This book portrays the life of John Maynard Keynes and how his economic philosophies rescued the world after the great depression of 1929, also how ignoring his advice after World War 1, led us to World War 2 and all it’s horrors.
It also shows how his economic philosphy led us to wide spread prosperity of the developed world from 1950 to 1970 and the rise of a well to do middle class. Keynes died in 1946, but his economics lived on, with the help of influential economists like JK Galbraith.
The fight back of the elites with the help of a few influential neo liberal economists has decimated the middle class and led to a world more inequal than at anytime in recent history.
The inequality and rising poverty have led us to the rise of dictatorial leaders like Trump, increasing risks for democracy and heightening potential for violence. Interestingly the author puts the blame of the current situation on centrist leaders like Clinton and Blair, Obama and Merkel, rather than right wing leaders. Their failure to deliver for those hurt by neo liberal policies, led to normally left leaning workers fleeing to populist leaders like Trump and Johnson.
What kind of world would you want if you didn’t know whether you will be born to a rich or poor family?
This is a question few of us ask today, especially if you are a wealthy or a high earner, from the right side of the tracks.
The latest book by Harvard Professor of Philosophy Michael Sandal is a timely warning that a well-meant focus on meritocracy has gone wrong. Inequality has deepened, opening wide rifts in society. People in despair, failed by traditional politicians from both right and left, have flown to the extremes. Dark clouds of dictators and demagogues are threatening democracy.
People in despair, failed by traditional politicians from both right and left, have flown to the extremes.
Adverse impacts of meritocracy have been exacerbated by other trends over the past 40 years. Globalisation and automation have reduced the number of higher-paying manufacturing jobs traditionally filled by blue-collar workers. The power of multinationals and high-earners has increased due to well-funded lobby groups and laws allowing unlimited spending on political contributions in the USA. The financialisation of the economy has seen obscene income and wealth flowing to a few traders in financial products that add little or no value to the economy. Reducing levels of taxation for high earners, investment incomes and capital gains have increased income and wealth gaps. Lower tax revenues and demonising the poor have reduced social benefits and services like health and education. The reduced power of unions has slowed growth or decreased the real wages of workers.
Meritocracy, Globalisation, Automation, Financialisation, Tax changes, Reduction of welfare benefits, Lobby Groups have widened rifts in our society.
The current wave of meritocracy started with Reagan and Thatcher. They believed that markets will deliver both economic growth and the fruits of the economy to all willing to work. Those who failed did so due to lack of effort and deserved to be poor. The problem deepened with Clinton and Blair, who tried to soften the impact on low-income earners rather than challenge the premise of a market-driven meritocracy. Both Liberal and conservative politicians have focused on meritocracy and education as the primary vehicle for advancement to achieve a good life in society
The economic and social policies adopted by Anglo-American democracies veered sharply away from those of Scandinavia and mainland Europe to an economy and country of winners and losers.
Achieving pure meritocracy, equality of opportunity is a fallacy. A wealthy family has many advantages; their children start miles ahead in the race of life. Better schools, private tutors, more parent support and access to resources far greater than a child from a low-income family. However, those reaching the top in our economy strongly believe that they did so due to hard work and merit, thus deserve outsize rewards. While those espousing meritocracy envisioned a society with higher social mobility and lower inequality, the actual results have been directly the opposite. More students come from families in the top 1% at Princeton and Yale than the bottom 60%. Two-thirds of admissions for Ivy league universities have come from families with earnings in the top 20%.
Pure meritocracy is a fallacy, children born in a wealthy family start the race of life miles ahead of the rest.
Parents of both rich and poor tell their kids that they will reach their goals if they work hard. The reality is different with sluggish economies, struggling families, poorly funded schools and the high college cost. Income mobility is low, leaving many stuck in these jobs, which are poorly paid and insecure. Profit maximisation rarely takes into account the social cost of laid-off labour.
The relentless focus on merit has impacted those on high incomes as well. Anxiety, depression and alcoholism have taken a toll.
While politicians from both right and left wings have repeatedly spoken about education as the primary vehicle for advancement, opportunities for a better education have decreased for those on lower incomes. Lower tax revenues reduced funding, lowered the quality of education, and made it more expensive by levying higher fees.
Whilst retraining has been promoted as the way forward for those displaced due to globalisation and offshoring, funding provided for this has been minimal. Economies of rural areas and small towns have been decimated. Deaths of despair have soared, along with social ills like drugs and alcoholism.
The rapid escalation of rewards flowing to winners of our society has sharply increased inequality between the elites and those on the bottom rungs, diminished the middle class. Manufacturing jobs that paid a reasonable wage have been replaced with low paid service and retail work. Earnings of blue-collar workers have declined or stayed stagnant while those for top ranks have surged ahead.
Low-income earners are looked down upon as losers by the elites and, at times, by themselves. The dignity of work and respect for them diminished. The value placed on middle-class jobs like teachers, nurses and police have reduced along with their salaries. College degrees are increasingly tied to income and prestige.
Higher wages and tax advantages are hardening into wealth passed onto the next generation. Establishing a hereditary aristocracy.
We need to reverse the trends of the past four decades, raise taxes, provide better essential services and pay better wages for those at the bottom. The lessons of history are clear; we ignore them at our peril.
A plain-English guide to what it is and why it’s interesting
“There’s nothing to prevent the federal government creating as much money as it wants” -Alan Greenspan, former Chairman of Fed Reserve, USA
Stephanie Kelton, Professor of Public Policy and Economics at Stonybrook University argues that there is no harm in printing money, there will be no inflation as long as there is unused economic capacity or unemployed labour. Government spending can be used to boost the economy and eliminate unemployment. Inflation can be controlled either by reducing government spending or withdrawing money by increasing taxes.
Explains that highly publicized instances of hyper inflation in pre war Germany and Zimbabwe were due to lack of resources to boost economies, rather than printing money.
While traditional economists still haven’t accepted MMT, what many governments are doing since GFC is printing money.
Government spending can be used to boost the economy and eliminate unemployment.
“The cruelty of high inequality countries is to induce starstruck dreams upon their young people, but refuse to fund pathways to get there”
George Lakey, ex Professor for Issues in Social Change, Swarthmore College
The social-democratic economic model.
High taxes, high wage costs, short hours of work, long vacations, even longer maternity leave, free childcare, free college education, extensive social welfare programs that pay an unemployment benefit of up to 80% of your wage,
And highly productive economies sound like an oxymoron, a fantasy too good to be true.
How would you encourage entrepreneurs and compete in a globalised economy when your costs are so high? In a world where low labour cost and low taxes are deemed essential for success.
This book dispels the myths that prevail, putting Scandinavian success down to culture, a homogenous population, size of the countries etc. An anomaly.
The arduous journey these nations undertook to transform their economies, from the Viking spirit of war and adventurism to capitalism with a human touch, a caring society. The struggles of the Nordic people to achieve a more equal country over more than a hundred years. The battles to overcome missteps that arose, trying to follow the neo-liberal models that changed the Anglo-American economies in the 1980s. The recovery from virtual bankruptcy that engulfed Iceland following the Global Financial Crisis of 2008. A clue -they didn’t bail out the reckless bankers. And they resisted pressure from the IMF to implement harsh austerity measures.
Scandinavian countries have a higher rate of startups than the USA, free higher education builds human capital, an excellent social welfare net encourages risktaking.
Businesses are encouraged to be competitive, except by cutting wages and benefits. Strong unions provide a balance between employers and employees. Successful cooperative ventures dispel the myth that private ownership or listed companies are the only viable economic models.
Scandinavians support high taxation, as they know they get a high level of services in return– “To get a lot, we pay a lot”. The economic system was built for everyone. It is not a system that encourages the notion in high inequality countries that the winners are supporting losers.
Social welfare programs, while comprehensive, encourages a strong work ethic. The focus is on getting people back to work. Sole parents are encouraged to work by providing free childcare. Teenagers are supported into employment or apprenticeships, providing a smoother transition from school.
This book by George, an American who lived in Norway for many years tells the story of the Nordic economic model. The successes, the challenges, warts and most importantly, lessons for the rest of the world. How we can achieve a highly productive economy where people are treated with dignity and the balance between business and society is highly equitable.
Global Financial Crisis, 2008. Wall Street was in meltdown. The crisis sparked by reckless lending by American banks had spread way beyond the USA. They were giving loans to the rich, the poor, the poor and elderly, without any risk review. Banks granting the loans knew they shouldn’t be giving out these loans, they wouldn’t get their money back. ‘No doc loans’ and ‘liar’s loans’ issued by major banks and some smaller banks. Stuff which appeared like a scene out of a fantasy story playing out in real life. Banks for whom risk management should be the first precept in the bible ignored all rules, laws, principles and ethics.
Financial deregulation had led to ‘exotic products’, bad loans bundled up with the good and sold as triple-A-rated. You could mix good apples with rotten, sell them at the price of good apples, making a profit. Pack them in brown paper bags; people bought the apples without being able to check their condition. They, in turn, would sell these to someone else, who sold to someone else, who sold to someone else etc. all making a profit. It does look and feel like a fantasy story.
Banks in other countries would join the charade; they didn’t want to miss out on lucrative profits. Then it came down a house of cards.
Some of the more affluent countries were able to bail out the banks. Greece was less affluent. The structure and politics of the EU are not conducive to helping these countries in an economic crisis.
The government of Greece collapsed. Fresh elections saw the left-wing Syriza party, campaigning on an anti-austerity platform win 10% of the votes. The newly elected government collapsed within a few months. Yet another election; Syriza won 36% of the vote, enough to form the next government. The dramatic swing to the left reflected the deep dissatisfaction of the Greek people. Yanis Varoufakis found himself as the Finance Minister of the new Syriza led government.
Post -World War11 Greece was led twice by the armed forces, following coups overthrowing democratic governments. Yanis’s father was a political activist who was imprisoned by a military-junta, tortured to make a false confession, which he resisted. This experience left a deep impression on his young son.
Yanis was an obscure economics professor in an American university; shoulder tapped by Syriza party to be their economic advisor and later appointed Finance Minister.
To say that the Greek government was in an economic crisis at that time was an understatement. They were nearly bankrupt and fighting for survival. Negotiations held with a ‘troika’ of three parties- European Union (represented by their finance ministers – Eurogroup), European Central Bank and the IMF. A tough negotiation, made worse by troika’s prejudice towards a left-wing government.
The new government, with a strong mandate from the Greek people, expected flexibility and a realistic approach from the troika. What they found was an inflexible foe, who wanted even tighter conditions than they had conceded to the previous government. The Eurogroup led by the Dutch Finance Minister Jerome Djesselbohm proved to be the harshest party in this negotiation. They embarked on a course of ‘maximum pressure’, which nearly brought the Greek economy and the banks to a complete shutdown. The inflexible position effectively shut off the possibility of a deal. While many people in this story came off poorly, Jerome was probably the most disliked.
Long hours of negotiations came to an impasse and conditions the troika were demanding were extremely unpalatable and unrealistic.
Syriza was extremely unhappy with the ‘deal’ that was offered but agreed to hold a referendum so that the Greek people could have the final say. Syriza would campaign against the deal and outline what rejecting the agreement would involve- leaving the EU and a hard road ahead. The Greek people would retain their pride and independence, instead of bowing to the troika. The Greek people voted to reject the deal.
Then came an entirely unexpected twist in the saga. The Greek Prime Minister and leader of the Syriza party, Alexis Tsipras blinked. He rejected the will of the people and opted to accept the deal offered by the troika.
Yanis resigned as he could not agree to reject the people’s will, the primacy of the people. Nearly a third of Syriza MPs refused to back Tsipras, triggering the 5th election in 6 years. Syriza won the election, which Tsipras considered as a mandate to reject the referendum vote and accept conditions laid down by the EU.
A few passages from the book are so memorable that they stick in my mind till now. Christine Lagarde head of IMF at the time admitted privately to Yanis that the deal was not viable. Still, they had too much politically invested, and it was too late to back down. As ‘adults in the room’ they had to go ahead with the deal, hence the title of the book.
Greece would be in ‘debtors prison’ for a very long time. The troika was pushing for a fire sale of Greek government assets, at a time where the market was at it’s lowest ebb. At one point they were insisting that even the Parthenon be on the block! Suicides by Greek pensioners, whose pensions were cut by 30% or more. Remarks by Larry Sommers to Yanis, ‘You need to be an insider to get a deal. If you are an insider, you cannot criticize other insiders’, effectively saying criticism of those in power meant shutting off the possibility of a deal.
German Finance Minister Wolfgang Schauble ‘we cannot negotiate a deal just because there is a new government’. A government of an EU nation elected with a mandate from their people to renegotiate terms of an agreement had no right to do so. Yanis expected negotiations with the EU to be tough and challenging; but most disheartening was the lack of support from his party. Especially the Prime Minister, Deputy PM and people he considered close friends.
Lack of support from American President Barack Obama, whose words turned out to be empty. The only American politician to support him was Bernie Sanders, an obscure senator from Vermont at the time. Writing to Christine Lagarde that American funding of EU shouldn’t inflict more pain on the Greek people, threatening to block funding.
The book is a blistering criticism of EU, IMF and ECB, prominent figures in those establishments and their approach towards economically less affluent countries like Greece and Spain in a crisis. The Greek economy shrank by 30%; a result worse than the US economy at the height of the Great Depression. The unemployment rate reached 26% (youth unemployment rate of 50%) and is still around 15%, ten years on from the crisis. Economic targets proved to be unrealistic, debt repayments which were supposed to end by 2040, look unlikely. A recent proposal by the IMF aims to end repayments by 2080! Greece is in ‘Debtors Prison’, and it appears for a very long time.
EU approach to economic crisis now caused by COVID19 appears just as ineffectual. Funding released is far less than required, with some commentators casting doubts whether EU itself will survive.