The meme that is destroying Western civilisation—Part II

Why both sides of politics sing from the same economics textbook

In the previous post I asked, “why do both sides of politics deliver Neoliberal, austerity-oriented policies when in power? Since they end up being disastrous for them politically, why don’t they offer and try something different?”

The best answer to that question was given by the main architect of mainstream economics, Paul Samuelson. In the foreword to a study guide for lecturers using his textbook Economics, he wrote that:

I don’t care who writes a nation’s laws—or crafts its advanced treaties—if I can write its economics textbooks. The first lick is a privileged one, impinging on the beginner’s tabula rasa [blank slate] at its most impressionable state. (Samuelson 1990)

This was no idle boast: a colleague who worked in the corridors of power—including the office of the then Australian Prime Minister, Paul Keating—recounted how, when some crisis erupted, emergency meetings would be held, and everyone would be in a pickle about what to do about it, until someone said something that chimed with what they’d all been taught as undergraduates by a first-year economics textbook.

Suddenly, there was intellectual clarity to the discussion, and the policy that emerged was by and large shaped by an economics textbook. If it wasn’t, then the “errant” policy would be criticized by journalists and think-tanks—who views were also shaped by those textbooks—and revised until it did conform.

The key concept that had been engraved into their minds during their studies, whether they did just a year of economics in a PPE course (“Philosophy, Politics and Economics”), or a full PhD, was what we now call a meme: the “supply and demand diagram” that was first invented by Alfred Marshall. The intersecting lines of supply and demand becomes the prism through which the world is perceived by victims of an education in economics.

Figure 1: The supply and demand diagram on page 7 of Mankiw's 1st Year Macroeconomics textbook

I say victims, because this meme has done immeasurable harm to the capitalist system it purports to describe. Policymakers who follow its guidance end up making capitalism far worse than it would be without their interventions. It’s as if podiatry taught that the best way to fix someone’s foot was to shoot it. It’s been shown to be wrong by decades of mathematical and empirical research, and as I’ll explain in later posts, it’s nonsense even when applied to goods markets like, for example, the market for cars.

But the key thing that leads political parties of both the Left and the Right to keep on making disastrous policy decisions is applying this meme to “the market for money”.

Mankiw’s first-year economics textbook draws the demand for money as a downward-sloping demand curve, and (to simplify his argument) the supply of money as a vertical line—meaning that it is fixed. He then explains that an increase in government spending means that the government borrows some of this fixed supply, making less available for the private sector. The amount available to the private sector falls from S1 to S2.

This, Mankiw explains, reduces private investment and therefore the rate of economic growth:

the government finances the additional spending by borrowing—that is, by reducing public saving. With private saving unchanged, this government borrowing reduces national saving. As Figure 3-10 shows, a reduction in national saving is represented by a leftward shift in the supply of loanable funds available for investment… the increase in government purchases causes the interest rate to increase and investment to decrease. Government purchases are said to crowd out investment. (Mankiw 2016, p. 73)

He also asserts that the government debt is “an unjustifiable burden on future generations”

The government debt expressed as a percentage of GDP roughly doubled from 25 percent in 1980 to 47 percent in 1995. The United States had never before experienced such a large increase in government debt during a period of peace and prosperity.  Many economists have criticized this increase in government debt as imposing an unjustifiable burden on future generations. (Mankiw 2016, p. 557)

The message that government spending is inherently a bad thing, and government debt is worse, is hammered again and again throughout the book:

When a government spends more than it collects in taxes, it has a budget deficit, which it finances by borrowing from the private sector or from foreign governments. The accumulation of past borrowing is the government debt (Mankiw 2016, p. 555)

Most models in this book, and most economists, take the traditional view of government debt. According to this view, when the government runs a budget deficit and issues debt, it reduces national saving, which in turn leads to lower investment and a trade deficit. In the long run, it leads to a smaller steady-state capital stock and a larger foreign debt. Those who hold the traditional view conclude that government debt places a burden on future generations. (Mankiw 2016, p. 614)

This argument is in the minds of both Left-leaning and Right-leaning baby politicians at Universities. Whether they are conscious of it or not, that “supply and demand” meme frames what both sides of politics think is possible. Therefore, both implement Neoliberal policies with an emphasis on cutting government spending and reducing government debt. Politics now is an argument over which side of politics is better at imposing the same policies.

And it’s completely wrong—as I’ll explain in the next post.

Mankiw, N. Gregory. 2016. Principles of Macroeconomics, 9th edition (Macmillan: New York).

Samuelson, P. A. 1990. 'Foreword.' in Phillip Saunders and William B Walstad (eds.), The Principles of Economics Course: A Handbook for Instructors (McGraw-Hill: New York).

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