The system in deep trouble and it is waiting to blow

Today is rather historic because it is the 40th anniversary of the collapse of the Bretton Woods system. On August 15, 1971, the then US President Nixon gave an address to the nation – The Challenge of Peace – where he announced the “temporary” suspension of the dollar’s convertibility into gold – and by closing the “gold window” the fixed exchange rate system was over. The demise of the fixed exchange rate system – and by implication the introduction of the fiat monetary system – provided governments with the scope to pursue domestic policies without tying monetary policy to defending the parity. It gave fiscal policy the capacity to sustain full employment no matter what else occurred. It is a pity that since then governments have been steadily white-anted by conservatives who have aimed to undermine the capacity to ensure there are enough well-paid jobs available at all times. The 2008 crisis that is now reverberating again is a direct result of the conservative political success since that time – not only directly but also indirectly, by pushing the political spectrum so far to the right that the “left” are not “right”. The result of all this is that the “system in deep trouble and it is waiting to blow”.

As an aside, I read this article at the weekend – Is There Enough Money on Earth to Save the Banks? – and wondered why anyone who claimed to be an expert on finance and banking would pose that question. My conclusion was that the expertise was a charade.

But this article is just representative of the media biases these days. The economics media is dominated with financial issues – too much public debt; debt ceilings; fiscal sustainability; sovereign risk; and all the rest of the non-issues that have taken centre-stage.

The self-reinforcing debate then focuses on all sorts of spurious arguments relating to how these “non-issue” aggregates might be rendered benign. Along the way the elephant stands virtually silent – economic growth.

Sure enough most of the conservatives have a standard line that they want to restore jobs and growth but then in the same breathe outline massive public spending cuts which would further undermine growth.

The successful candidate at the Iowa “straw poll” (the US electoral system fascinates me – by which I mean it is so quaint relative to our versions of democracy) – made a victory speech and said (Source):

Whether we are Tea Party or social conservatives or fiscal conservatives or national security conservatives, if we stick together … greatness will once again belong to the United States of America

The problem is that sticking together will not do it. Especially, if the US was to follow the strategies that she is promoting in her campaign for the US presidency – large cuts to federal government spending, no increases in public debt, widespread deregulation to name the key proposals that will destroy job creation in the US.

She thinks that growth will self-ignite as soon as the federal government stops spending and taxing. The British Prime Minister and his Chancellor lackey continually talk about “fiscal contraction expansions” yet just over the sea (Ireland) they should see how false that notion is.

The world economy is once again slowing and there is talk that it is about to “blow” (see the UK Guardian article (August 14, 2011) – We’ve been warned: the system is ready to blow). Somehow the conservatives have managed to convince themselves and now the rest of us that fiscal policy was given a chance and it was just as we told you – it failed and just left us with massive debts.

Well the public debt has risen but we don’t own it. But, moreover, fiscal policy hasn’t been given the chance to work. When the crisis hit in 2008 it revealed what we knew all along – the policy framework that the neo-liberals had put in place which was predicated on the proposition that the private markets would self-regulate and deliver unprecedented wealth to us all was a lie.

The crisis proved categorically that the “Great Moderation” was a chimera. The crisis was the realisation of several several decades (since about the mid-1970s) of developments which undermined government oversight of the labour and financial markets (the governments were active participants in this degradation).

While credit was flowing freely and consumerism was rampant and economists were telling us that life would just get better it was clear that the pre-conditions for the crisis were being set in place. Proponents of Modern Monetary Theory (MMT) were ringing bells but were dismisses as loonies.

The mainstream profession pointed to rapidly rising wealth levels and soaring housing markets but went quiet on the rising inequality and household debt burdens. We were deluded into equating “paper” wealth with real wealth.

As part of this delusion we failed to see the increasing size of the financial sector and the increasing risk of products that were being traded that in some cases could ultimately be traced back to our very housing stock. The Great Moderation – no more business cycle blues – our children will thank us.

At first, the neo-liberals were silent as the financial system went close to collapse. The mainstream economists didn’t know what to say because their whole theoretical edifice was in tatters. That provided the scope for the pragmatic fiscal interventions which while leaving a lot to be desired in design carried sufficient spending to stave off the worst.

At that point – with unemployment rising and the production systems starting to see room for expansion – the governments should have gone in very hard on a number of fronts.

They should have ignored Wall Street types and seriously reformed the financial system. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

They should have ignored the vested interests who told them that employment growth required a suppression of real wages growth. The clear policy agenda should have been to increase the capacity of workers to enjoy real wages growth in line with productivity growth to ensure that the dramatic reductions in the wages share of national income were reversed.

In doing so, they would have aligned the consumption power (out of income) with output growth and reduced the need for workers to seek credit.

They should have revisited the neo-liberal “show dogs” – like NAFTA, US-Australia free trade agreement – and all the rest of the so-called “free trade” agreements which were meant to improve life for everyone – especially the poorer nations like Mexico. These agreements do not promote “free trade” and have created poverty and misery in many parts of the world.

It is in that sense, the free (not!) trade versus fair trade context, that I would agree that the current account can be a problem. But that is the topic for another day.

At the outset of the crisis, governments should have reinforced the benefits of flexible exchange rates. With the 40th anniversary of the demise of the Bretton Woods system, it is significant that there are still mixed monetary systems operating in the world. While most of the attention is focused on the P.R. of China in this regard – with accusations of exchange rate fixing to defend its trade advantage – the major danger in the world at present is the European Monetary Union which imposes fixed exchange rates on the member nations and denies them currency sovereignty.

This voluntarily-imposed monetary system is a disaster and the bond market attacks on it will eventually bring it asunder unless the ECB continue to use its capacity to fund the member states. The problem is that the ECB thinks there has to be a quid-pro-quo for it acting in this way and the neo-liberals have ruled that member states have to impose fiscal austerity for the ECB to defend them.

This nonsensical stance means that the crisis will spread to Italy, and onto France before long. The ECB strategy is anti-growth and guarantees that the fiscal positions of the individual member states will move in a way that the bond markets reject. So a bailout – further cutbacks – rising budget deficit – more bond market attacks – an elevated sense of crisis – and the growth stagnation then spreads the crisis more widely.

Each iteration broadens the crisis. The problem is in the construction or design of the system. Greece didn’t experience this type of crisis before it joined the EMU and surrendered its sovereignty – even though it was paying generous wages to its public servants and its top income earners were not paying much tax.

The problem is the euro and the design of the fixed exchange rate monetary system. The solution is to restore currency sovereignty and flexible exchange rates.

In that context I do not agree with Larry Elliot (UK Guardian article) who in his August 14, 2011 article – We’ve been warned: the system is ready to blow – argued that:

Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.

The reality is that it made it hard for external deficit nations to sustain full employment and collapsed because it was unworkable – throwing all the adjustment onto deficit nations and forcing them to be continually contracting their domestic economies.

The problem now is that the neo-liberal paradigm was not killed off in 2008 and in re-asserting itself (at the wrong time) – we have the worst of all worlds. Growth is slowing because spending growth is inadequate because the conservatives have declared fiscal policy a failure – “see, it had its chance” – and monetary policy “had its chance but cannot move any further” and so – according to the mantra – the only thing that we can do now is swallow the bitter pill.

A problem with this is that the ones who are telling us all this will not be the ones who swallow the bitter pill. The tenured academics and those on sinecures from the likes of Peter G. Peterson who are making the most noise will not lose a bean and will probably swoop on the reduced real estate bargains that will emerge if the economy further contracts.

The other problem is that the confidence everyone placed in monetary policy was itself a reflection of neo-liberal bias which had convinced us that fiscal policy was ineffective and monetary policy should be the main counter-stabilisation policy weapon and then only to control inflation because then growth would be maximised.

They also convinced us that bank lending was so low in 2008 because there wasn’t enough liquidity in the system. That was the flawed justification for what became known as quantitative easing. It was never going to work because lending wasn’t reserve constrained. Banks didn’t lend and are still not lending because there isn’t enough growth.

There isn’t enough growth because there is not enough aggregate demand (spending) and too much of it is leaking outside the economy in the form of imports. there is not enough spending focused on the domestic economy because the private sector is trying to reduce its overall (unsustainable) debt levels and are not confident about future demand (so firms are being cautious) and public spending has been placed in a straitjacket because somehow we are being told it is bad!

Growth should be the emphasis of the policy debate. In that context, there was an interesting Harvard Business Review Op Ed last week (August 8, 2011) – The Real Solution Is Growth – by MIT economist Daron Acemoglu.

He wrote:

Recent headlines have focused on the debt ceiling, the recent credit rating downgrade, unemployment, and the other thorny fiscal challenges facing the United States. But consider this: increasing the country’s average growth rate by one percentage point over the next 20 years would not only result in much higher incomes and more jobs for all Americans but would also obviate the need for drastic spending cuts today to reign in the government deficit. With a 2% increase per year, average incomes in the United States, and to a first approximation government tax revenues, would be 49% higher in 20 years than they are today; with a 3% increase per year, they would be 81% higher.

I ran some regressions myself today to estimate (rough) cylical elasticities for US federal outlays and tax revenue. This means in English that I wanted to estimate how much revenue and spending changed for each percentage increase in real GDP. The results were interesting but confirm Acemoglu’s intuition. The tax sensitivity to the business cycle (that is, the automatic stabiliser component on the revenue side) is higher than the spending sensitivity.

Which means that growth narrows the budget deficit without any discretionary change in fiscal policy being required.

Acemoglu is clearly still in the “mainstream” camp using terms like “to reign in the government deficit”. But he clearly understands the best way to proceed.

He says:

The underlying message? We should not take our eye off the really important ball: economic growth and the innovation process that underpins it.

His emphasis is on firming up “Patent protection” which he says is “becoming a more bureaucratic, red-tape-ridden, and uncertain process”.

He also says that the “explosion of salaries on Wall Street has attracted many of the talented individuals who otherwise would have gone into research, design, and engineering occupations”. This is a point that proponents of MMT have often made – reduce the size of the financial markets (through regulation etc) and increase the pool of smart people who can cure cancer and Aids.

He considers that free “(m)will not generate enough innovation” and so there is a need to increase the “government subsidies to research and higher education”. He says the conservative attack (my words) on government spending will create “long-term damage” to the innovation system in the US.

His final danger to innovation is the denial of potential. He says “social mobility is essential for generating incentives for innovation and for enabling those with the ability and ambition to reach their full potential”. In that regard, the take-over of government by the “robber barons” and the entrenched unemployment that the fiscal austerity is creating are the anathema to sound policy.

His solutions are to “(e)skilled foreign workers to work and settle in the United States … Despite extremely high unemployment numbers” and for governments to fund the “commercialization of academic research” with a “(f)ocus on green technology”.

However, Acemoglu doesn’t address the overall challenge – to reduce the importance of neo-liberalism in the policy debate. He still accepts that his preferred initiatives should be followed even with the environment of spending cuts.

I have sympathy for some of this views but there is no case to be made at present for public spending cuts (net or otherwise). There is, in fact, a desperate need for high deficits.

But increasing public spending and focusing it on job creation is only part of the story.

Advanced nations have to dramatically change the way national income is distributed. Larry Elliot (link above) says that during the neo-liberal years:

… there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.

This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

This pattern is repeating throughout the advanced world and is one the basic characteristics of the neo-liberal period. Not addressing this structure of distribution will see the crisis deepen and “blow”.

Governments should prioritise full employment which reduces inequality and disadvantage. We have to ensure that everyone has access to real wages growth. We have to reduce the access to real income by the financial markets.

As Elliot says this has been a “crisis that has been four decades in the making” and dramatic changes are required. The types of policy responses that our governments have been making over the last few years – fiscal austerity aside – are not dramatic enough.

So these structural problems are not being addressed. And then fiscal austerity is once again undermining growth – the very thing we need.

Elliot says that:

There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.

This is a system in deep trouble and it is waiting to blow.

The fight is on now but the conservative counter-attack is almost guaranteeing that our children (collectively) will be worse of than us. I have been recently writing about what would Marx say now which will form part of a book I am working on at present. The dynamics of Capitalism that allowed it to forestall some of the crises that Marx foresaw and allowed the mainstream to dismiss Marx as a failed prophet are accumulating into a destructive cocktail.

Where would I start? First, the world needs a jobs agenda. The Editorial in the New York Times (August 15, 2011) – A Jobs Agenda, Anyone? – argues that:

In what can only be described as a triumph of bad policy and craven politics, Congress and the Obama administration have spent the year focused on budget cuts, as the economy has faltered and unemployment has worsened. Official unemployment is 9.1 percent, but it would be 16.1 percent, or 25.1 million people, if it included those who can only find part-time jobs and those who have given up looking for work. For the past two and a half years, there have been more than four unemployed workers for every job opening, a record high, by far. In a healthy market, the ratio would be about one to one.

Exactly, except the NYT editorial team should think again next time it writes an editorial complaining about some “fiscal crisis” or “debt crisis” or “long-term fiscal unsustainability” or the rest of the nonsense.

I agree that “(w)ithout more jobs, both the economy and the budget will deteriorate further” but that will require the US government to increase deficits now because a lack of jobs growth is directly linked to a lack of economic growth which is directly the result of a lack of growth of spending.

With private debt still too high, the government has to net spend more. There is no other way.

The NYT reveals it doesn’t understand that when it proposes a large “school renovation program” which on technical logic “would employ 500,000 workers” but the spending would be “offset” by “ending tax breaks for fossil fuels”. Offsetting spending will not provide the stimulus required. The employment that is generated by those tax breaks might not be desirable in the long-term but it is still employment.

What is required is a net injection of public spending.

They do acknowledge that the US government should be “borrowing at today’s low rates to provide direct fiscal aid to states” and that the government should “over a 10-year period … tackle near-term action on jobs and … [take] … long-term action on deficit reduction”.

The point they ignore is that growth will render all the alleged “horror” budget scenarios benign.


The problem is the current solution.

That is enough for today!

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    21 Responses to The system in deep trouble and it is waiting to blow

    1. Neil Wilson says:

      It’s “free trade” to the extent that the more powerful entity expects to obtain all the trade goods for free.

    2. Neil Wilson says:

      “His emphasis is on firming up “Patent protection” ”

      Which is precisely the wrong way to encourage innovation and productivity. We should be weakening monopolies, not strengthening them – particularly in intellectual property.

      You should get two years, and if you can’t do anything with it in that time it should be opened up to the rest of the world to have a go with it.

      Scientific innovation is best done by properly funding University research departments and making their findings open to the world.

      The world would be a much poorer place if Tim Berners Lee had patented the World Wide Web. Under the current system the patent would just have expired.

      And we wouldn’t be having this discussion.

    3. Paul says:

      under the current financial system that we take part with where money created is DEBT. No matter what we try to do, we only delay the inevitable, the collapse of the whole monetary system. Basically, every single assets we have belongs to the bank not the goverment which represent the people until we paid finish. But there is nothing we can do tho :(

    4. Ramanan says:

      “They should have revisited the neo-liberal “show dogs” – like NAFTA, US-Australia free trade agreement – and all the rest of the so-called “free trade” agreements which were meant to improve life for everyone – especially the poorer nations like Mexico. These agreements do not promote “free trade” and have created poverty and misery in many parts of the world.

      It is in that sense, the free (not!) trade versus fair trade context, that I would agree that the current account can be a problem. But that is the topic for another day.”

      Hmm … Look forward to it!

    5. Gary Causer says:

      Why is it in all the bailout discussions it’s always orientated to the supply side of the equation. Couldn’t be because our fearless leaders are bought, could it? Or because the squealing pigs get all the attention from our fawning media.

      If they were serious about ending the crises send me and every other worker who pays FICA taxes 20 thousand or so and we’ll end the depression in a few days! After all that’s what ails the economy right now.

      We are collectively broke!

      P.s, trust me I’ll spend every dime!

    6. Sergei says:

      Neil: “Which is precisely the wrong way to encourage innovation and productivity”

      It is an anti-solution which is repeated so often that became self-obvious. The problem is that the speed of innovation pushes the break-even hurdle for most investment efforts too high which in its turn pushes down the investments. Speed of innovation is like interest rate. Do you want to have it higher or lower? And if you want to have it higher you still have to give companies a chance to recover their R&D costs, meaning you have to agree with higher prices.

      I believe we need now much slower speed of innovation then we have today. Not just economy but the structure of human society can hardly cope with so many changes and clearly suffers from information overload.

    7. Dale says:

      Well, since we’ve no place to go…
      Let it blow, let it blow, let it blow!

    8. /L says:

      Elliot have a somewhat superficial description of how we have come to this point, he seems to avoid why. It have been an deliberately waged what only can be called a class war where the top end of town have put in place policies that moved substantial parts of overall wealth from the many to the few.

      The fall of Bretton Woods, structural changes in the global economy and so on is not the real cause. Bretton Woods and the new financial order served the victor of WWII USA and were dumped when it was no longer sustainable.

      Large parts of populations in working age have deliberately been made unemployed and put in an reserve pool of labor as “inflation fighters” and a lesson to others, this is of course unsustainable while by and by people in this pool become more and more unemployable and is less and less any real reserve pool of labor. But of course still a warning to others, if you don’t “behave” …

      “social contract” and social contract it’s about power, the working people was abandoned and betrayed by those who have been their prime arbitrator for political power the social democratic and labour parties. In many cases these have been the worst in implementing fiscal policies and monetary policies to implement the rule of NAIRU, because they where trusted to act in the interest of working people. The dodging for this have often been the so called structural changes in the global economy.

      The total wellbeing of societies have been sacrificed so the few could gain, it’s not about some economic academics or politicians not understanding or are misguided about economics and so on it is about power noting else. As long as we continue to vote these people to political power the misery will go on. The problem is that there is very little alternative.

      As one Swedish economist fighting against the neoliberal agenda said some 25 years ago:

      To spread the power and prosperity a little evenly among the people is only possible by one method: to have a labor shortage. Over the whole economy evenly divided labor shortage. Ultimately, this is where all and sundries human value are defined. This is what can give women and youth intrinsic value in their own right: that their services are really required and necessary. Not because anyone thinks it is fair and reasonable and to be magnanimous. But because their services have a high economic value.

      NAIRU is of course a diabolic way to rob the working age citizens of real political and economic power.

    9. Neil Wilson says:

      “And if you want to have it higher you still have to give companies a chance to recover their R&D costs, meaning you have to agree with higher prices.”

      Or you use a different system for where creation and innovation isn’t strangled by the profit motive, and profit is only available on efficiency of the delivery system.

    10. Ikonoclast says:

      I agree with your economics and politics as far as they go. However, you are ignoring the real world physical (and thermodynamic) problem of limits to growth. You say, ” Growth should be the emphasis of the policy debate.” Yet, in addition to our financial and political problems, our key underlying problem is that exponential growth in a finite system (earth) cannot continue.

      For MMT to be taken seriously by true empiricists, it must be the (first?) economic theory to address limits to growth and find a way to propound a steady state economy.

    11. Dismayed says:

      “For MMT to be taken seriously by true empiricists, it must be the (first?) economic theory to address limits to growth and find a way to propound a steady state economy.”

      Real GDP can grow *and* we can use fewer natural resources. It happens when we use resources more efficiently.

    12. John Armour says:

      “I agree with your economics and politics as far as they go…etc”
      I think most readers here are pretty concerned about the environmental limits Ikonoclast.
      In a paradoxical sense, our “opponents” erect artificial limits on the boundless financial resources (e.g. the GBC) but ignore the very real constraints on the “real” resources.
      Things would be a lot better if it was the other way around.

    13. Ikonoclast says:

      Dismayed says, “Real GDP can grow *and* we can use fewer natural resources. It happens when we use resources more efficiently.”

      This is true… to a point. Logically however there must be an end point to efficiency gains. To argue to extremes, we cannot create a perpetual motion machine nor can we create a perpetual motion economic system. Somewhere between the current efficiency of our economy and infinite efficiency (a perpetual motion machine) there is a theoretical maximum efficiency. The laws of thermodynamics enforce this.

      To reacap, both processes must have an end point on a finite earth; the process of growth and the process of efficiency gains. The creation of tangible, material products and services and also the creation of knowledge and culture (less tangible but not wholly intangible) require an increase in order. To increase order and fight the natural tendency to greater disorder (entropy), requires energy for useful work applied locally. Local order (products of economy and culture on planet earth in this case) will increase although the entire entropy of the universe will still increase.

      Earth is a closed system in thermodynamic terms. This is a technical definition which means matter cannot enter or leave the system (except in very minor ways in the case of earth) but energy can enter and leave. As a closed system, with a maximum energy inflow (and close to balancing outflows) via solar radiation (insolation), the earth has a real maximum and finite energy flow available. A portion of this will be available for useful work. Again, there will be a finite and real maximum. However, energy flow may not be the limting factor for economic grwoth. Following Liebig’s Law of the minimum, there may be (and probably will be) some other limiting factor which intervenes first to limit the growth of the human economy on earth. Liebig’s Law states;

      Growth is limited not by the total amount of resources available, but by the scarcest resource as the limiting factor.

      Footnote: Lay people are often confused about what “closed system” means in thermodynamic terms and think that it means nothing (neither matter nor energy) can enter or leave. However, this latter situation is an “isolated system” which in pure terms does not exist except perhaqps for the universe in its entirety.

    14. joebhed says:

      For MMT to be taken seriously, “”it must be the (first?) economic theory to address limits to growth and find a way to propound a steady state economy.”

      Actually, it does to a certain degree and I take Bill’s economic growth as compared to our present austerity-driven deflation and contraction.

      But, if you want to follow the true economic theory that flows from the steady-state, sustainability of the economy, then you should follow that strain of thought that these guys ignore:
      That of Soddy (The Role of Money; Wealth, Virtual Wealth and Debt;, of Herman Daly and John Cobb in their writings on “”For the Common Good – Redirecting the Economy Toward Community, the Environment and a Sustainable Future””, and the modern Ecological Economists who stem from that school, notably B. Senf, J Huber and J Robinson.
      Soddy began the study of the economy as a natural functioning entity, finding the money system its major calamity.
      They were monetary reformers all.
      Their monetary system reform solutions far surpasses that of the MMT school, and they’re not based on accounting.
      The Money System Common.

    15. ParadigmShift says:

      Ikonoclast is right. Perpetual growth in a finite system is impossible, and yet our economic models are based on this absurdity. It is well past time that mainstream economics recognised this.

      Some local (relative) decoupling of growth from resource use is possible, and has been achieved in various OECD countries over the last few decades, partly due to the move away from domestically based manufacturing. Unfortunately there is, so far, little to no evidence that global economic growth can be ‘absolutely’ decoupled from global resource use, in the sense that economic growth can increase while overall resource use decreases.

      I highly recommend Tim Jackson’s book “Prosperity Without Growth” for anyone interested.

    16. Andrew says:

      Ikonoclast is not wrong, but economic growth is in terms of both services and products. Surely we can have economic growth in services AND promote sustainability in the use of resources to produce products.

      Employ more people to recycle and reuse, employ people to provide health and social services, develop sustainable energy solutions, provide education on birth control, improve agricultural land use.

      We can have economic growth and improve the planets sustainability. It’s a non issue and independent of the economic paradigm. Anyhow surely MMT does not dictate perpetual growth once full employment is met. Deficit can equal zero, zero inflation, zero interest rates…..perfect!

    17. Bob says:

      Regarding Ikonoclast: First of all, Earth is NOT a closed system in thermodynamic terms. A closed system does not have inputs and outputs (like the solar radiation your talk about). It may be a system at a “steady state” (or something close to it, if the inflow and outflow is approximately equal), but by definition it is not “closed” in any thermodynamic terms. Furthermore, humans can do a lot to control those inflows and outflows, which is the apparent reason for global warming. But there’s nothing saying we can’t put inflow of solar energy to better use and/or regulate outflow (perhaps using technology not yet discovered).

      “For MMT to be taken seriously by true empiricists, it must be the (first?) economic theory to address limits to growth and find a way to propound a steady state economy.”

      There are four separate issues here, and three of them are more about policy and politics than about economic theory per se.

      (1) Population growth — steady state will never be achievable with a growing population
      (2) Physical resources — steady state requires true sustainability (ultimately, complete recycling)
      (3) Energy resources — steady state requires true sustainability (dependence only on completely renewable sources)
      (4) Economic growth — steady state is irrelevant, as long as the preceding three conditions are met: intangible money can grow or retract depending on all sorts of things (efficiency, innovation, etc.), without having any impact on finite resources mentioned above

      The first three things are not really the purview of economic theory in the abstract, and while economic theory can perhaps offer advice on achieving such goals, ultimately its advice would mostly be about efficient ways to achieve these goals — the real work has to be done by political initiatives.

      Economic growth is dependent on all sorts of factors, many of which can increase without making use of more physical resources. A minimal netbook computer can perform calculations at a speed that is probably close to the speed of all of the human “computer” job force that existed before the transistor. And that netbook surely uses less resources than tens of thousands of people did. Do we make use of the netbook’s computing power as efficiently? Not really. Entire industries have been created, including much of the modern financial industry, based on the ability to compute things on a single computer that couldn’t be done with thousands of humans doing it manually just a few generations ago. If the promise of quantum computing comes true, who knows what the next frontier of electronic computing might be?

      This is not at all to say that computers don’t have an environmental cost. They do, and it is a problem. But such an invention has made it possible to generate economies and industries based on abstract computation that would have required trillions of manual workers in the past, and that would be true even if we used computers in a sustainable fashion.

      I think it is naive to assume that the computers produced in the last few decades are the end of that sort of growth. Who can predict the next invention, the next paradigm of industry, the next way of using resources in a way that will duplicate the work of millions of present-day people?

      Yes, in theory, there is only so much energy, and the thermodynamic argument means there is some upper bound on this sort of innovation and efficiency. But I think it’s pretty unlikely that will be reached for at least the next couple centuries, and by that time I’m sure the “economy” will be just as foreign to us as the economies of medieval times would seem to us today, so preparing a theory for that contingency is a bit futile.

    18. Bob says:

      Apologies to Ikonoclast — it has been some time since my thermo classes. Yes, according to thermodynamic definitions, “closed” means that mass doesn’t change. (Which isn’t true about the earth anyway, by the way — atmosphere escapes continuously and meteors fall down.) Anyhow, a relevant point might be that one can actually run a perpetual motion machine if one has a continuous input of energy… but I’m not sure what that has to do with economic growth in the abstract.

      Anyhow, I neglected to read your final comment about closed vs. isolated. Apologies.

    19. Neil Wilson says:

      Theoretically the limit is Star Trek. Once you have matter replicators and fusion energy then you can convert whatever mass you can get hold of into a mass in another form using up some energy in the process since you are reversing entropy.

      So its how close the physics and the engineering can convert science fiction into science fact.

      But just thinking of a world where there are matter replicators brings a whole load of philosophical implications. There is literally no need for anybody to do any work to make things. You will likely have Droids that can do all the service elements as well.

      Thinking about a world where there is no need for people to do anything then requires you to work out how to distribute resources (the work = income model breaks down) and how to add meaning to their lives.

      Just thinking about an economic model that serves that sort of world allows you to draw lessons for our world where the Paradox of Productivity isn’t anywhere near as acute.

    20. Ralph Gardner says:

      Fusion energy production, where energy output is much greater than the energy input, is scheduled to be demonstrated within the next two years. See Lawrence Livermore National Laboratory:

      The 50,000+ factories that were moved from the US to China over the past 10 years have been a great contributor to our current unemployment. In the past after a recession when stimulus was added they would call their workers back put now their workers are overseas. Those factories took many, many years, hard work, and lots of failures to perfect and replacing them it seems to me is going to be quite difficult.

      Just for comparison China has 60 percent of its population working compared with 45 percent of the US population working.

      I saw a documentary on “Food” on PBS and they said that NAFTA resulted in 1.5 million Mexican corn farmers losing their farms and many of them moving to the US to find work after the cheap subsidized corn from the US undercut the Mexican corn prices making their farms unprofitable.

    21. Fed Up says:

      “Today is rather historic because it is the 40th anniversary of the collapse of the Bretton Woods system. On August 15, 1971, the then US President Nixon gave an address to the nation – The Challenge of Peace – where he announced the “temporary” suspension of the dollar’s convertibility into gold – and by closing the “gold window” the fixed exchange rate system was over. The demise of the fixed exchange rate system – and by implication the introduction of the fiat monetary system – provided governments with the scope to pursue domestic policies without tying monetary policy to defending the parity.”

      Is it more like closing the “gold window” was all about making sure current account deficits could be run without interest rates rising?

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