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The Free Lesson in Political Theory

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The Free Lesson in Political Theory

Barry Naughten (16-May-2012)

The following is a reflection on a widely emailed political joke with US origins, calling itself ‘The $50 lesson in Political Theory’. The joke emanated from sources sympathetic to the U.S. Republican tea-party, such as Balanced Budget movements and lobbies. A link to a U.S. survivalist movement with same story goes back at least to 2007. As former Secretary of the Treasury and Reserve Bank Governor Bernie Fraser recently pointed out, we can expect more of these sorts of fables from sources such as the tea-party movement, itself a symptom of decaying social fabric in the U.S.

The response here is in several parts. First is a comment on the key debating trick implied in this political joke, essentially the Orwellian technique of ‘the big lie’ This is an analysis recently brought up-to-date by the cognitive scientist George Lakoff in his discussion of the role of metaphor in political communication. A basic recent history on full employment policy logically follows. The second part is a reflection on some relevant history of economic thought, in a search for some deeper lessons about macro-economics and ideology. The third part is about the importance of historical context, notably of the 2008 ‘Meltdown’ and the GFC that followed.

Given this importance of context, we need to be careful about ‘eternal verities’. Instead, we need a better and wider understanding about how economies and societies actually function (or not) as systems, in changing circumstances. But we still face the challenge of simple and clear explanation.

The Joke

The joke isadapted to Australian political terminology and circumstances and is told in the first person singular by its hero:

Recently, while I was working in the flower beds in the front yard of my Canberra home, my neighbours stopped to chat as they returned home from walking their dog.

During our friendly conversation, I asked their 12 year old daughter what she wanted to be when she grows up. She said she wanted to be Prime Minister someday.

Both of her parents were rich Public Servant chardonnay sipping Socialist Laborites – were standing there, so I asked her, “If you were Prime Minister what would be the first thing you would do?”

She replied, “I’d give food and houses to all the homeless people.”

Her parents beamed with pride!

“Wow! what a worthy goal!” I said. “But you don’t have to wait until you’re Prime Minister to do that!” I told her.

“What do you mean?” she replied.

So I told her, “You can come over to my house and mow the lawn, pull weeds, and trim my hedge, and I’ll pay you $50. Then you can go over to the grocery store where the homeless guy hangs out, and you can give him the $50 to use toward food and a new house.”

She thought that over for a few seconds, then she looked me straight in the eye and asked, “Why doesn’t the homeless guy come over and do the work, and you can just pay him the $50?”

I said, “Welcome to the Liberal Party.”

Her parents aren’t speaking to me.

A first response: which parties are in fact less tolerant of unemployment?

Clever? It could be useful to consider the debating tricks in this Tea Party parable.

One (not the only one) of the ‘big lies’ in the joke is to imply that encouraging paid employment is a ‘Liberal’ view and not a ‘Labor’ view — or ‘Republican’ rather than ‘Democrat’ in the original U.S. versions.

On the contrary, the Labor side of politics is the side more disposed to governments reducing unemployment levels — that is, ensuring there are sufficient paying jobs for the workforce. That is the objective for governments stimulating the economy by means of budget deficits during deep recessions, incipient or actual. This observation is not to deny that Liberal (or Coalition) governments like that of Menzies in the 1950s (under the guidance of Keynesian officials like ‘Nugget’ Coombs) shared the full employment objective and the faith in fiscal and monetary policy that went with it.

Expansionary fiscal policy was exemplified by the Rudd-led Labor Government’s courageous and prompt action in 2008 and 2009 in response to the ongoing GFC and its possible deeply-feared effects in Australia. It is central to recall that this policy was opportunistically opposed by a Coalition that in Opposition (under all three leaders but in particular Turnbull and Abbott) could have learnt from the Menzies Governments’ examples of the 1950s and 1960s, but chose not to do so. Why might this be so?

The reason (contrary to the ‘joke’) that Labor-inclined and social democratic Governments have historically favoured putting people to work with lower rates of national unemployment than tolerated by the more right-wing parties was discussed as far back as 1943 by the Oxford economist Michal Kalecki. As Kalecki pointed out, as the prime political representatives of business, the major conservative parties tend to place a greater weight on there being ‘sufficient’ unemployment (and sufficiently low unemployment benefits) so as to weaken somewhat the wage-bargaining power of employees. This is a rather different story from that told in the ‘joke’.

However, this business-oriented logic about so-called ‘wage discipline’ applies only to an economy that is relatively close to full employment. When the reality or prospect of full scale economic collapse looms, both sides, capital and labour, can be exposed to prolonged economical failure and suffering. These aspects, pertinent once again in Europe and the U.S., are explored in the remainder of this reflection.

Some lessons from the history of economic thought

In several respects, the ‘joke’ has resonance with an argument put by the political economist Rev. Thomas Robert Malthus in the context of an English economic depression following the final victory over Napoleon (1815) at Waterloo. This depression may have been caused in part by the attempts of the British government to meet its enormous war debt.

Unlike his personal friend but adversary in the study of political economy David Ricardo, Malthus rejected Says Law to the effect that supply creates its own demand — and that by so doing this ‘Law’ ensures against an economic depression resulting from the collapse of economy-wide demand for investment and consumer goods.

The fact that Malthus sought to explain was the reality of such a deep recession, whatever Ricardo’s theories. His conclusion was that there was a shortfall in aggregate demand in the economy as a whole. Malthus was thus acknowledged by John Maynard Keynes as a precursor to his own thinking about the same problem in the 1930s, indeed, as Geoff Harcourt reminds me, Keynes designated Malthus ‘the first of the Cambridge economists’.

Politically, Malthus was aligned with the land-owning aristocracy. It was difficult to see that this class had an active role in the economy apart from collecting the rent on their inherited property. How could this wealth, in itself, become socially beneficial?

Malthus’s under-consumptionist idea was that the shortfall in aggregate demand causing deep recession could be corrected by leadership from the landed aristocracy. If that class could be persuaded to spend more of its wealth on goods and services — not by giving charity to the unemployed! — then jobs would be created and the economy would recover.

This notion has some resonance with the claim of the first person ‘hero’ in the above ‘joke’! However, there are some all-important difficulties and complications regarding implementing any analogy with Malthus’s ‘aristocracy-led recovery’ such as a ‘private gardening-led’ one.

Despite the reality of economic depression left unexplained by Ricardo, Malthus could never quite get his argument together. This had to await Keynes’ General Theory (1936). Keynes allows for the possibility of long-term slump and deep unemployment. But he underlines that this does not have to be a permanent state of affairs because there are measures available to Government to set the economic process in motion again.

What are the complications? First, the modern Liberal party (as cited in the ‘joke’) has an ideology that is more like the Ricardian version that believes the universal validity of Says Law — or its modern variant ‘the efficient markets hypothesis’. It thus ruled out in advance what became the reality of the Wall Street Meltdown and subsequent GFC. This ideology denies that the government has a responsibility to stimulate the economy by creating jobs in such a recession, for example, by running a deficit. This claim is maintained even in a situation (unlike that of the U.S.) where a government, such as Australia’s, is not over-burdened with accumulated debt, and the Federal budget can be brought back into balance as the economy recovers and tax revenues rise as a consequence.

In a deep recession, ordinary citizens (like the ‘hero’ in the joke) are less likely to purchase luxury goods like additional gardening services. This is because there is likely to be a loss of consumer confidence just as there is a loss of business confidence typical of deep recessions. Keynes pointed out that this situation, which he called the ‘paradox of thrift’, is also an example of a ‘fallacy of composition’. That is, the virtue of thrift is actually bad for an economy in deep recession. Macro-economies don’t behave as the individuals and firms of which they are comprised. When times are tough it makes sense for the individual to reduce spending but this is bad medicine for the economy as a whole.

If all this is occurring in a deep recession, the hero of the ‘joke’, if representative, can be assumed ‘thrifty’ in the above sense. That is, if he spends on the luxury good of additional gardening then he will cut back his spending elsewhere and this will tend to cause a compensating loss of jobs unless the public sector picks up the slack.

These are the reasons why government is required to intervene in an economy facing deep recession. In Keynes’ message it would do so, for example, by public investment and budget deficits, so as to kick-start the economy. This would allow an increase in economic confidence so that the level of employment can be restored by resumption of normal private economic activity.

To the extent that government provides jobs for the unemployed specifically (whether or not funded by a temporary deficit) it is likely to draw the ire of economic conservatives for whom any increase in government expenditure is anathema (at least rhetorically). Such jobs, especially for the less skilled or for those losing jobs that had required skills no longer in demand, are often contemptuously dismissed by these right-wingers as ‘leaf-raking’. It is perhaps refreshing that the job offered by the benevolent hero in the ‘joke’ is precisely one of leaf-raking, or is it?

Context can be all-important

Parables and political jokes are often presented as eternal verities, but in the real world context matters.

Thus, Steve Keen, Nouriel Roubini and a few other economists predicted and warned about the Wall Street meltdown (2008) and subsequent global recession. As part of the causal background they identified that private and public sectors were carrying levels of debt that were unsustainable given over-inflation of private asset values. In turn, this over-valuation, the bubble that burst, had been driven in large part by private sector’s over-indebtedness. Lack of fiscal discipline was evident also in government sectors around the world, instanced in the U.S. case by the policies of the G. W. Bush Administration: gratuitous tax cuts for the rich and Middle East wars authoritatively estimated to have a lifetime cost to the U.S. of $3 trillion.

This was a regrettable absence of frugality to the point where net U.S. national savings ratio was around zero, a situation made possible in large part by foreigners’ preparedness to purchase and hold U.S. bonds, even at rock-bottom interest rates. In effect, as Michael Hudson and Robert Wade have long maintained, these foreigners, and notably the Chinese and oil-rich Middle East governments, were (involuntarily) funding the foreign wars and entanglements of the U.S. Government as well as its other excesses.

The 2008 Wall Street crash and its GFC sequel has now reversed some of these unsustainable excesses. But this reversal could hardly be called a market ‘correction’. Rather, it has left the U.S. and other economies indeed to face Keynes’ ‘paradox of thrift’. By reducing the propensity to spend after the crash, the inherited burden of over-indebtedness reinforces that ‘paradox’ in the private sector and promotes a dysfunctional ‘austerity doctrine’ with respect to government sector spending.

Along with  its dependence on the China-based mineral exports boom, Australia’s situation is mixed: over-indebted in the private sector but able to countenance measured fiscal stimulus through public sector spending without the risk of unsustainably rising government debt.

The economy is a complex system so choose your parables carefully

What this case demonstrates among other things is that ‘paradoxes’, ‘fallacies’ etc. are not only verbal but can be inherent in social reality. This is because we are often dealing with “complex systems” — in this case an economy. As in the case of the climate system and other natural and social systems with which it interacts, the economic system can involve destabilising positive feedback loops and ‘tipping points’ that need to be either managed or avoided at all costs.

One kind of ‘common sense’ is that purveyed by the dominant class in society. That is all about ‘blaming the victim’ and attachment to ‘convenient’ non-sequiturs such as the ‘fallacy of composition’, in which the economy is promoted as just the individual or family writ large. These metaphors are easy to grasp but their purpose is often to mislead.

Appeals to ‘common sense’ are the stuff of debate but unfortunately some kinds of common sense can be poor guides to good policy when we are dealing with a complex system. The more is this so when ‘common sense’ propagated over recent decades has been reversion to pre-Keynesian austerity doctrine. Thus, as Krugman puts it:

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Fortunately, in this case we have surer guides about how the economy actually works, notably those associated with Keynes and those extending similarly critical insights as circumstances change and recur in changed forms.

Barry Naughten bio

Barry Naughten, PhD, MAIR, MEc, BSc is a Departmental Visitor in the Centre of Arab and Islamic Studies, ANU, where he is completing a book on U.S. foreign energy policy in the Middle East. He was formerly a Senior Economist in ABARE, the Commonwealth Government economic research agency, where he specialised in energy economics. He has published journal articles and book-chapters in these and related fields.

He is contactable on barry.naughten@anu.edu.au and on gnaught@netspeed.com.au

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Written by Barry Naughten

August 23, 2012 at 4:01 am

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