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Austerity, economic inequality, & social unrest dance together in an intertwined destiny August 15, 2011

Posted by larry in economics, interpretation, Justice, social policy.
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There have been a number of discussions on the possible relations there might be among economic inequality, social unrest, and the economic austerity programs that are so popular with Western governments. Let me begin by listing articles that take slightly different interpretations to this complex issue so that there is a shared information base on the relationship between austerity and social unrest.

Hutton & Porter: On the UK riots in Sunday’s Observer;

Washington’s blog: Austerity and runaway inequality lead to violence;

Polly Toynbee: Moral outrage at rioters fixes nothing;

Larry Elliott: We”ve been warned: the system is ready to blow.

All of the above provide an explanatory context for the riots that are not embedded in an explicit political-economic context. Elliott, as economics editor of the Guardian, states explicitly that

“Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.”

Bill Mitchell (a proponent of Modern Macroeconomic Theory (MMT), which is a descendant of Keynes-Kalecki, Lerner, Kaldor, and Minsky, with a little Marx thrown in) provides the basic outlines of an explanatory context for the discussions of Elliott and the others by means of a question he asks and the answer he provides in a recent Saturday quiz.  I wish to explore the context of Mitchell’s question and answer in some detail in respect of the relationship between the economy and social unrest.

Mitchell asks whether the claim that in the UK, unemployed youthful rioters on income benefit are living off the hard work of taxpayers is a valid one, and answers in the affirmative.

Importantly, Mitchell refers to Abba Lerner’s The Economics of Employment (1951) where Lerner employs the metaphor of the economic steering wheel as part of his argument against laissez-faire conceptions of the economic system. Lerner’s economic steering wheel refers metaphorically to an automobile going down the road where, in a laissez-faire attitude to driving, the driver takes his hands off the wheel, whereas where more control is needed, such as in a contemporary complex economy, the driver needs to keep his hands on the wheel.

In his preface, Lerner emphasizes that – contrary to expectations of his friends and colleagues – his book does not focus on unemployment or on full employment per se. As he explains,

“I was expected to write a book devoted to attacking the evil of unemployment or to write a book indicating how one could achieve the desirable state of full employment. I think I have done both of these things, but neither can be done properly if primary attention is directed at what we want to avoid or at what we want to achieve. Primary attention must be directed at understanding and explaining the way things work [my emphasis]. Understanding comes first. Only when we understand the nature of the machinery that determines any level of employment can we hope to be able to avoid what we do not like and achieve what we do like.” (1951: vii)

This is precisely Mitchell’s epistemic position; it is also mine. And it is explanatorily the most effective for understanding what has been happening the past few years. I am emphasizing Mitchell’s contention in some detail, both because Mitchell’s argument poses such a good counterpoint to the other articles I have listed and it presupposes a certain view of economic processes that may not be widely understood.

The most important point that Mitchell makes here is that non-workers on benefit obtain command over real goods and services and that because these are finite at any given time, this leaves fewer resources left for those working to have command over themselves.  The arguments against providing such benefits to the poor rely on confusions between the nominal resources implemented by the government accounting system and real goods and services.  This is related to another essential point: where the funding for those on benefit comes from.  The answer is: nowhere.  In other words, workers do not lose out as a consequence of non-workers receiving this kind of funding.

How does this work? The funding is created ab initio by the Treasury and placed in the accounts of those receiving such benefits.  This enables them to have access to real goods and services, notably food, clothes, and housing.  It does not mean that they can thereby afford luxuries such as yachts.  Since this funding is created ab initio by the Treasury, it does not come out of worker taxes.  So, in a real sense, workers are not paying for the benefits provided to non-workers. The conservative position can be summed up in this way: what the lazy get the industrious must forego, or put another way, what the industrious create the less privileged can access to the advantage of all. As Lerner and Mitchell would be keen to point out, this is not how the system actually works:

Except in the case of full employment, government funding for non-workers has no economic effect on workers, however psychologically affected workers might be by what appears to be a disproportionate disparity between the two groups, which is a consequence of the group members accepting some type of neoclassical orthodoxy.  To contend that such funding of non-workers does have an economically deleterious effect on workers and their working environment is to implicitly assume that this activity is in effect a zero-sum game, which is to implicitly imply that what one group gets the other gives up.

Were a societal system able to provide work for everyone who wants to work but is under a serious resource constraint, such as limitations of a finite resource, the provision of benefits to certain groups of non-workers might cause social problems.  But we are not living in such a generally resource constrained system. So this putative causal link has no general application.  In general, any resource constraints that exist are politically created, and thus not a consequence of economic principles.

Another important issue here is the function of taxes. Taxes are not used by governments to fund programs.  They are used to constrain spending.  So, a large tax on the rich will mean that fewer hundred million dollar yachts will be purchased and a lesser degree of malicious speculation might take place as well.  This can only be a good thing.  Since taxes are not used to fund spending, they are not used to finance benefit payments. Hence, the workers are not paying for the benefits accorded to non-workers through their taxes.  It would be equally correct to say that they are not paying for them at all.  All that the system is doing is decreasing the economic inequality between the rich and the poor.  Only in a societal system with seriously constrained resources would benefitting the poor effectively disadvantage the better off.

A question arises.  If the rich are not effectively disenfranchised by helping the poor, why are they so opposed to it taking place?  This requires a deeper response than I can provide here. But let me say this. The issues Mitchell raises provide an economic context for assessing the social and psychological impacts of inequality and austerity. They allow a differentiation between what is and is not relevant in the assessment of putative social policies designed to deal with economic crises.  One conclusion that could be drawn is that the gross inequities enjoyed by the rich are so socio-culturally divisive that a more equitable redistribution of economic resources would be best for society as a whole, and that would include the rich.

Does this invalidate the positions of the other authors I have listed above?  Not at all.  It complements them via a deeper interpretive and explanatory political-economic framework.  In the case of the social unrest with which we began, the perspective set out by MMT enriches the explanatory scenarios developed by the other authors.  In particular, MMT principles imply that greater equity in a less divisive socio-cultural context should lead to a decrease in the probability of social unrest of the sort we have recently witnessed.  After all, the distinction between haves and have nots becomes more a question of having a little less vs. having a little more, where the socio-economic distance between the various groups can be significantly diminished.  History shows that nicely equable distributions such as these are highly unlikely to take place or, if they do take place are inherently unstable, unless the government puts its hands on the economic steering wheel and exerts some degree of control over the dynamic system that is the political economy.

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