Rethinking economics

Back in April I wrote a post titled “We’ve lost our way”. The point of the post is captured in the following paragraphs

So after years of a China driven mining boom that continues to adjust our terms of trade ever upwards how did we get here? How is it possible that after so much luck in our economic circumstances we have a private sector choking on debt and a public sector claiming it doesn’t have the money to deliver services? In a decade marked by the privatisation of many government services and entities in order to balance government budgets I find it hard to point to a single piece of new production enabling infrastructure that any government has delivered.

….

I think the main issue is that there is a complete lack of long term economic strategy in this country. As I have always said, the aim of macro economic policy should be to support sustainable growth, productive gains, employment and social calm, with the overall goal of economic self-reliance and a better standard of living for the nations citizens. The real issue as I see it is that Australia has forgotten this and simply lost its way.

While I was on leave last week I had some time to step back from the daily flow of economic news and spend some time thinking on this and some other “bigger picture” issues within global economics. I have come to the conclusion that the world’s economic elite need to re-think what economics is about.

My long-term readers would be aware that I consider myself a pragmatic chartalist. In my opinion chartalism (MMT) is useful in understanding economics in two distinct ways. Firstly it allows me to understand money from a functional perspective, but secondly (and in my opinion more importantly) it gives me a perspective on the economy that is separate from money. This may sound a little strange, but in a modern economy money itself is actually a somewhat abstract concept and in many ways a hindrance to understanding macro-economic policy.

As I stated in many of my posts I consider the most important measure of an economy is the standard of living of a nation’s citizenry. In my opinion the economy of a country is a public asset, which has a primary purpose of making the lives of the citizens of that country better. It is very clear from the current situation in Europe that this particular message has been completely lost by the Euro-elite as they try to work out a way of saving their banking system while the populace withers. The same is true for the US.

It always amazes me that Western culture narcissistically believes that it has all the answers. While we see the likes of China actually using its economy to improve the lives of the Chinese people western nations succumb to the lunacy pedalled by private interests by selling of the farm for short-term gain. It would seem that Europe is finally reaching the limits of madness this week under the realisation that you can only pretend that a spade is not a spade for so long. It is now time to make a decision. Create a real monetary and fiscal union to support all Europeans or drop the whole thing and let individual countries do what they should have been doing all along, that is using their economies to better the lives of their citizens.

It would seem in the swirling madness of global economics that the political and economic elite are either too corrupt , too bound by ideology or simply too stupid to realise what they have signed the citizens of their countries up for. I find it very hard to believe that the citizens of the European periphery are going to accept that they must make massive changes in their own standard of living because of decisions made by non-elected bureaucrats, and it continues to amaze me that Americans are so quiet about doing the same. It is only a matter of time before the economic world wakes up to the fact that the human capital of those nations will not support their own real life suicide for the sake of magic numbers in a central bank’s computer.

In all of this madness everyone seems to have completely forgotten why economic mechanisms such as money exist in the first place. It is there to provide a means that allows people to provide resources to others in order to better their own lives. Taking a look the modern economic world you would be very hard pressed to find a representation of that underlying ideal, and even harder pressed to find government policy that supports it in the western world. In Australia for instance we see a private sector bogged down in debt because low interest rates and government policy incentivised credit creation towards housing.

So what does this actually mean outside of money?

It means that Australians continue to expand their obligation of time and resources to others to gain access to housing. Are Australians receiving any additional quality of living for this expansion of obligation? If not, then why does government policy continue to support this?

It is time that we all re-learn and re-think what economics is about and then demand our economic policy makers deliver better outcomes.

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Comments

  1. we are wasting all the money received from selling our natural resources for paying interest to foreign banks to be able to buy existing houses (that we already own) from each other

    sound like a “good deal”

  2. Its too tough for the average joe and economics is not taught well at the school level or citizen responsibilities. We are however forced to vote for policies and thus the mess. “Governments are Us”

  3. Fantastic post DE, one that should be read widely in this country. Unfortunately our political leaders view the economy as a political mechanism to be used and gamed to win and then maintain office, not for the good of the people

  4. We get the government we deserve.

    Look at the NBN as an example of the political difficulty of infrastructure spending: “It’s a waste”, “we don’t need it”,”it’s obsolete before it’s even built”,”should spend it on hospital instead”,etc. The misinformation campaign is simply staggering. The Rupert Murdoch medias simply don’t mind publishing ‘mistruths’ to push their political agenda, and the general population goes on to believe those lies. This is the political reality.

    The ‘right’ side of the politics believes cutting taxes will solve every problem in the universe, and both Labor and Liberal are ‘right-wing’ political party run by ammoral political operators who practice ‘followership’ instead of ‘leadership’. “Infrastructure” is therefore something you flock off to pay election bribes.

    The Chinese political model is a hybrid command and market system which relies on having the ‘right people’ in the top jobs. It becomes a total catastrophy if ‘bad apples’ ends up in charge. The current Australia political class is full of ‘bad apples’ who put their own self interest ahead of the national interest, so adopting the ‘Chinese system’ will only make things far, far worse.

    On a final note, the modern 24/7 news cycle and the relentless assault of your private life from the media means you have to be crazy to become a politician. Look at Kevin Rudd : he saved Australia from the GFC, and his reward is a knife in the back. I expect that Tony Abbott’s crass popularism will come to dominate politics, and ‘opinion poll’ will not only crowd out national interest, it’ll even crowd out what is true. Expect to see these kind of headlines : “AGW is not happening, scientist is wrong : see online Opinion poll”.

    • Rudd saved Australia from the GFC, but at what cost? There’s no such thing as a free lunch, as Australia looks set to discover, just as the rest of the West has.

      • Avid Chartist, I think if you went and looked over MMT you would see there is such a thing as a ‘free lunch’.

        Idle resources (specifically human capital) is wasted if it is not used. As governments with sovereign control over their currency are not revenue constrained they can employ those resources (putting unemployed people to work, ie spare capacity that would not be otherwise used) and produce goods and services for the community in a costless manner.

        Unemployment is the greatest tragedy but for the tragedy of war. We loose all perspective when we look at them as statistics rather than humans. I fear for the current youth (declaration, I am one of those) that are being denied the opportunity to work and condemned to a life of misery and depression because governments falsely believe they must balance budgets.

        I HIGHLY HIGHLY recommend you read the two articles below to actually understand what unemployment really is. It is far more than some statistic, it is IDLE human resource that can be used if government chooses to do so. There will be a war between generations if this continues (Baby Boomers with everything versus the youth who don’t even have a job)

        http://www.nytimes.com/2011/07/10/business/the-unemployed-somehow-became-invisible.html

        http://economix.blogs.nytimes.com/2011/07/13/i-am-not-a-statistic-the-invisibility-of-the-unemployed/

        For more on the class wars
        http://macromon.wordpress.com/2011/07/18/the-clash-of-generations/

        http://macromon.wordpress.com/2011/07/18/sovereign-debt-and-geriatric-deadbeats/

      • I was young and unemployed in the early 90s recession. I agree, it’s horrible.
        I don’t think more government spending, and larger government defecits is the answer, is all.
        What is the answer? Well, something similar to one of the common themes on MB… let the productive areas of our economy grow (eg. mining and …. well, just mining, sadly), reduce our reliance on the credit fuelled unproductive areas of our economy die (eg. housing & government), and we’ll end up in a better place.

        • Thanks Avid Chartist but while
          wasteful government spending is annoying to those that pay tax, why is there this ridiculous Orwellian Animal Farm Mantra that all now chant
          Public Sector Bad
          Private Sector Good

          Hasn’t housing bubbles, GFC, over bloated banks and the like recalibrated this thinking at all? The people that use these mantras are the same ones that enjoy all the benefits of the public sector but blindly believe they get no benefit from public goods (hospitals, parks, schools, internet, university, roads, rail, law and order)

          Government spending is not about communism or socialism, this is some sort neo con retort to any suggestion of government spending. To say that government is a poor allocator of resources and the private sector is a great allocator of resources as some form of indisputable fact is what is wrong with this Ayn Rand/Republican Tea Party thinking that is so professed at the moment.

          Private sector debt higher than it has ever been on houses that don’t add to productive capacity is one great example. Why hasn’t the private sector allocated to great developments of biotech, infrastructure and IT? Rather than the zero sum game of house price appreciation.

          I find it even more hypocritical when all decry government involvement as wasteful, useless and unnecessary but at the same time see the Chinese command economy as the exemplar of a great economy.

          • “Private sector debt higher than it has ever been on houses that don’t add to productive capacity is one great example. Why hasn’t the private sector allocated to great developments of biotech, infrastructure and IT?”

            And why has the private sector devoted so many financial resources towards housing? Government policy maybe? Think tax incentives (negative gearing, CGT concessions,etc); artificial restrictions on land/housing supply; artificially low central bank interest rates; government support of the banking sector; FHOGs; family home exempted from assets test and means testing for the pension/welfare; the list goes on. Let’s not kid ourselves here, we are not dealing with a “free market” for housing.

            By contrast, Texas – the home of the Tea Party – operates the closest thing to a “free” housing market in the Western World and has some of the most affordable housing. It has also allocated a far smaller proportion of private sector resources into housing than Western nations where government intervention is excessive.

          • Thanks, Leith.

            It can be easy to create straw men and then knock them down.

            Sorry, MMT, but the notions of libertarianism (or whatever) seems to not really be on the ball WRT that, and I think you’re criticising a straw-man version.

            The Western statu-quo is a long, long awy removed from the sort of “free market” that many libertarians proprose (and many still propose having govt, just a small one, and not anarcho-capitalism (and I am not necessarily criticising anarcho-capitalism here, just correcting misconceptions about libertarianism, generally)).

    • Yes, let’s look at the NBN. Why is the Govt wasting, yes wasting, money on this thing when Telstra was going to build it ten years with their own money?

      It has been costed at around $40bn, this monstrosity will eventually cost $100bn, if not more. Telstra were going to build it for $4bn.

      Yes, taxpayers’ money should be spent on hospitals. Have you been to the emergency ward of a public hospital lately?

      We spent decades trying to dismantle govt monopoly of telecommunications, and now the ALP has reintroduced govt monopoly of telecommunications. They have also introduced internet censorship. For some strange reason you think these are right wing policies! Really?

      • In regard to the NBN, Telstra REFUSE to build it unless they can operate it as a monopoly. Telstra wants to yank out the ADSL equipments installed by other ISP from their exchange in the process. Telstra also promise to sue the government for 20-30 billion dollars if the contract is award to anyone else for a FTTN (Fiber to the node, which is much cheaper). This is why a 43 billion dollar ‘Fiber to the Home’ is being rolled out : it’s to bypass the use of Telstra copper.

        As I mentioned before, the amount of ‘disinformation’ in the media makes it hard to argue the case. The only thing worse than a government monopoly is a private monopoly, and NBN will become the new ‘Telstra’ when it’s sold off somewhere down the track.

        • If Telstra builds and pays for its own network, it has the right to run it however it sees fit. If Optus or Vodafone cry to the govt, the govt should tell them to build their own network. That is how competition works.

          Telstra didn’t build a network because the govt at the time insisted that it had to share it with others. To which Telstra, quite rightly, told the govt to sod off.

          Speaking of “yanking stuff” how about Telstra being paid $10bn(?) by the taxpayers to yank out perfectly good copper wire. Or the govt leaning on Telstra not to promote wireless technology that would compete against the NBN.

          The real monopolists are those backed by the govt.

          • Most of Telstra’s network was built when it was a Government owned monopoly. The NBN is partly rectifying the mistake of not splitting Telstra into wholesale and retail when it was privatised.

  5. Is China really “using its economy to improve the lives of the Chinese people”, or using huge amounts of debt, much as Western nations did in the preceding decades?
    Can any government use “the economy” to improve the lives of its citizens, or would we all be better off if government got out of the way and let the market / “economy” function?

    • The government is likely to be just as successful as the private sector. Because in the end it is people who have to make and implement the decisions and are what count, and the public and private sector are full of those. It is the quality of the people that count not whether they work for the public or private sector.

  6. “It means that Australians continue to expand their obligation of time and resources to others to gain access to housing. Are Australians receiving any additional quality of living for this expansion of obligation? If not, then why does government policy continue to support this?”

    My view:

    (1) Federal and State tax coffers.
    (2) Banks do well by the expansion of credit which they largely manufacture given the low reserve requirements.
    (3) There is no real desire to get us saving vs consuming and spending as we all know it’s all about the flow of money. I exclude super form this statement as that it stored for later consumption.

    How else does a visionless government would they develop a sector of the economy (tongue in cheer) the size of housing? H&H has explained it perfectly before.

  7. Sandgroper Sceptic

    I read Schumacher’s “Small is Beautiful, Economics As If People Mattered” over my holidays and found it thought provoking and on this same topic, albeit written in 1973. I didn’t agree with all of his propositions but they were challenging and encouraged new ways of looking at these issues. Schumacher certainly does not believe that western culture has all the answers.

    The whole permagrowth model we have developed in economics will be impossible to sustain in the future, particularly as we approach/pass peak fossil fuel inputs.

  8. It means that Australians continue to expand their obligation of time and resources to others to gain access to housing. Are Australians receiving any additional quality of living for this expansion of obligation? If not, then why does government policy continue to support this?

    Both parties supposedly want to run surpluses. Both parties view themselves as managers of a household. Both parties will drive us to recession again.

    • Depressing isn’t it.

      We must have a surplus.

      We must save for a rainy day (i.e. election year when we can throw pork at anyone who looks like voting for the other side).

      We must not waste taxpayers money (i.e. skimp on infrastructure so we can throw tax cuts and welfare at the middle class)

  9. I can only point at the SWISS as a working democracy who use the economy for the benefit of their people, to only have 9 members of their federal parliment, democracy at a grass roots level and where the leader of the nation can walk the streets without bodyguards.
    Australia needs political and economic reform and we should model it on the swiss with some unique refinements of our own.

    • The Swiss Federal/canton model is very interesting – it encourages competition and independence between the cantons, whilst letting the Federal government get on with the core functions that smaller governments cant do.

      Contrast with the top heavy Aussie federal system, with multiple layers of bureaucracy and no competition or independence between the States – except when it comes to handouts.

    • Good luck with that (political reform).

      Both parties will run the ruler over any reform proposition and only support it if it enhances their power.

      Agree with Price about the system. If we are going to have a centralist federal government then why have states. Alternatively if we had robust states why have a top heavy Fed?

      My two cents worth is that the level of governance and competence in the states is pretty scary. Regardless of what we may think of federal politicians they are miles ahead of the average state government hack.

      BTW why have we increased the numbers of federal politicians over the years. Just because the population grows why not just increase the number of people “represented” by each politician?

  10. Hi DE, here is something I have done 2003 when the world was obsessed with the great benefits of deregulation of world economies and the myths about the globalisation. I think it is even more actual today than eight years ago.

    GLOBALIsATION: MYTHS AND REALITY (research essay)
    Modern economics struggles to explain our fast changing reality, its problems and the questions arising from economic internationalization, shrouded in many myths, which is named globalisation. Some writers present globalisation as a cultural phenomenon (Robbins, 2001), others emphasize the impact it has on daily life and the economy, its sources of power and technological achievements (Toffler, 1971, 1990). Politicians, the media and international institutions proclaim its benefits. They all seem to create the impression of talking about a totally new phenomenon, glorifying and mythologising it by adopting new terms and definitions for its explanation. Where is the dividing line between myths and reality with respect to globalisation, what is the price of its benefits and who pays most of the cost?
    Globalisation is above all a euphemism of a well recognisable economic phenomenon of developed capitalism, driven by capital, its expansion and technological advance. Its most significant features have been described by writers, scientists and the media as: financial liberalisation, deregulation of national economies, wider adoption of an open, free market model, international competition, mass production of goods and services and the formation of global companies. However, in general these characteristics of capital development have been predicted. The nature of capital’s global prospects was genially revealed more than a century ago by one of the greatest philosophers of the nineteenth century, Karl Marx, in his in-depth economic manuscripts:
    Capital drives beyond national barriers and prejudices as much as beyond nature worship, as well as all traditional, confined, complacent, encrusted satisfactions of present needs, and reproductions of old ways of life. It is destructive towards all of this, and constantly revolutionizes it, tearing down all the barriers, which hem in the development of the forces of production, the expansion of needs, the all-sided development of production, and the exploitation and exchange of natural and mental forces (Marx, 2002).

    Liberalisation of financial and capital markets, resulting in “a surging ocean of capital free of restraining walls”, is the most fundamental feature of globalisation (Toffler, 1990, p.426). This phenomenon represents a logical stage of capital accumulation and its global expansion and centralisation. Realised on a basis of new technologies, liberalisation has increased enormously capital mobility, has integrated capital, stocks, and bonds markets and transformed monetary functional forms in an electronic impulse. An enormous mass of capital can be reallocated only in a second, crossing national boundaries and finding the most profitable place for faster growth. Financial institutions, such as the International Monetary Fund, the Word Bank and the US Treasury, which impose free market “fundamentalism” on new emerging economies and developing countries, rule the process of liberalisation by using financial instruments, such as hard loans’ conditions (Stiglitz, 2002).
    One of the most propagated myths about globalisation is that it leads to higher economic growth and financial stability (The Economist, 2003). Unfortunately in the last two decades there are only a few examples supporting this statement: Korea’s economic performance and the economic success of China, despite its resistance to US and EU pressure for financial liberalisation (Hiscock, 2003). Contrary to The Economist’s statement, financial liberalisation, free market fundamentalism and global competition resulted in destructive financial and economic crisis in most of the other countries, where the national income dropped dramatically by almost 50% (The World Bank, 2000; Weisbrot, M., Naiman, R., & Kim, J., 2000). Typical examples are the financial crisis in Brazil (1988), Argentina (1995), Mexico (1994), Asia (1997-99), Africa, Eastern Europe and Russia (1996-98) impoverishing hundreds of millions of people, who paid the highest price for capital emancipation, by losing their jobs, savings, income and social benefits.
    Another well-manipulated myth about globalisation is that it leads to higher efficiency and less inequality in income. Every student in economics knows that these outcomes are incompatible. If we want more capital efficiency we have to pay for it with less equality. In fact, economic deregulation as well as liberalisation ensures higher capital efficiency, meaning higher profit rates and growth, but these benefits are at the expense of social (welfare) programs, equality and well-being of the majority of people. Unfortunately, global competition for foreign capital investments, especially among less developed countries, makes government income and tax policies inapplicable as a tool for poverty and social problem solving. Certainly, the statistics show that many people have risen above the poverty line of $1/day, e.g. China (The Economist, 2000), but at the same time another hundreds of millions have found their living standards dramatically worsened, for example people in Eastern Europe, Russia, Latin America, Asia, Africa and including workers in USA and other developed countries, who have lost their jobs. The majority of countries have registered increasing inequality. Only 0.5% of Americans own more than 55% of business assets, 32% of bonds and more than 31% of stocks in the United States (Weisbrot, M., Naiman, R., & Kim, J., 2000). Finally the most impressive evidence is that the wealth of the three richest men outweighs that of the world’s 600,000,000 poorest people (What Is Globalisation?, 2003).
    Another mythological aspect of globalisation is that it creates more jobs and prosperity. In fact “one third of the world’s ‘willing to work’ population is either unemployed or underemployed” due to globalisation (What Is Globalisation?, 2003). Unpaid or volunteer jobs, part time jobs and casual jobs have become more widespread than ever. New jobs in a few developing countries, for example in China, have been created at the expense of the destruction of many jobs in traditional sectors in the rest of the world, for example Europe, Asia, the USA and Australia with lost jobs in manufacture (Nine News, 2003). In addition, people are gradually losing their social benefits due to the harsh competition in the global market and intense pressure to lower labour costs. Furthermore, commodification of human potential or economisation of all aspects of our life transforms people’s relations and dehumanizes them. Economisation, which had been analysed by Marx, means that everything, material and non-material, for example, pregnancy (Lubbers, 2000), assumes market value and can be exchanged for money, simply because
    Value excludes no use value; i.e. includes no particular kind of consumption etc., of intercourse etc. as absolute condition; and likewise every degree of the development of the social forces of production, of intercourse, of knowledge etc. appears to it only as a barrier which it strives to overpower. (Marx, 2002)
    The advocates of globalisation go further by arguing that economisation, global competition and mass production enrich consumer choices. The truth is that mass industrial production leads to consumerism and indebtedness, but fewer consumer choices. Common life experience and statistics (Brown, 2003) show that the period of enlargement of international trade (after WWII) was really beneficial for the majority of consumers. People discovered other cultures’ commodities and diversified their consumption. In contrast, globalisation shrinks this consumption diversity, because global companies displace and substitute national producers who cannot survive the global market competition. Furthermore global mass production offers lower quality of products, due to the lower standards (or lack of standards) and lower qualification of the labour force in countries of origin. A typical example is the quality of the goods available in shops today. Most of the good quality products are already unaffordable for the median consumer, although they have been traditional in the past for many national developed markets. In fact, as a result of global competition a few suppliers are bound to remain on the global market, let us take for example China, Microsoft, Intel, and News Corporation etc.
    Another attempt at justification of globalisation, without consistent arguments is that it brings more democracy around the world (The Economist, 2003). Part of the truth is that some despotic regimes, such as in Afghanistan and in recent times in Iraq, have been claimed being changed to democratic governments, due to interests of global capital investors in taking control of important global resources, for example US Vice-President Dick Cheney’s Halliburton. On the other hand, globalisation suffers from a terrible lack of democracy and results in a concentration of financial and political power without any representation, which is not compatible with democratic and social values. The main reason is that on a global level, people do not have representation; things like global well-being, social policy, public goods or security are absent without parliamentary representation (Lubbers, 2000). Multinational companies exercise power without any restrictions, dictate unfair trade rules, impose destructive requirements on less developed national economies (Stiglitz, 2002 & 2003) and gain more and more power (Toffler, 1990).
    In addition to this erosion of democracy, national sovereignty will be more and more undermined. As Alvin Toffler wrote in 1993, the UN may find itself, in part, “a club of ex-nations” (p.242). However, people need common laws and governance in order to be coordinated. The foundation of law is society’s values, common sense and morality. As long as there are fundamentally different social values among nations, some of the countries will be forced to obey to others. Apart from that, even existing international laws are violated and not upheld by some of their promoters, for example the United States exerts pressure to impose immunity from international and national laws on its soldiers. Governments can no longer defend national interests and achievements, even though interests of global capital and those of local populations can be significantly different or opposite. The power shifts from national governments to the representatives of the global capital.
    In conclusion, the reality is that, globalisation is nothing more than a stage of capital global expansion, because “capital posits the production of wealth itself and hence the universal development of the productive forces, the constant overthrow of its prevailing presuppositions, as the presupposition of its reproduction” and power taking (Marx, 2002). The usage of a euphemism and propaganda’s myths as an apology of globalisation’s benefits can hide neither the real nature of the ongoing process of capital concentration and centralization nor its final aim, i.e. unlimited power over the global society. This power can buy everything: goods, technologies, people, brains, souls, knowledge, governments, nations, the nature and even the future of our generations in a global village.
    01/09/2003

  11. Alistair Maclennan

    I couldn’t agree more. The non-money side of economics is fascinating. The economist, Michael Hudson, is right on top of this point. His article ‘The Road to Serfdom’ highlighted this point brilliantly in 2005/6.

    He argues that higher house prices are nothing but debt servitude to a financial system that has transformed our economy into a rent-taking economy, rather than a producing economy. I recomend anyone to read this or other Hudson articles. http://michael-hudson.com/

  12. Fair call on Europe DE, maybe this is the impetus to drop the whole charade. I’ve never understood it, the idea you can bring together such disparate cultural and political systems into a financial utopia just never made any sense to me. The ‘overhead’ to get it to work in itself is mad, as is being shown now. Would wonder what the efficiency of having the Euro is, relative to if it had never existed? Anyone know of any analysis on this?

  13. The government and central banks created the housing bubble.

    I don’t want any central planning or long term vision from Canberra.

    Individuals, entrepreneurs and families are equipped with the information they need to plan their own lives.

    Technocrats, policy experts and central planners all suffer from the information problem described by Hayek. North Korea and the Soviet Union show why 5-year plans and long term visions are doomed to fail.

    • >The government and central banks created the housing bubble.I don’t want any central planning or long term vision from Canberra.Individuals, entrepreneurs and families are equipped with the information they need to plan their own lives.

      I agree Jono, but this is a more difficult thing to address. If you have read any of my previous pieces you would know I talk about something called “economic democracy” and that it should actually be the private business sector that has a say in government deliverables.

      Much of this however is political ideology, government bad->private sector good. I believe the truth is somewhere in between.

      I think it is naive to believe that if we privatised all government services that we would somehow be delivered a economic utopia. The last few years certainly suggests otherwise. I do however think that the current system is failing miserably, which is really the point of the post.

      • IMO government, in principle, is good. Problem arises when government decides to pick winners and basically dictate outcomes rather than focussing on providing the framework for organic growth/outcomes.

        Screwed up government is just as bad as screwed up private sector (e.g. wall street banks). Instead of saying one sector is good or bad we need to focus on the screwed up bits in both.

  14. > Firstly it allows me to understand money
    > from a functional perspective, but
    > secondly (and in my opinion more
    > importantly) it gives me a perspective on
    > the economy that is separate from money.

    Separating money from the economy seems to be akin to separating body organs from the nervous system. Remove money from the economy and it just can’t function due to not only lack of signalling of value but also impossibility to store and transfer of this value between different economic actors. Sure you can replace the fiat money by gold or silver but the precious metals would still be money.

    Although, it makes sense to analyse what happens to the real economy if the monetary system is interfered with through things such as money supply, credit supply, interest rates etc., I don’t see much purpose in considering the real economy without money. Am I missing something?

    • >Am I missing something?

      Well that depends on your ideology of what you think economics is about.

      It is about the understanding of the dynamics of money and monetary accumulation? or is it about the study of financial mechanisms in order to deliver better social outcomes?

      I am personally in the second camp.

      >Separating money from the economy seems to be akin to separating body organs from the nervous system. Remove money from the economy and it just can’t function due to not only lack of signalling of value but also impossibility to store and transfer of this value between different economic actors. Sure you can replace the fiat money by gold or silver but the precious metals would still be money.

      As I said in the post chartalism is a function perspective on money, which is all of the things you are describing. However there is a broader question about economics. What is its purpose ? Is the economy about finding better ways to accumulate money or is it about finding better was to utilise resources to provide better living standards?

      Again I am in the second camp.

      I have discussed these two perspectives previously.

      http://macrobusiness.com.au/2011/01/readers-question-another-visit-to-centralbankopia/

      • Perhaps we could/should also consider that economics is, really, merely a descriptive interest, that people with “make certain things happen” mentalities have turned into a prescriptive, control-centric venture…

        Trying to understand how something works and trying to manipulate it are two very different undertakings, IMHO.

        And, then, if we accept that Economics is a human system, not a mechanical/natural one, then we realise that describing economics is to describe the interactions of people…but to manipulate economics is, therefore, an attempt to manipulate people…

        …Good luck with that…

        Let me finish by saying this: With respect to Money, your topic, DE – I believe that one of the main reasons that our economics systems are failing is this: the powers that be have a different view of money to what the general populace do: for the powers that be, money is a means to control their social and political ends; it is a control element of their control paradigm.

        However, the general populace see Money as being a store of value – their value, of justice, of fairness, of morality, etc.

        Hence, on Money, there is a major discrepency between the powers that be and the general populace: one tries to control and manipulate for the own ends, and the other resists control and manipulation in accordance with their own ends.

        Therefore, the individual does not “play the game” WRT Money (among other things)…eg. when the are “supposed” to spend, they save; when they are “supposed” to borrow, they delverage; the list goes on.

        Truly, this is what is comes down to, to a large extent, IMHO: completely and utterly control; or back off and govern diligently and justly, but largely keep out of the picture of people lives, their values and there sense of value. Too much more in-between just doesn’t work.

        My 2c

  15. It is so amazing and so much exciting to observe how people today slowly, but with such great clarity and objectivity, start describing and understanding something about reality, which had been written and predicted more than a century ago. I only don’t understand why we are still afraid to give the genius of the past the credit he deserves for his deepest economic analysis of the free market, competition, capital, their driving forces and tendency. People have never treasured the messengers of the bad news, because we are prone to believe what makes us feel better.

  16. Does anyone know what the Swiss gov’t consume of their GDP?

    I’ve been curious about a statement made by a corporate accountant made to me that: 15% of GDP is sustainable for governments to take, after that level they become like cancerous tumors ie. eventually killing the host!

  17. Alex Heyworth

    Government these days is mainly about enriching the already rich at the expense of the poor. It is the complete opposite of what you have described as “Centralbankopia”.

    H/T Alistair Mclennan (above) for drawing my attention to Michael Hudson. He has a truly remarkable commentary on the current world economic malaise in this interview http://michael-hudson.com/2011/07/the-euthanasia-of-industry/.

    • >Government these days is mainly about enriching the already rich at the expense of the poor. It is the complete opposite of what you have described as “Centralbankopia”.

      Yes I know. That is the point.

      >H/T Alistair Mclennan (above) for drawing my attention to Michael Hudson

      I agree Michael Hudson is a wonderful resource.

      • “The test of good writing is to simplify complex subjects.” James Cook

        “The demand for certainty is one which is natural to man, but is nevertheless an intellectual vice.” British philosopher Bertrand Russell (1872-1970)

        “If we want things to stay as they are, things will have to change.”
        “The Leopard” by Giuseppe Tomasi Di Lampedusa (1958)

        “It´s so hard for government planners, no matter how sophisticated, to ever substitute for millions of individuals working night and day to make their dreams come true.” ~ Ronald Reagan

        “No legal tender law is ever needed to make men take good money; its only use is to make them take bad money.” ~ Stephen T. Byington

        “Politics is the gentle art of getting votes from the poor and campaign funds from the rich by promising to protect each from the other.”– Oscar Ameringer

        “No one is useless in the world who lightens the burdens of another.”
        English novelist Charles Dickens (1812-1870)

        “There are four things that hold back human progress: ignorance, stupidity, committees and accountants.” Sir Charles James Lyall (1845-1920)

        “The seven blunders that human society commits and cause all the violence: wealth without work, pleasure without conscience, knowledge without character, commerce without morality, science without humanity, worship without sacrifice, and politics without principles.” Mahatma Gandhi (1869-1948 ).

        M. Hudson. Good article below.

        http://www.zerohedge.com/article/big-banks-are-waging-warfare-against-people-world

        “Always be kind, for everyone is fighting a hard battle.” Plato (427-347 BC)

    • Alex Heyworth

      I know you know 🙂 But my point was that while the aim of those in power is to enrich the oligarchs, they cannot at the same time be progressing towards Centralbankopia. At best the people are thrown a few bones from time to time to keep them quiescent.

  18. Alex Heyworth

    PS, in other words, it is not so much that governments have lost their way so much as that their way is not our way.

  19. El Zorro Dorado

    Very timely post DE and from the heart too…most reflective and touching for an economist ( F1E2A). You raise lots of points which cannot be done justice in short posts. But they rightly benefit from being raised. And you’re right. Aussie has gone off the track, and for many reasons, we’ve collectively wasted a lot of our endowments: not just in the sense of less than potential growth and better ( egalitarian) distribution, but in the lost opportunities from inefficient top-heavy, governmental systems, and our reliance on luck to get us through. We are cursed with a banking system comprised of complacent long-lazy-lunchers with all the strategic, long term perspective of a ravenous Labrador in front of a bowl of Pedigree. And our bankers do not reward their mandated privileged and profitable position with appropriate social conscience. There is a general short-termism pervading the markets and economy which calls for profits now and bugger the long term potential, and which mis-prices money, projects, and resources. We have governance –both political and commercial –which lacks depth and integrity, and is short-term in perspective also ….just to the next election or to when the performance bonuses vest.
    Privatization –ah.. the sighs of relief from governments of all levels when they realized that responsibility was avoidable but dividends could still be extracted, and without much stoking or upgrading. Everyone could make a dollar and direct responsibility –for getting those admirable aims you mention ….self-reliance, social calm, better living standards for all…..well they could be claimed for the electorate and yet avoided at the same time.
    And whilst we’re there what about the media? They have been the lost knights of yore — hopeless in their quest for truth ( ha!), in their substituted interpretations ( ha Ha!), in their blatant bias, and worst of all ( yes again) in their short-termism.
    But you single out economists as having lost their collective way. I put it to you that many have lost their individual ways –and collectively have led us up the garden path. With all their models, laws, and “scientific” paraphernalia, economists think they know what’s best. Secure in their hubris and cosseted corners, they contend they are privy to the science of personal and societal interactions. Models and algorithms are ubiquitous, and form the basis of many day to day actions, but they cannot be relied upon as adequate descriptions of today’s social and economic morass.Yet they are presented as such. Economic theories are just that, and the various ‘laws’ do not stand up to the rigorous reality of today. In truth there is over- reliance on foolish assumptions and hocus pocus, with nary a valid statistic between them and their potential Nobel prize. Many–but not all – are simply wheeling their own wheelbarrows to market.
    And the housing market is a perfect example of the type of cheap spruiking by economists and real estate salesmen ( often, who could tell the difference?) and of the debasement of government policy for cheap political gain (at the expense of the electorate), and of the crass money-grubbing of an overly aggressive banking sector, and of the lies peddled by the media in able support of their best advertisers.
    Sound a bit cynical? You betcha –and its right on the hammer. So the basic element of a good and just society, trust in the law, trust that governments will do their best, trust in all the things we’ve learnt as basic for a fair go….all these things are now in question.
    We have a long way to go in solving the questions you pose.
    I’m not just critical though, and I have suggestions for each of the areas above , and for society as a whole. They are thoughts and offerings –not gilded solutions – but they contribute to the overall.
    Perhaps there’ll be scope next time.

  20. Great post on what is an important but touchy issue.

    To question contemporary economic theory typically earns you the label of being a lefty, a socialist, or even worse, a communist.

    Stupidly, this does nothing to nullify the criticisms of “the system”, but it does usually dissuade most from persisting for fear of the consequences.

    Recently I have much enjoyed reading two books, which perhaps should not be read in conjunction with each other lest you lose all faith in the aforementioned “system.”

    They are:
    The cancer stage of capitalism – John McGurtry
    Hidden power: what you need to know to save our democracy – Charles Derber

    As somebody has already mentioned, we really do get the government we deserve.

    Reminds me of the old joke:
    Apathy is killing this country………but then again, who gives a damn…