Must-Read: Anatole Kaletsky: A “Macroneconomic” Revolution?

July 21, 2017

Must-Read: Anatole Kaletsky: A “Macroneconomic” Revolution?

Must-Read: Anatole Kaletsky: A “Macroneconomic” Revolution?: “Given the abundance of useful ideas, why have so few of the policies that might have ameliorated economic conditions and alleviated public resentment been implemented since the crisis?…

…The first obstacle has been the ideology of market fundamentalism. Since the early 1980s, politics has been dominated by the dogma that markets are always right and government economic intervention is almost always wrong…. Market fundamentalism also inspired dangerous intellectual fallacies: that financial markets are always rational and efficient; that central banks must simply target inflation and not concern themselves with financial stability and unemployment; that the only legitimate role of fiscal policy is to balance budgets, not stabilize economic growth. Even as these fallacies blew up market-fundamentalist economics after 2007, market-fundamentalist politics survived, preventing an adequate policy response to the crisis.

That should not be surprising. Market fundamentalism was not just an intellectual fashion. Powerful political interests motivated the revolution in economic thinking of the 1970s. The supposedly scientific evidence that government economic intervention is almost always counter-productive legitimized an enormous shift in the distribution of wealth, from industrial workers to the owners and managers of financial capital, and of power, from organized labor to business interests. The Polish economist Michal Kalecki, a co-inventor of Keynesian economics (and a distant relative of mine), predicted this politically motivated ideological reversal with uncanny accuracy back in 1943:

The assumption that a government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. Under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure, leading to government-induced pre-election booms. The workers would get out of hand and the captains of industry would be anxious ‘to teach them a lesson.’ A powerful bloc is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound…

The economist who declared that government policies to maintain full employment were “manifestly unsound” was Milton Friedman. And the market-fundamentalist revolution… lasted for 30 years… succumbed to its own internal contradictions in the deflationary crisis of 2007…. If market fundamentalism blocks expansionary macroeconomic policies and prevents redistributive taxation or public spending, populist resistance to trade, labor-market deregulation, and pension reform is bound to intensify. Conversely, if populist opposition makes structural reforms impossible, this encourages conservative resistance to expansionary macroeconomics.

Suppose, on the other hand, that the “progressive” economics of full employment and redistribution could be combined with the “conservative” economics of free trade and labor-market liberalization…. If “Macroneconomics”–the attempt to combine conservative structural policies with progressive macroeconomics–succeeds in replacing the market fundamentalism that failed in 2007, the lost decade of economic stagnation could soon be over–at least for Europe…


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