innovation since labor was at a subsistence level and the upper classes retained substantially all the value. Environmental or economic pressures from time to time could lead to a revolution, with it’s attendant high price of punishment if not successful. The replacement system was generally a new feudal system where life was better for a time, but eventually relapsed into the old ways.

    Now comes the interesting part.  

    In a capitalistic system, there is no general tendency toward a fair equilibrium between all laborers and the upper class.  Economic activity is cyclical and dynamic and, to a large degree, cannot be controlled.   Other market/environmental forces come into play.  Over time, class wealth accumulation diverges, with the lower classes suffering the greatest negative effects. Labor value/price relationships change such that a class bifurcation can occur (CEO pay at 450 times factory floor worker pay, for example). Ownership of the means of production and other wealth is distributed to the upper classes.

    The unemployed generally suffer the most severe economic and social consequences. An underclass may develop and never be able to enjoy sufficient economic wealth to achieve social/moral satisfaction.  There are many more possible dislocations between laborers and the upper classes.  

    Marx characterized it slightly differently, but continuing disparities in accumulated wealth and social values resulted in significant moral unfairness.   As a result, the system would require a transformation to reassert the moral fairness of the wealth available for distribution.  That transformed economic system is socialism.

    I’ll leave it there.  Others can add to this, or change it as they see fit.  It’s late here and I need some sleep.

    One thing though---as you’re reading the bold paragraph and you are checking “yes” to each attribute as you read through, it doesn’t take you long to see that our system is teetering on the edge of socialism.  And that the Republican Party is unknowingly doing it’s damnedest to push our republic further in that direction.  The only way NOT to move through a transformation is to morally reallocate the wealth in the system before it’s too late.  If we don’t, then transformation will occur.  And not necessarily a fun time will be had by all.  I saw the are in Paris where Marie Antoinette was "transformed".  There is a nice Egyptian obelisk to mark the spot.  I think she would have liked that.

    .

    The Dude abides, now get off my lawn.

    by Boris49 on Tue Sep 13, 2011 at 01:53:48 AM PDT

  •  Brilliant Sythesis and Narrative. (0+ / 0-)

    I knew it would take a while to read and digest.

    Thanks for the effort.

    While I don't hold Obama in high esteem, that doesn't mean I would say he's the Devil Incarnate and the lessor of evils. He is merely the lessee of evils.

    by xynz on Tue Sep 13, 2011 at 07:08:04 PM PDT

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