The consensus is dangerously wrong, Palley says

Following up on Palley's latest:

NIRP has quickly become a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment...

If the consensus is wrong, it means our solution is part of the problem.

If the consensus is dangerously wrong, it means the problem is bigger than we think.


"In a growing civilization," Arnold J. Toynbee wrote, "a challenge meets with a successful response which proceeds to generate another and a different challenge which meets with another successful response."

"There is no term to this process of growth" -- there is no end to it, he says -- "unless and until a challenge arises which the civilization in question fails to meet--a tragic event which means a cessation of growth and what we have called a breakdown. Here the correlative rhythm begins. The challenge has not been met, but it nonetheless continues to present itself. A second convulsive effort is made to meet it, and, if this succeeds, growth will of course be resumed."

The depressions and great recessions of the capitalist era are the "rhythmical challenge" that we have failed to meet. Our economic troubles will defeat us unless we rise to the challenge. And, by "they will defeat us" I mean civilization dies, as Toynbee said. It's on us.

People who speak of "the end of the American century", people who express concern about the rise of totalitarian governments, they see it coming.

The Breakdown

"The nature of the breakdown can be summed up in three points," Toynbee wrote:

• "a failure of creative power in the creative minority, which henceforth becomes a merely 'dominant' minority;"
• "an answering withdrawal of allegiance and mimesis on the part of the majority;"
• "a consequent loss of social unity in the society as a whole."

Losing its creativity, the creative minority becomes a merely dominant minority. Government becomes more oppressive. A common complaint today, government is more oppressive.

Everybody complains about government, these days. "Withdrawal of allegiance", that is. But we can't solve our problems by focusing on government. What's missing is the "creativity". To fix the problem, we need the right solution to the right problem. Changing the government doesn't necessarily do it. Toynbee thought creativity solves the problem.

By "creativity" Toynbee meant the problem-solving ability.

If it sounds like circular argument when I say it, then I'm not saying it right.

Where we are now is late in the process. Things now are so bad that we see government as the problem. But that's a cascade effect. When "a challenge meets with a successful response", civilization continues to grow. But when there is no successful response, there are consequences. These consequences we call problems.

They are problems. But they are consequences. They are "cascade effect" problems. They are results, and you can't solve results. You have to solve the problem. Identify and solve the problem.

We have to solve the original problem, the one that keeps coming back. "Here the correlative rhythm begins," Toynbee said. "The challenge has not been met, but it nonetheless continues to present itself."

What causes depressions and great recessions? Thomas Palley identifies the problem:

... the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

It is a problem of our own making. That's what makes it so difficult to solve. We think of it as our solution.

Our solution is part of the problem, and the problem is bigger than we think.