Republicans don't just wake up in the morning and decide to rob the widows and orphans so that they can enrich their billionaire friends. Their lack of empathy for the less fortunate in society isn't by design. There is a rational, scientific theory behind their policies.
That scientific theory that conservatives cling to is from the 19th Century, and it failed spectacularly on a global scale nearly a century ago.
I think it is critical to understand the flawed science behind their policies if we want to defeat their economic agenda.
To do this we have to look at economic history and theory.
Because economic history and theory can be rather bland, I'm going to try to simplify the concepts as much as possible.
HearSay
I want to introduce you to the most influential classical economist you've probably never heard of -
Jean-Baptiste Say.
Say is the namesake of
Say's Law. In Say's own words, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: pp. 178–9).
John Maynard Keynes described is it as "supply creates its own demand".
If that sounds weird to you, join the club. Even today economists debate the exact meaning of this theory. It's actually easier to explain the consequences of Say's Law than it is to explain the law itself.
Why Republicans are cruel: the science
A critical point of Say's Law is the premise that general gluts cannot exist, meaning that in a capitalist economy you will never have more production than demand for an entire economy.
According to Keynes, this meant that Say was claiming there could never be widespread unemployment. Persistent depressions are impossible in a free market according to laissez-faire principles.
The key assumption of followers of Say's Law is that the market will never produce a general recession, and if one occurs then it must be because of government policies.
Say's Law also posits that it is irrational for the wealthy to hoard money, thus wealth inequality doesn't matter because the wealthy will put the money to use in the economy.
Paul Krugman describes Say's Law as "the “law” is, at best, a useless tautology when individuals have the option of accumulating money rather than purchasing real goods and services."
With Say's Law, Adam Smith's Invisible Hand, and David Ricardo's comparative advantage and law of rent, classical economics dominated all economic policy in the world for over a century.
The only influential economist of the era to challenge the idea was Karl Marx, who considered Say's Law to be nonsense. But Marxism was outside the Overton Window.
So what happened? The Great Depression happened.
Suddenly all the things that Say's Law said couldn't happen, did happen. A persistent economy depression created widespread and extended unemployment which crashed overall demand and created a general glut.
Meanwhile the wealthy hoarded their cash.
Classical economics, and Say's Law in particular, was discredited.
The Temporary Triumph of Keynesianism
John Maynard Keynes turned Say's Law and classical economics on its head. Keynes argued that demand creates supply (as opposed to Supply creating demand), and that unemployment happens because of imbalances in demand and whether the economy was expanding or contracting, rather than laziness.
The classical economist perscription to recession and unemployment involved abolishing minimum wages, unions, and long-term contracts, to increase labour market flexibility. Keynes rejected that reasoning because it would depress aggregate demand and make the recession worse.
Classical economists argued that excess savings through hoarding by the wealthy would depress interest rates and thus stimulate investment. Keynes pointed out that investment is based on long-term expectations, not short-term interest rates.
With Keynesianism guiding economic policy through the next four decades, the United States became the wealthiest nation the world has ever seen.
So what happened? Stagflation happened.
Under Keynesianism there was supposed to be a tradeoff between inflation and unemployment (as imagined through the Phillips Curve). Higher inflation was supposed to reduce unemployment, and visa versa.
Unfortunately that didn't happen in the 1970's. High inflation and high unemployment could indeed happen at the same time.
Keynesianism had a flaw.
The Triumph of Neoclassical Economics
Instead of trying to fix the flaw in Keynesian, it has since been generally rejected on the fiscal side, and is now only sometimes used on the monetary side. But you would never know that from right-wing sources who still rail against Keynesianism in the same way they rail against hippies.
All the perscription by classical economists for high unemployment and recession that I listed above is now standard economic policy by modern conservatives and neoliberals.
The modern term is: austerity.
First of all, where do economists get the idea that a lower standard of living is a good thing? That concept was fully developed at the Chicago School of Economics by Don Patinkin. His theories about unemployment and lower wages leading to a healthy economy was embraced by conservative economist Milton Friedman, and caused a great deal of controversy.
The famous economist Hyman Minsky, while he didn't directly dispute Patinkin, voiced his misgivings about the theory.
"If the Patinkin effect is relevant it is only in the long haul and after a large price is extracted in lost output and employment...[If the economy stabilizes] by way of the Patinkin real-balance effect, it may go by the way of Hell."
- Hyman Minsky
The fact that classical economics completely failed in the Great Depression is simply ignored by most mainstream economists. The right-wing spends their time trying to rewrite history rather than learn from it.
The fact that neoclassical economics can no better predict stagflation than Keynesianism is also ignored.
All the economic success experienced under Keynesianism is ignored.
Instead of learning the mistakes and moving ahead like any real scientific field of study would, mainstream economists turned back and embraced theories that have already been thoroughly discredited. Could it be because those theories
help justify rising wealth inequality?
“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our morals.”
- Adam Smith, “The Theory of Moral Sentiments.”
Sadly, John Maynard Keynes' theories are normally only mentioned now when it comes to government spending programs, one of the least important parts of his work. Even his supporters are guilty of this.
Just because economists no longer pay attention to most of Keynes' teachings, doesn't mean he isn't still trying to tell us something, and the 2008 crisis and the failure of the neoclassical efficient-market hypothesis opened the window to reexamine the Keynesian school.
Consider a concept of Keynes that is most relevant today: liquidity trap.
A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Common characteristics of a liquidity trap are interest rates that are close to zero and fluctuations in the money supply that fail to translate into fluctuations in price levels.
Those are exactly the conditions that we are currently suffering from today, a point that Paul Krugman has been trying to call attention
to for
years.
Back in 2005, new Fed Chief Ben Bernanke warned about a global savings glut. Since then it has only gotten bigger as the global elite hide their riches from the tax man. This is happening despite global interest rates at record lows.
This is exactly the environment that Keynes described when he created the liquidity trap theory, yet today's neoclassical economists are still "puzzled" about why economic growth remains slow, and why the economies of Europe are flat despite several rounds of austerity.
The wealthy don't invest these trillions, but instead use it to hoard and speculate, often causing disastrous bubbles. Neoclassical economics and Say's Law has no answers for this problem, but Keynes logically predicted it.
You might think that when the global economy has such an obvious flaw that has been predicted and described in detail by one of the great economists in history, that people would pay attention. Yet outside of Krugman, everyone scratches their heads in wonder, as if Keynes had never existed.
It is long past time for mainstream economists to rediscover Keynes.
Of course another economist also predicted the failure of classical economics before Keynes, but he still exists outside of the Overton Window.
“Karl Marx had it right. At some point, capitalism can destroy itself. You cannot keep on shifting income from labor to capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.”
- economist Nouriel Roubini