Monday, July 6, 2015


Illuminating metaphor:
To use an anachronistic metaphor, Keynes approached the economy like a nuclear reactor: a combustible and nearly limitless source of energy that requires constant supervision if it isn’t going to either melt down or die out. Recall that inside a nuclear power plant is an ongoing reaction that is controlled by moving carbon rods in and out of the reactor core. These rods absorb the subatomic “bullets” that are flying around and splitting other atoms. If the reactor is too hot, the rods are inserted more deeply, thus absorbing more particles and slowing the reaction. If the reactor is too cool, the rods are pulled back, allowing the reaction to heat up. Push the rods in too deeply, and the reaction goes out. Pull them too far out, and the core overheats and melts through the plant floor—a “meltdown.” Keynes’s insight consisted chiefly in treating demand like the nuclear reaction and government response like the carbon rods. Sometimes demand was too low and required stimulation by government spending and increasing the money supply to encourage inflation; sometimes demand was too high and required raising taxes and shrinking the money supply to cool things off.
The Keynesian point of view illustrates the danger of any economic orthodoxy, like ordoliberalism, that insists on moving the carbon rods in only one direction. If regulators focus only on inflation, say, and not at all on unemployment, they have no way of stimulating the economy when things cool off. Austerity is the clearest result of such an orthodoxy: by raising taxes and cutting spending in a recession, it amounts to pushing the carbon rods deeper into an already cooling reactor. In fact, you could make the case that the global economic reaction was effectively dead in 1932—killed by austerity—before the explosion of the Second World War reignited it.
What the metaphor misses is that there is a lot more going on in the 'reactor vessel' than the 'control rods' can govern. The unofficial, black market, criminalized economy is bubbling ever faster, another force to be reckoned with, though usually unacknowledged by these monetarist 'ordoliberal' models. I wonder if this thought is just another version of "if there was hope, it must lie with the proles".

If you ever wondered why the powers that be are so focused on inflation, recall that inflation gives breathing room to debtors and gives creditors a haircut, a partial explanation for the slogan "austerity is class warfare".

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