Finishing a thought

Brad DeLong, in a 2013 post, quoted Keynes from the online Gutenberg version of The Economic Consequences of the Peace:

After 1870 there was developed on a large scale an unprecedented situation.... In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up.

Keynes was born in 1883, making him one of those brought up in the "economic Utopia" that developed after 1870. Moreover, he was all of 36 years old when he wrote Consequences. For what it's worth I began studying the economy in 1977, so I have studied it now for ten years more than Keynes had been alive when he wrote that book. And yet, the best advice I could offer you is just read Keynes. The quote continues:

That happy age lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy.

The founders of Political Economy were filled with melancholy because the economy as they knew it was not capable of being Utopia. But the post-1870 economists, growing up in an apparent Utopia, were full pleased with the success of their science and their efforts. (To my knowledge Keynes doesn't say they took credit for that success, but that *is* the way of human nature, don't you think?)

Sixteen years after publishing Consequences, Keynes published another book: The General Theory. In this latter book the same thought returns, the thought that giddiness replaces melancholy among those who lose sight of reality. But this time, Keynes brings the thought to a clear conclusion:

... nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.

(From Chapter 23.)

The earlier economists might have considered it an economic Utopia, Keynes suggests, but saw Utopia as unreachable. The thinking of the post-1870 economists was that Utopia had been achieved. It would have been no great leap to reach that conclusion. But it took an outside-the-box thinker even to notice that this Utopia was, as Keynes described it, "unstable and peculiar."

The General Theory came out 16 years after Consequences. It took Keynes 16 years to finish his thought.

That's okay. It took me until now -- thirteen years at least -- just to notice the connection between the two books.

Meet the Press, This Week

In paragraph #4 of my previous post, I wrote:

"Government is NOT the cause of the problem, but we think it is, so government growth -- or "government" -- is the problem we are trying to solve. But we can only fail to solve it, because the size (or existence) of government is not the problem."

In other words, government growth is the consequence, not the cause of our economic problems. Now, I wouldn't expect these words to be immediately embraced by conservatives, the "we" of the quoted paragraph. But I would expect them to be embraced and accepted immediately by liberals. Judging by my Blogger stats, however, that has not happened.

Why? Why do Democrats not print GOVERNMENT IS NOT THE CAUSE OF THE PROBLEM on big placards to wave in front of television cameras? Perhaps because the Democrats focus on WHAT'S WRONG WITH REPUBLICANS. That is quite clearly the focus of Sunday-morning network-TV talk shows, and all day every day at MSNBC. No doubt self-righteousness and self-satisfaction are embedded in that focus. But it isn't news and it damn sure isn't productive.

We do not solve our economic problems by focusing on the misbehavior of Donald Trump. Nor do we solve them when federal deficits provide funds to help people cope while economic policies fail to address root causes.

One studies the economy (as opposed to studying economics) to understand economic problems and to contemplate solutions. I do, anyway. Far as I can tell, though, Democrats do nothing of the kind.

On the objection to government growth

Objection to the growth of government is one of the main themes in economics today, because of the cost involved in government growth. Until things deteriorated to the point that all analysis became political, cost was explicitly the driving issue behind that objection.

Things deteriorated because government was unable to stop it.^[1] But along with continued economic deterioration, there came also a deterioration in our view of government. Because the government had failed, people stopped expecting it to succeed in stopping the deterioration. Instead, we turned on government. We came to see government as the cause of deterioration. Our solution changed as well: Our solution now is to object to government itself, and reject it.

After half a century of deterioration and decline, we had come to think the economic problem was unsolvable. It was not. The problem was never solved because the wrong solutions were tried. The right solution existed, but was not adopted.

The problem we see today, however, cannot be solved. Government is NOT the cause of the problem, but we think it is, so government growth -- or "government" -- is the problem we are trying to solve. But we can only fail to solve it, because the size (or existence) of government is not the problem. Oh, we may end up destroying our own government, yes, or changing it so much that it is effectively destroyed. But this will not solve the initial problem, the economic problem that began as a cost problem with an unknown cause. We may succeed in destroying our own government, but even that will not solve our cost problem. The cost problem will remain even after we have destroyed our government.

 

I should have said already that if we look at things today, yes certainly it appears that government is the problem. In large part this is because government failed to solve the real problems, which let things continue to grow worse. In addition, government has tried to adapt, and this has made things worse. Adapting to problems is not a solution.

The original problem was (and still is) a cost problem, an economic problem. The cost was (and still is) the growing cost of finance, which is a consequence of the growing size of finance, which itself is a consequence of human nature and economic policy. And maybe we cannot change human nature, but we can change policy. We just need the right plan.

Finance creates cost but does not create output. It certainly does not create output in proportion to cost. Therefore, finance creates a form of inflation: the inflation called "cost-push". Since the late 1940s at least, wages have been said to be the cause of cost-push inflation. That analysis has been incorrect since the late 1950s.

Many people say there is no such thing as cost-push inflation because cost shocks are temporary. That is correct, as far as it goes. But it is US policy to promote the growth of finance and the availability and use of credit. Because of policy, the cost shock created by the cost of finance is a "permanent" (long-term) shock that can and does create cost-push inflation. It slows economic growth as well, and has done for half a century.

The longer our decline continues, the farther we are from the initial cause of the problem and the less likely we are to discover (and solve) that problem. But again, the cost problem will not go away even if the government goes away.

Even a strong, healthy economy cannot support both a high and rising standard of living and profits enough to keep that economy strong and healthy ... and yet also sustain a large and growing financial sector. Finance is a parasite. National Geographic describes the problem:

In parasitism, one species (the parasite) lives with, on, or in a host species, at the expense of the host species. Unlike in predation, the host is not immediately killed by the parasite, though it may sicken and die over time.

The consumption sector and the nonfinancial business sector are the host species; finance is the parasite that is causing the hosts to sicken and die.

My son Aaron came to visit recently. Talking about the economy, he said "Things don't get this bad by accident." He's not suspicious. He's not paranoid. He thinks about things. He says only that the results we have now are not random.

I agree with him, except I worry that he thinks there is a carefully designed plan to make things go bad. I don't see that purposeful plan. I think people have different ideas about what needs to be done. I think the people in power see things from their own perspective, the perspective of wealth and power. When they make decisions to improve things, they see improvement from their own perspective. And indeed, things do get better -- for them. That, however, is not the solution America needs.

After we eradicate the parasite, or reduce it to a small infestation and find a way to keep it small, our economy will begin to regain its health and vigor. At that point the discussion of government size should again come into its own. And we will find that our solutions (whatever we decide) will work, because the financial impediment has been removed at last.