Left to its own, free market capitalism trends to stagnate, says Yanis Varoufakis, unless there is a stimulus, he adds.
The free marketeers believe there is a magic number for interest rates, which the free market will set, but in practice this never happens, as Varoufakis explains.
The free marketeers believe there is a magic number for interest rates, which the free market will set, but in practice this never happens, as Varoufakis explains.
A decade after the 2008 financial crisis, faith in markets' self-regulating abilities once again lies in tatters. There simply is no single real interest rate that would spur investors to funnel all existing savings into productive investments, and employers to hire all who wish to work at the prevailing wage.Setting aside the magical interest rate’s non-existence, capitalism’s natural tendency to stagnation also reflects the failure of money markets to adjust. Free marketeers assume that all prices magically adjust until they reflect commodities’ relative scarcity. In reality, they do not. When investors learn that the Federal Reserve or the ECB is thinking of reversing its earlier intention to increase interest rates, they worry that the decision reflects a gloomy outlook regarding overall demand. So, rather than boosting investment, they reduce it.
Instead of investing, they embark on more mergers and acquisitions, which strengthen the technostructure’s capacity to fix prices, lower wages, and spend their cash buying up their companies’ own shares to boost their bonuses. Consequently, excess savings increase further and prices fail to reflect relative scarcity or, to be more precise, the only scarcity that prices, wages, and interest rates end up reflecting is the scarcity of aggregate demand for goods, labor, and savings.
What is remarkable is how unaffected free marketeers are by the facts. When their dogmas crash on the shoals of reality, they weaponise the epithet “natural”. In the 1970s, they predicted that unemployment would disappear if inflation were subdued. When, in the 1980s, unemployment remained stubbornly high despite low inflation, they proclaimed that whatever unemployment rate prevailed must have been “natural”.
Varoufakis is clueless. An important market mechanism, apart from interest rate changes, that ensures something like full employment is the so called “Pigou effect”: that is, given excess unemployment, prices fall, which increases the real value of money, base money in particular, which encourages spending. Plus there is government debt which is in effect base money except that it pays interest. MMTers recognise the importance of the sum of those two quantities and sometimes refer to the sum as “Private Sector Net Financial Assets”.
ReplyDeleteThe Pigou effect clearly works much better in theory than in practice, though it did work to some extent in Britain the 1800s in that there was basically no inflation during that century: the price of bread in 1900 was the same as it was a century earlier, in 1800. I.e. prices rose as well as fell during that century.
Having government and central bank create and spend new base money into the economy is clearly a better alternative and that also increases the totally value of the stock of base money, plus government debt funded stimulus increases the private sector’s stock of that paper asset.