Playing for time
By the beginning of the second decade of the new millennium, the world had begun to adapt itself to a problem that had tortured it in the 1930s, and deformed it subsequently — that of sub-optimal equilibrium. The practical significance of this idea is difficult to exaggerate.
As a rigorous economist, Henry Hazlitt was theoretically entitled – and even compelled – to savagely deride the Keynesian model of ‘low-employment equilibrium’, and to painstakingly explain that it did not describe an equilibrium of any kind (in economic terms). Yet such attacks, like those of the Austrians more generally, have been of slight consequence, since Keynes was not in any strongly defensible sense an economist, but rather a political economist, in both of the obvious ways this expression can be understood. His bad equilibrium did not reflect the operation of market forces, but rather, the workings of the market under a specific conception of politically realistic circumstances, and the ‘analysis’ of the General Theory was less a technically rigorous description of events than a political prescription for action, keenly attentive to the opportunities and constraints affecting its application, or transition into policy.
Keynes defined the political spirit of the second half of the 20th century, first in the West, and later more widely, by normalizing the pre-eminence of the state in economic affairs, and by subordinating the idea of economic self-correction to political considerations. The role of the new political economy, now technocratically mainstreamed as economic policy, was to route around labor markets, which could never be expected to work efficiently, since downside corrections were judged politically unacceptable. Pure economics was ended, or at least utterly marginalized, by the recognition that labor could opt out of the game, kick over the table, and refuse to play the commodity. Market-clearing labor pricing became an abstract (and, for Keynesians, risible) conception, oblivious to the realities of popular democratic politics, and – in extremis – the potential for Marxian revolution.
Hence the consensus-building sympathy for the Keynesian approach on the establishment right, where it was interpreted as a bulwark against Marxist temptations, and also the deep antipathy it elicited on the anti-establishment right, where it was (no less realistically) understood as a pre-emptive concession to socialism. On the left, a comparable schism was evident, between those who embraced it as a curtailment of capitalism, and those who denounced it as an ersatz socialism, designed for conservative convenience. The Keynesian ‘middle’ has been the decisive political reality of the 20th century, and its multiple ideological meanings still organize every major axis of socio-economic controversy.
When labor markets are locked on the downside – through macroeconomic recognition and political petrification of their ‘stickiness’ – some kind of socio-economic ratchet mechanism is automatically produced. To an extent, capital can flee into informalization (for instance illegal immigrant labor), or international labor arbitrage, intensifying the trend to out-sourcing and globalization. More central, however, are the twin macro-tendencies Keynes focused upon: towards fiscal and monetary compensations, based on demand management and the exploitation of ‘money illusion’ (or attachment to nominal income). Fiscal stimulus can be undertaken in an attempt to elevate demand, until it reaches a point of artificial equilibrium commensurate with labor price levels (thus clearing unemployment). Alternatively, or in concert, money supply can be expanded – and currency degraded – to facilitate real wage decreases despite nominal stickiness.
Essentially, that’s it. There’s no other ammo in the macroeconomic arsenal. This is remarkable given the fact that both fiscal and monetary adjustments are mere tricks, and not even sophisticated tricks, but quite straightforward attempts at confidence manipulation that anybody with ‘rational expectations’ sees through immediately, thus neutralizing them. On the monetary side this is especially obvious — and well-attested historically. Once inflationary expectations have become entrenched, they become the staple topic of wage negotiations, as was seen in the 1970s. There is no evidence whatsoever to suggest that workers are indifferent to inflationary wage depreciation. ‘Money illusion’ – insofar as it exists at all – is basically a one-off scam, harvested in the brief period when a long-established reputation for responsible currency management is thrown in the trash. Fool me once, shame on you, fool me twice isn’t going to happen. Basing economic policy on this is the cheapest kind of street hustle (and few would any longer admit to trying it in public).
Stimulus isn’t much better. Real demand is ultimately exchange, and thus derivative from supply. Nobody can (economically) demand anything, without having something to offer in return – that’s Say’s Law, and it’s theoretically impregnable, because it’s elementary common sense. The only way to steer around it is conjuring, by extracting demand from one part of the economy invisibly, and re-inserting it conspicuously somewhere else. This kind of magic can get quite Byzantine, so it tends to reach exhaustion more slowly than monetary abuse, but its foundations in sustainable economic reality are no more secure. Once taxpayers acknowledge government debts as liabilities (future tax payments) that have already been virtually deducted from their spending power, the game is over. Since a plausible model for (expansive) fiscal policy exhaustion is sovereign debt crisis, it is not unreasonable to begin drawing the curtains already.
Given the exponential trend of social history, most of what has ever happened has taken place since the Great Depression began, and during this time the world has inhabited — more or less consciously — a deliberately constructed system of illusion, or confidence trick. Whether analyzed from the left or the right, the most striking feature of this situation has been inadequately apprehended, or even interrogated: how has it persisted? How can something that is transparently [insert epithet] unworkable last for over 80 [insert triple epithet] years?
Eighty years is a pretty good human life-span. Someone could easily expend their life within the Keynesian dream-palace, literally living a lie, with the implication that whatever importance ‘reality’ might have in theory, it need have almost nothing to do with us. We can miss it completely, caught up in a magic show that exceeds our longevity, half-hypnotized by illusions that no one really believes in, but which suffice to put things off, and off, and off, and … in the long run we are all dead. Who cares about a truth that never arrives? A magic trick that lasts your whole life is your life. Scarcely anybody alive today has known anything else.
And it’s all going to be over real soon … honestly …