Tag Archives: economics of pessimism

Why our times desperately need the economics of optimism

Economics can be categorised and divided in a number of ways, but one the most fundamental divisions in economics is between that of the economics of optimism and that pessimism. Quite simply the first tells you how to do things and the second why should not attempt to do things. The former is the economics of change, the latter is the economics of no change. Usually the first is associated with left of centre politics and the latter with right of centre politics. Possibly the best example of the latter is the current policy of austerity practised by the Conservative government. They can say no too many desirable things such as more spending of health care on the grounds that there is no extra money to finance such spending. In the words of the Prime Minister Mrs May,  there is no ‘money tree’. They prioritise sound finance over other social goods. In contrast the social democrats or socialists would ask the question, how can we raise more money to finance increased spending on health.

Usually the economics of pessimism holds sway in economics, so I will explain that first. One of the earliest exponents of this school was the clergyman Thomas Malthus. The originator of the theory of diminishing returns. He stated quite simply that there was a finite quantity of productive resources and if the population increased indefinitely the same quantity of wealth would be divided between more and more people and so each successive generation would have less than the previous. There was he believed a  saviour which prevented the mass impoverishment of all, a natural system of checks and balances that kept the population numbers in check. These were disease, famine and war.

Today’s economists of pessimism believe that there is a similar limit on to the good things in life and for the sake of the well being of society the poor must be denied a fair share of these good thins. There is just not enough to go around.  Far better that wealth is restricted to the deserving few, the wealth creators, without whom we would all go hungry. These are the billionaires that the popular right wing novelist  Ayn Rand lauds in her books. Wealth is the just reward for their zeal and enterprise. She does not deny that the masses deserve some share of the  wealth. However all they are entitled to are the ‘crumbs’ that fall from the rich man’s table. What these economists call the trickle down theory.

In the simple story told by Ayn Rand, if the super rich were prevented from enjoying their obscene wealth, they would cease in their work of wealth creation. In one of her books she describes how the billionaires disappear from society and go into hiding. Without their enterprise societies collapse and thousands of the poor starve to death. Only when the billionaires cease their strike do things return to normal and the surviving poor are now able to benefit from that minimal income that the generous billionaires think they deserve.

There is interestingly another strand to this economics of pessimism, traditional Catholicism of the Catholic ultras. This although a Christian philosophy of life and economics, is in practical terms is little different from that of Ayn Rand. Mankind they believe is corrupted by original sin and human society is but a corruption construction made by sinful man. Any attempt to reform or improve this damned and corrupt society is doomed to failure. Only God has the power and knowledge to create the good society, or heaven on earth. Any attempts to redistribute are income doomed to failure by the very nature of this dysfunctional society. They are likely to have the unintended consequence of making things worse for all as increased taxes to will add to the costs of production so making businesses inefficient so reducing output making all poorer.  All that is permissible is individual acts of kindness or charity. In a corrupted society inequality is inevitable, as are the vast inequalities of wealth and income. Changing or improving a society of people damned with original sin is impossible and should not be attempted.

Although the economics of pessimism has usually been the dominant mode of economics, there was a brief period during the 1950s and 60s, when the reverse is true. Usually this philosophy is associated with J.M.Keynes, but there were others such as Michael Polanyi. Briefly economic practice was directed to making and preserving the good society or the welfare state. Economic policy making was intended to  five combat what William Beveridge defined as the “Giant Evils” in society: squalor, ignorance, want, idleness, and disease. Perhaps for the first time in its history the economy was directed in a manner which benefited the majority of people rather than the lucky minority.

Then when the economic crisis of the 1970s hit the Western economies it was easy for the economists of pessimism, to demonstrate that the crisis was caused by the profligate spending urged on governments by the economists of optimism.   Since then the pessimists have prevailed.

Now when faced with a crisis in Western economies, economies that fail to generate sufficient employment and income to meet the needs of their people, government policy can be summed up as either ‘can’t do’ or ‘won’t do’. As the governments have shown little interest in the welfare of their peoples, populist movements have developed. Movements that threaten governments with their ideology of economic pessimism. European right wing populist movements with the exception of the British, are threatening to intervene in the economy to protect and maximise the welfare of the people. If governments persist with their policies of ‘can’t and won’t do’, they will be replaced by those that can. What the populists of both the right and the left espouse is an economics of optimism or more simply the economics of ‘can do’. While some doubts must be expressed about the politics of the populists, what they do believe is that governments need an activist economic strategy. If the National Rally of Marie Le Pen ever attain power they will find that they need to intervene in business to protect the welfare of the people of France. Employment protection measures will be re-introduced, employers will find it impossible to pay less than a living  wage. Taxes will be increased on business to finance health and social care. Policies that are normally associated with the left. Societies may become less free and more intolerant but people will accept that if it means a better standard of living. What is forgotten is that the popularity of Hitler in Germany came improving the material well being of the German people. In return they tolerated the cruelties and barbarism of the Nazis.

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Thinking ourselves into poverty

If there were two words that I could use to describe the current state of economic thinking, they would be pessimism and helplessness. All economists can offer is an indefinite period of continuing misery, which they call austerity and that this misery is unavoidable and necessary given the conditions that prevail in the world economy. The Europeans in particular must suffer for indulging in a frivolous life style in which they squandered money on welfare, education and health services, money which would have been better spent on investing in industry. Now it’s payback time. What Europeans did not realise that there is an economic Darwinism, that governs the world economy. Those nations that are uncompetitive fall by the wayside and must suffer the consequences of which the main one is a dramatic fall in living standards. Europe having become uncompetitive through increasing its labour costs by taxing employers to pay for welfare spending etc. must now pay the price. The price is increased unemployment, poorer working conditions and lower pay and only then will Europe become competitive in the world economy.

What economists never say is that they are advocating for Europe a return to what used to be called the ‘second world’ standards. In the initial period after the Second World War there was a category of development status between first and third world, it was the second world. Second world economies were those of Eastern Europe where the standard of living was modest, people were poor but not in want, that is they were fed, housed and clothed but lived a life devoid of luxuries such as car ownership. Labour was cheap in these countries and businesses would never lose out to foreign rivals because of high costs.

The best way of understanding contemporary economics is by way of metaphor, contemporary economists can be compared to high priests in the blood stained Aztec, Mayan and Inca cultures. Then the people believed that the natural catastrophes that they suffered were the actions of malevolent Gods, who punished the people for offending them. Only the priests understood how to manage these supernatural malevolent forces which was through human sacrifice. The priests decided when sacrifice was necessary and how many should perish. The Mayan had one cruel ritual in which two teams of young men played a form of hand ball, in which the losing team were beheaded. This ritual blood letting would appease the Gods and stop them inflicting suffering on the Mayan people as a whole. Today rather than priests it is the economists who understand and manage the malevolent forces that threaten our well being. Only they have the knowledge necessary to appease the angry Gods of the free market and that is yet another form of human sacrifice. Fortunately the sacrifices to be made are of income not life. People must be prepared to accept drastic cuts in their standard of living for the betterment of all. In a world beyond human control the only way to control or assuage those violent forces that threaten human well being is to appease the Gods of nature or market through human sacrifice.

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There is a crude economic determinism that governs economic thinking. People are pawns in the game of competing market forces, if those forces turn against a people they must expect to suffer. Economists can read the runes and advise that sacrifices have to be made to avoid the direst of economic consequences. Any reading of an economics textbook demonstrates the view that the economy is a force outside or beyond human control, and that human life must be managed according to its dictates. There are the laws of supply which demonstrate that if prices are too high (incomes) demand will fall and products will remain unsold (unemployment). Only when prices (wages) are cut will demand rise (employment levels increase). This even has a name it’s called Say’s Law.

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One example is the economic austerity that is deemed necessary to reduce the out of control government deficit. It makes sense that if we reduce our spending our debts are reduced and as government debt total is about 80% of GDP, obviously we the British must cut our spending until the debt is back under control. Actually this is nonsense economists are lying. They are well aware of the much greater national debt and that is the one run up by the banks which totals about 400% of GDP. If the UK GDP was £1.5 trillion government debt would total £1.2 trillion while bank debt would total £6 trillion. Economists rarely mention the latter, it is deemed irrelevant relevant to their analysis. What matters is not the truth but what authoritative voices say is the truth. Economists as with the ruling caste of priests in Mayan culture could manipulate data to further their interests. If there was a bad harvest the solution was not to arrange a fairer distribution of food, but to appease the Gods by increasing the number of human sacrifices. Economists as with the Mayan priests practice a philosophy of non answers, ritual substitutes for action. Enforcing a policy of austerity on the majority benefits the economists and the financial elite of which they are members, as it is a ritualised substitute for taking sanction action against the real debt, bank debt. Cutting bank debt would mean reducing the cash balances of the banks and as the largest depositors are the rich they would suffer disproportionately.

Rather than seeing us as the victims of economic forces beyond our control, the economy should be seen as a human creation subject to human control. The economy is a organised set of human relationships designed by people to achieve particular ends. If it is a human creation, it is infinitely malleable and it can be designed to serve a variety of ends. Either the economy is designed to benefit a privileged elite or to benefit the majority. There are
There are other ways of understanding of economics other than accepted Neo-Liberal model. To outline the alternative I want to borrow from the writings of the 19th philosopher Hegel on phenomenology. He believes what we experience as reality, is reality as perceived through our conscious mind a reconstruction of reality, nothing more. We live in the world of our imagination. Hegel’s theory of phenomenology is fraught with difficulty when applied to the natural world, as our perceptions of cold and heat are not subjective. However it does offer insights into understanding society, something not visible but understood through our consciousness. Is it not true that we know the social world subjectively? It is a projection of our minds, yet it is also a imagining rooted in the common reality of our culture. If we admit that any individuals understanding of society is subjective, the apparent realism of free market economics with their laws of supply and demand disappears, it becomes just one of many understanding of social reality. Admittedly an understanding that one of the most authoritative groups in society that the interlocking elites of economists, financiers, traders and economists. There can therefore be other equally valid understandings of the economy. Why should the understanding of Andy Haldane (Senior Bank of England economist) be privileged over the understanding of a joiner, engineer or doctor. This economists understanding of the economy is but one of the valid views, there is no reason why the joiner should not have an equally valid of the economy. What I have in mind is the ends or purposes of an economy, rather than the techniques of economic management, in which Andy Haldane will be superior. Ends do inform technique so the separation is not complete. The joiner would see making people unemployed in large numbers as an invalid technique of economic management.

Rather than there being one authoritative understanding of economics there needs to be an acceptance of their being a number of equally valid interpretations. In a free society there would be representatives of different economic understandings participating in the political debate that decides economic policy making; instead of as in the UK where only representatives of the Neo-Liberal economic tendency are heard in the political debate. Holders of dissenting views are not usually imprisoned in the UK, the exception being is if their campaigning is perceived to be too,effective. Yesterday representatives of Occupy London and Jenny Jones London Green Party Assembly member were arrested for demonstrating in Parliament Square and intimidating the MP’s going about their business. Other ways are usually found to exclude or marginalise holders of dissenting views.

In a democracy the economic understanding of the economist or financier would be challenged by the holder of an alternative view. The financier would want freedom from regulation which which restrict their entrepreneurial activities arguing that by so doing the society as a whole would benefit from their wealth creating activities. This would be opposed by a trade unionist who would argue that the removal of restrictions on the entrepreneur would harm the community. They may want to use low cost methods of manufacture that are dangerous and pose a threat to the health of the workers. They may want freedom to employ labour as and when they need them, but the trade unionist would point out that this would be extremely harmful to the individual worker who would be denied a regular wage with which to support their family. The needs of people cannot be switched on and off to suit the whims of an employer. While neither side would ever accept the standpoint of the other a compromise could be achieved whereby the excesses of each could be curbed. A process not too similar Aristotle’s mean, whereby he saw virtue situated between two extremes. Courage was the virtue equidistant between foolhardiness and fear. Courage has elements of both, the courageous person knows fear but has the ability to overcome those fears. Perhaps the ideal state is one that practises Aristotle’s mean, all be it an economic mean.