During the twenties of the last century Irving Fisher was an acclaimed economist, comparable only to Paul Samuelson or Joseph Stiglitz in our time. Like virtually all economists of international repute, he tended to be wrong – indeed fundamentally so. As late as October 1929, he reassured investors with his prophecy that their money would be perfectly secure in Wall Street. A few days later the world was horrified by Black Friday. (1)
Irving Fisher’s reputation was wrecked. He drew a perfectly right conclusion: Expert knowledge does by no means protect against errors. From today’s point of view we should even insist that experts can be extremely dangerous. Often it is nothing else but their wrong recommendations or omitted warnings that produced the crisis in the first place. After the event Fisher was left alone. He had plenty of time to reflect on his shortcomings. The outcome was his Debt-deflation theory of great depressions. The book was almost overlooked as Fisher was no longer the great man of economics but it is, arguably, his best and most important work.
Roubini and Ferguson in DER SPIEGEL
Given the fact that American economists – especially those in leading positions – tend to be wrong when pronouncing themselves on the future (2), it seems legitimate to ask what gives them their amazing self-assurance. In an article recently published in the German weekly DER SPIEGEL (2012, No. 24) Niall Ferguson and Nouriel Roubini boldly assure the German public that „the road that leads out of the crisis seems evident.“ They believe to have learned the right lesson from history, which means from last century’s Great Depression. At that time, Chancellor Brüning had by his austerity measures and tight monetary policy caused an economic breakdown followed not only by the rise of the Nazis but finally by World War II. They argue that present day Germany acting as Europe’s Savings Commissioner takes a similar route.
To them the way out of the crisis „seems clear“. The two transatlantic gurus want to overcome the crisis of debt by adding still further debt. This is the core of their message.
Even then, the infection started in the United States
Unfortunately, their review of the events of the late twenties is incomplete. First, it should be stressed that then as now the source of the infection which led first to the German collapse and then to the self-destruction of Europe, was to be found in America. There indebtedness had accumulated up to a point where it could no longer be serviced by the working population. As Marriner Eccles, then governor of the Fed, put it with amazing candor: “… a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth…As in a poker game where the chips are concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.” (3)
The markets, ie the top one per cent, were therefore suddenly struck by distrust of their own people. Wealthy property owners got into panic when they realized that all their money given away as credit (including a huge mass of consumer loans) was vanishing into thin air. The result was an economic collapse in times of peace and a social polarization which divided American citizens into a huge mass of very poor people and a minority of the extremely rich. (4) There was a shortage of money (deflation), as the major creditors no longer wanted to invest their funds in the collapsing real economy. In order for goods to remain in circulation, money loaned out to foreign countries was speedily brought home. Of course, this happened to loans granted to Germany as well.
Gold reflux and the dismantling of German industry
Because of this repatriation German gold reserves shrinked, which in turn had a sinister effect on the German currency, as paper money was tied to gold by a ratio of about three to one. The German government did not want to give up the gold backing of its currency, which had been introduced in 1924 on the initiative of the United States. So three times the gold flowing to the States had to be removed from paper money if the latter were to uphold its previous value. In this way, the collapse of the U.S. economy spread to Germany, which in the late twenties was well on the way to recovery but was now exposed to the iron dictates of saving.
In retrospect, all of us, including the gentlemen Roubini and Ferguson, are fully aware that such a procedure could do no good. The two transatlantic experts are convinced that Chancellor Brüning should never have embarked on a policy of saving. Instead he should have braved inflation. Maybe the two pundits would even recommend the policy practiced by Greenspan as well as by Bernanke. In this case the printing press would come into action spitting out more and more paper money on the Germans.
Do they really know what they are saying?
Let’s for a moment still remain in the late twenties. I am pretty that the policy so assertively defended by Roubini and Ferguson would have aroused the same distrust of foreign creditors in the German state now experienced by Greeks and Spaniards. An inflated German currency would make international creditors suspicious and drive them away. No doubt, Hitler, after coming to power, did run the printing press with undeniable success, but his success was based on the fact that at that time the German economy had already been largely divorced from the „markets“ that is from foreign trade. In a situation of dependence on powerful creditors a policy of fiscal and monetary austerity is as dangerous as its opposite: a policy of easy money. Ferguson and Roubini just forget about the plain fact that there are situation which do not allow for any conventional treatment. (5) Excessive or uniformly growing indebtedness is such a case. Germany had made itself dependent on the mercy of foreign (at that time mainly American) creditors.
Sometimes, things turn out well, but not always. Excessive or even growing debt is always tantamount to playing with fire, as creditors tend to represent society’s most powerful stratum both in economical and political terms. (6) The two American gurus apparently overlook that both measures – stubborn austerity as well as a policy of easy money – provide no remedy against the basic evil, namely, the concentration of wealth in a few hands and the resulting debt burden on the shoulders of the majority. The blindness of the two American experts is all the more remarkable, as they should know the solution from the history of their own country. Roosevelt’s New Deal was nothing else than a gigantic and finally successful effort to level the social divide. Though recovery came not during the life time of Roosevelt himself but only at the onset of the war, it would have been impossible without the New Deal. The great Democratic president succeeded in breaking the power of the very rich minority thus doing away with an all but unbearable pressure of debt on the shoulders of the American people. The two experts could have learned this lesson from the history of the Great Depression.
Let’s see what US-experts made of their own country!
The history of the US itself since 1945 could have taught them an even more sobering lesson. Economic experts – at least those who acquired sufficient reputation to play a role as government advisers – have managed to turn the largest industrial country of the past 150 years into a declining nation. Of course, there was no lack of beguiling phrases with which to embellish the process. Robert Reich spoke of a future American society characterized by the rise of so called „symbolic analysts“. Americans would no longer handle such dirty things as machines and other industrial gadgets but deal with bits and bytes, Hollywood fantasies and other symbols. The dirty work would be done by others (by the Chinese and the rest of the less developed world). This statement of Robert Reich, then a leading economist and government consultant, was readily adopted by his European counterparts.
Alas, his prophecy soon turned out to be right – though its consequences were not exactly those that Robert Reich had depicted to himself and to his fellow Americans. The US is well on the way to a pure service economy contenting itself with issuing Airline tickets while the planes themselves – their famous Boeings – are produced elsewhere. They are now manufactured in China. This holds true for a growing share of total industrial production.
Irving Fisher was simply wrong but he didn’t wreck the American economy. Robert Reich was wrong and proved to be dangerous. On hindsight it should be evident that Americans were ill advised when listening to their economic experts. Instead they should have listened to an American historian – not an expert on economics – who had a much wider and better perception. „The industrial base”, says Paul Kennedy, “is … crucial: it virtually bears all the research and development, which is paid by the American industry, and a prosperous and competitive industrial base is still essential to national security „(Paul Kennedy, Preparing for the 21st century, Frankfurt 1997, p. . 380).
The transatlantic experts – at least the major government advisers among them – have simply overlooked this elementary truth. To my eyes they should be held responsible for the decline of their country, a decline which is now obvious to the world as well as to Americans themselves. The American public has painfully learned that it earns less and less with handling mere symbols, while those who in leaps and bounds expand their industrial base are the great world powers to come.
The road to decline is a way into dependence
But the transatlantic experts failed more than just a single time. Not one among them wants to renounce the ominous „American Way of Life“ which makes 5% of the world’s population consume 25% of earth resources. As the domestic economy after being switched to the production of symbols did no longer provide this incredible luxury, they looked for other sources of funding. That brings us back to the subject of debt! For years already the American fiscal deficit is financed by China – which means that a substantial part of imported industrial goods are consumed on credit.
Have leading U.S. economists protested against this dependency? To my knowledge this was not the case. Experts rather tried to convince the public that this type of economic policy would serve both parties in the best possible way. The Chinese like to sell a maximum of their production to American consumers, while the latter just love to prolong the American way of life. That’s what experts had to say on the matter. But even laymen know that credits have to be paid for by future generations.
Up to the start of the present crisis the generation living just now did indeed keep on splurging. 99% of Americans gladly upheld the illusion that things are quite ok because everything is so cheap. They gave little thought to the pitfalls of a life on credit. Why should they, if government and its economic advisers tried to convince them that all objections against such a policy were economical as well as political nonsense? As for the economically most powerful one percent of the country, about 3 million Americans, these were, of course, the first to fight for it with tooth and nail. They were and still are the most outspoken defenders of the neoliberal regime. This should be no surprise to anybody. Neoliberal economics allowed them to invest their money wherever it brought the biggest return – no matter how great the damage to their own country. In the name of economic rationality this was what the leading economic pundits expressly recommended. We, however, may ask in disbelief: Were these people really so naive as to follow the terrible word of Lenin, who said that capitalists would be ready to sell the rope to their enemies with which their opponents could hang them?
Harmony rarely prevails between creditors and debtors
Meanwhile, it can no longer be ignored that America – once a model of prosperity and democratic self-determination – has fallen prey to false and irresponsible economic advisers. The relationship between the U.S. and China shows dangerous cracks and is marked by growing tensions. The pundits should have known from historic experience: Debtors and creditors rarely harmonize with each other – especially when we speak of excessive or continuously growing debt. This year alone, the U.S. government spends about half of Germany’s national product (1300 billion U.S. dollars) more than it earns in revenue. No wonder that creditors begin to worry. China currently upgrades its military capacity at an alarming pace – in this respect it follows once rising industrial power Germany on the eve of World War I. And America, the world superpower in decline, reacts as nervously as did another world power in a similar situation, namely Great Britain. Since early 2012, the Pentagon shifts the bulk of the world’s still most powerful military machine from Europe and other parts of the world to the Pacific. Together with its allies (Japan, South Korea, Philippines, Taiwan), the US are zeroing in on the East Asian dragon. There is no doubt as to where America now locates its potentially most dangerous enemy. For China’s recent development even in the field of space and rocket technology is indeed breathtaking. If NASA’s far Eastern competitor continues advancing at the present pace it will soon overtake the Americans!
I think the question of the credibility of transatlantic economic pundits should no longer be shirked. Did they advise against de-industrialization, did they foresee the decline of the U.S. economy and the increasing tensions with China as the most important US-creditor? To my knowledge leading US-economists did not. On the contrary, they advised their government to go on with neoliberal policies.
Nevertheless, they are still in the habit of preaching to the rest of the world like gurus who are absolutely sure of the truth. “The way out of the crisis … seems to be clear“. Sorry, I don’t agree. What seems clear to me is that we are well advised to treat their recommendations with great caution, if not with outright suspicion. For there are still more items to add to their failures. Transatlantic experts did not only push their own country down the abyss of decline, they did even much more harm to foreign countries. Some self-critical Americans fully share this view. Joseph Stiglitz, a more level-headed representative of his profession, has drawn attention to the mischief done by the economic experts of the International Monetary Fund in developing countries after these were driven into debt.
A particularly unfortunate instance of misguided economic advice is certainly the role played by once-famous expert Jeffrey Sachs in Russia during the 90s. Regardless of Russian character and mentality, the professor of economics advocated and pushed through a program of privatization which, in a short lapse of time, transferred the wealth of the country into a few (predatory) hands. It must, however, be said that Sachs had been quite successful in Poland and that it was his government that wanted to help the Polish but not the Russians. Up to the present day the Russians look back to this time as to a period of national disgrace, humiliation and social recklessness. Furthermore, the privatization spree was not free from Western interest. It promised to give the West a direct command over Russian oil reserves. No wonder that it was perceived by the Russians as a barely camouflaged attempt at expropriation and therefore as a threat to national interests. Vladimir Putin, the new nationalist Tsar who propels Russia into an increasingly anti-Western direction, was the logical response to the reckless and ruthless actions of an American expert.
The lesson to be drawn
seems to be rather obvious. Don’t be too impressed by the recommendations of economic experts, be they American or otherwise. They may be utterly wrong, especially when in high positions. For then they are likely to be the mouthpiece of government whose actions they are meant to legitimize. The pressure exerted on scientific truth is more than truth can bear.
I hope that no conscientious reader will misinterpret these remarks as derogative statement on American scientists. Many of the best books on economics still come from the United States. But those who strive for true knowledge should rather consult those scientists who are not – directly or indirectly – on the payroll of governments or try to get there. Among non-economists, especially historians, we find much more reliable authorities, eg the Englishman Eric Hobsbawm, the already mentioned American scientist Paul Kennedy or the Frenchman Fernand Braudel. Even the newest book by the US-anthropologist David Graeber provides better insights into the long-term fate of indebted countries as what we are told by Ferguson and Roubini. Or take an outsider like former US-linguist Noam Chomsky. He talks about the hidden power interest and motives in economic activity – a subject mostly left completely in the dark by professional economists.
What makes the insights of outsiders such as historians, anthropologists or even linguists so often more relevant as what we are told by experts? I think this is mainly due to a significant advantage: They hardly if ever move within the sphere of power or even have any chance to get near to it. For science, this is surely a huge advantage. Power corrupts; its first victim is always truth. (7)
1 See Steve Fraser, Wall Street: A cultural history.
2 Nouriel Roubini rightly predicted the housing bubble, but the short circles of boom and bust have been known for more than a century.
3 Marriner Eccles: Beckoning Frontiers, 1973; quoted by William Greider: Secrets of the Temple; S. 706.
4 See quotations from Roosevelt and his Federal Reserve Chairman Marriner Eccles in: Jenner, Economic decline and the doctrine of free trade, in:
5 See Stiglitz versus Merkel at http://www.gerojenner.com/portal/gerojenner.com/Stiglitz-Engl.html
6 Debt when uniformly increasing implies eternal economic growth – which is a fantastic assumption. See my Pyramidenspiel.
7 As for the advanced entanglement of economics and politics, see Harald Schumann, Der globale Countdown. P. 121. Or Die Absahner by Geoffrey Geuens in Le Monde Diplomatique of 8.6.2012 (http://www.monde-diplomatique.de/pm/2012/06/08.mondeText.artikel, a0010.idx, 0). Ferguson and Roubini are members of the Nicolas Berggruen Institute – as are politicians like Gerhard Schröder and Tony Blair.