We need a Reformation in Economics – The salutary story of Semmelweiss

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First posted on Think Left as ‘Like heterodox economists, Semmelweis was ignored…’ 29th April 2013

 

In 1844, Ignaz Philipp Semmelweis graduated as a doctor, and was appointed assistant at the obstetric clinic in Vienna.  At the time, the great scourge of new mothers was ‘childbed’ or puerperal fever.  It was thought that the deaths were unpreventable… the result variously of overcrowding, poor ventilation, the onset of lactation or a dreaded ‘miasma’.

However, Semmelweis oversaw two maternity wards and couldn’t help but notice that the puerperal death rate was two or three times in one, to what it was in the other. In fact, the pregnant women were only too aware because they would go to all sorts of lengths, pleading to be booked in on the lower mortality ward.

The two divisions were apparently identical except that the first, with the higher mortality, was used for teaching student doctors, whilst the second was staffed with just midwives.  Semmelweis noted that the student doctors were coming to the maternity ward directly from the dissecting room, having just completed autopsies on women who had died from puerperal fever…. he suspected that somehow (at that time no-one knew about bacteria or viruses) that the students might be carrying the infection to healthy mothers on the ward.

As an experiment, he ordered the staff to wash their hands in chlorinated lime water before each examination, and within the week, the mortality rate dropped from 18% to 1%.  Furthermore, no women died on his wards between March and August 1848.

So with such an immediate, dramatic drop in the death rate, why was there no corresponding immediate and widespread acceptance of the practice of hand-washing?

Why did the editor of the Wiener Medizinische Wochenschrift write that it was time to stop the nonsense about the chlorine hand wash?  Why did pregnant women have to wait over 25y for the importance of hygiene to be accepted; with Joseph Lister being credited as ‘the father of modern antisepsis’ instead of Semmelweis?

The reasons are still relevant not only in medicine but also in politics and economics …

Despite various publications of results where hand-washing reduced mortality to below 1%, Semmelweis’s observations conflicted with the established scientific and medical opinions of the time and his ideas were rejected by the medical community… Semmelweis’s practice earned widespread acceptance only years after his death, when Louis Pasteur confirmed the germ theory and Joseph Lister, acting on the French microbiologist‘s research, practiced and operated, using hygienic methods, with great success.

http://en.wikipedia.org/wiki/Semmelweiss

In other words, Semmelweis’s findings required a ‘paradigm shift’ but the old-guard ‘power elite’ were ‘invested’ in maintaining the status quo in spite of all the statistical evidence of the efficacy of hand-washing.  The weight of authority stood against Semmelweis’s prophylactic practice.

Exactly the same is true of the ‘austerity’ which is being inflicted on the UK and across the Eurozone. The tenets of neo-classical economics are daily shown to be completely wrong, contradictory and ill-conceived.  Furthermore, the policies (just like puerperal fever) are inflicting enormous damage on the most vulnerable in our populations.  Nevertheless, our politicians and our media go on spouting the same mythologies and neglecting to see the obvious.

… the Tory/LD coalition government is borrowing £245bn more than expected in 2010 and the economy has grown by just 1.1 per cent, 4.9 per cent less than expected …

Sticking with TINA (monetarism) is clearly a madness akin to the rejecting of hand-washing on the labour wards of the 1850s.

There is an alternative!

However, just as the medical professors had not wanted to relinquish their status or their paradigm of miasmas, the 0.1% have too much to gain from pursuing the current paradigm.  In this, they have been ably aided and abetted by the embedded assumptions of the so-called ‘free press’ and MSM which are owned and dominated by the ‘oligarchs’.

Mainstream economist Paul Krugman writes in the NY times:

… the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

 

 The ‘Deficit’ is the new ‘miasma’ analogous to the flawed theories of puerperal fever causation.

But the deficit is just a reflection of the state of the economy.  In a sovereign country like the UK with its own currency, it is not a cause of anything.  If there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term The methodology of its calculation is wide open to dispute and in any event, one agent’s deficit is another’s surplus.   As Professor Bill Mitchell writes

Structural deficits – the great con job!

 

Similarly, with the so-called ‘debt’ problem …

but my intention is not to discuss economics but to show that disastrously ‘wrong thinking’ and manipulation can persist to our detriment and against all the evidence for extended periods of time… particularly when there is wealth and power to be gained.

As Paul Krugman concludes:

.. the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

Payam Sharifi quotes Mark Thoma, an economist who runs a popular economics blog :

“too many minds in the profession cannot be changed even when the empirical evidence is relatively clear…the politicization of the profession…plays a large role”.  Could it be that this reflects a crisis in economics, which is a crisis in its method of analysis and even the subject matter itself? 

That seems like good thinking .. there needs to be an Economic Reformation:

Economics in crisis – it needs a ‘Reformation’

 

As Antonio Gramsci wrote from his Italian prison cell, sometime in the 1930s:

‘The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.

I think it is more than time for our politicians to ‘wash their hands’ of the ‘miasma of deficit reduction’ and act as ‘midwife’ for an economics which serves the 99.9% and the natural world.

For more information about heterodox economists and MMT (Modern monetary theory – macroeconomic reality):

Bill Mitchell – billy blog

New Economic Perspectives

Steve Keen’s Debtwatch 

and many other sites

Related posts:

Cameron and Osborne dwell on Bullshit Mountain, UK

Telegraph tosh on economics

Neoliberal TINA economics is flat earth thinking 

Neoliberal TINA Economics is Flat Earth thinking

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By Prue Plumridge

Belief in a flat Earth is found in the oldest writings and early Mesopotamian maps showed the world as a flat disk floating in the ocean.  Thankfully things have moved on since that time and we now accept the proof that it is indeed a sphere spinning in space.

It is not difficult to imagine the reaction to those who challenged this view, such as Christopher Columbus, and the scepticism with which such ideas would have initially been received.  After all, if you’ve been told that you’ll fall off the edge of the world if you go too far, questioning that notion would have led to shaking of heads.  Those disputing the prevailing set of ideas or beliefs on the basis of “what if” would have been ridiculed, insulted or even physically attacked as fear of the new set in.

We have reached such a time in history now.  The destructive neoliberal status quo of the last few decades is being shaken to its core and there is an opportunity at last for a conversation about where we go from here and how we can bring about change.  It won’t be easy but Jeremy Corbyn has started the ball rolling by offering a radical vision which not only restores the core values of the Labour party and responds to a changing world but also opens up an opportunity for dialogue on such issues as climate change, finite resources and sustainable living.  It is a positive start.

Of course, those who have the most to lose will not let their power go easily and we are seeing that already with attacks on Jeremy Corbyn by the Establishment and business leaders and worse still, from his own party.  Only this week, an article in the Telegraph was predicting that Jeremy Corbyn’s economic plans will turn us into Zimbabwe and lead us to calamity.   We must, however, stand strong against such attacks which stem from fear and forge our future together.

People are starting to see through the decades long political neoliberal consensus which favours the magic of free markets.  But there is still a way to go and it won’t be easy.  It is vital that we ask questions and, even when, like the flat earthers, we find the potential solutions out of our comfort zone because it questions the long-accepted paradigm, we must not turn away.

Most people (including me) shy away from discussion of economics.  Mathematical equations and economic models dance before the eyes and shut down the brain like no other subject.  And yet the decisions made by our elected politicians are based on economic ideas which can wreak havoc on our lives and the lives of our families and friends or can, alternatively, be used for a public purpose to benefit those same lives.  Indeed, we are seeing the damaging consequences of those decisions today.  Dismantling our social security system, selling our publically funded public services to the private sector, deregulation, the watering down of employment and trade union rights and driving down of wages in the name of competition.  TTIP, TISA and CETA added into this mix will prove to be the final nail in the coffin of democracy.  It is, therefore, time to engage in a conversation and challenge those who have deceived us for so long.  We must ask ourselves what if the world isn’t flat at all?

Maggie Thatcher’s line “There is no alternative” is the usual excuse for continuing with the free-market ideology and the claim that continued austerity, balanced budgets and surpluses are vital to a successful economy.  We will all remember Liam Byrne’s infamous note, when Labour left power, saying ‘There is no money’.  That one stupid remark has allowed the deficit/debt reduction argument to dominate the economic and political landscape of the last five years and been used by David Cameron and George Osborne in a deliberate distortion of reality to justify cuts, the creation of a small state and private sector domination.

It is unfortunate that even some of the Labour elites are using the same loaded language which says that we must continue with such policies. Yvette Cooper, who has a PPE from Baliol College at Oxford, said recently “I don’t think the answer is what Jeremy has proposed, which is basically printing money that we haven’t got to build things”.  Her comment is symptomatic of her lack of grasp of wider economic ideas and yet, she, like many, has been a victim of the way it has been taught for decades in educational institutions. One might think that the doctrine of balanced budgets was the only game in town.

Regretfully, these ideas have been cleverly used to also deceive ordinary people that there is no alternative.  That we must accept the pain and balance our budgets in true Micawber style. The idea that the state should deal with the deficit and reduce the national debt has become a part of the narrative which is firmly fixed in the collective psyche. The problem has been reinforced by our experience of our own household budget which has to be managed to ensure we don’t go into the red or get into debt.

The first step is to ask questions. Don’t rule anything in or out – the world is a complex place much more so than even this simple presentation.

Most of us will remember from our history lessons, the 1929 crash.  The UK government’s response at the time was to balance the budget and re-establish confidence in the pound.  Public sector wages and unemployment benefits were cut and by 1931 unemployment had risen to almost three million. The march to London by the men of Jarrow is a symbol of that economic disaster which left thousands of people destitute and hungry.

One of the people who challenged that view was John Maynard Keynes who was fiercely critical of the then Conservative-Liberal coalition government’s austerity budget and wrote:

‘Every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every sort of economic activity, we can become prosperous again.” 

 

It is ironic, that when the coalition came to power in 2010, they chose to repeat an economic policy that had so singularly failed in the 1920s and 30s, and the Conservatives are promising more of the same over the next five years.

‘Insanity is doing the same thing over and over again but expecting different results’   Albert Einstein is once said to have observed.  But then one could ask the question is it insanity or a deliberate strategy?

To return to Keynes, his argument was, essentially, that in order to support full employment governments must use their spending power to invest in the economy on the basis that spending equals income to someone which is, after all, what makes the world go round. So when governments reduce public spending the result can only be higher unemployment.  Indeed in the last week we have learned that for the financial year so far the deficit was down £7.3bn (23%) but in the three months to June there was a rise of 25000 in unemployment.  To make the connections if we stifle spending to reduce the deficit then this can only have a detrimental effect on the economy by reducing the amount of money available to the non-government sector.

So where, may you ask, will the money come from to deficit spend?  When Yvette Cooper suggested wrongly as it happens that we can’t print money that we haven’t got to build things she was forgetting that electronic monetary resources were created to rescue the banking system in the form of Quantitative Easing which no-one objected to then, even though, basically, it disappeared into a big banking black hole.

Jeremy Corbyn’s People’s QE is quite another kettle of fish and this time those money resources would be used for public purpose that is for the benefit and well-being of society as a whole and not just a small section of it.  To put that clearly in the words of Professor Bill Mitchell:

“People would soon see the benefits in the form of better schools, hospitals, public transport, green energy innovations, more jobs, more diverse cultural events”

The response to these ideas has been one of panic-stricken hysteria, as emotive language such as ‘debt mountain’ is used by politicians and the media to scare the general public, by reinforcing the household budget model of our state finances and economy.  Let’s not forget the irony here that George Osborne has managed to achieve a debt mountain all of his own!

Professor Bill Mitchell’s conclusion should reassure the public:

PQE is an excellent strategy for the British government to introduce. It exploits the currency-issuing capacity of the government directly and uses it to increase the potential of the economy to improve well-being.

It is astonishing to realise that contrary to common belief sovereign governments start the ball rolling by issuing money, tax revenues are not necessary for a government to spend and that our national debt is not a debt in the usual sense of the word.

So, I can hear you ask:  what then is the purpose of tax?  I’ve heard that ‘printing money’ is inflationary?  And say that again our national debt is not a debt at all?

We must start with the first principle which is that, since the abandonment of the gold standard, sovereign governments like ours can issue as much money as it needs. Remember the money issued comes first, and not taxes.  This is a key point.  Without money in our pockets we can’t pay taxes anyway.

Beardsley Rumi former Chairman of the Federal Reserve wrote as long ago as 1946:

… given control of a central banking system and an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.

What this actually means is that tax, far from being a revenue raiser, is a mechanism for what we can call public purpose meaning, for example, redistribution of wealth from the rich to the poor.  It also has the function of managing inflation by raising taxes to dampen demand, or reducing them to increase it.

Secondly, money issue by a sovereign state is not, in itself, inflationary. Politicians parading as prophets of doom are warning us that ‘printing money’ will cause inflation.  In an effort to scare people, we are reminded of Germany’s hyperinflation after the First World War or Zimbabwe’s in the 1990s.  In both cases, the truth of the matter is that these episodes could not be described in any way as normal – they were extreme events and not remotely like the situation in the UK or the US.  Of course in Germany’s case, the imposition of huge reparations in gold under the Versailles Treaty, the loss of 25% of its industrial capacity as a result of the war and then the occupation of the Ruhr when Germany defaulted forced them to increase the money supply which did not match its supply capacity.  So when exports then slowed and Germany could not continue to pay back its debts it led to the hyperinflation which was to have catastrophic consequences for the German nation both in the short and long term.

And herein lies the clue, if you keep on spending and can’t produce the goods to meet that spending, you’ll get inflation  Spending with no regard to whether there are enough resources to match it, is the cause of inflation not the money issue in itself.  So deficit spending is not the problem.  The issue is whether we have the resources to justify the spending and if we have, how we can use them effectively for the benefit of society as a whole.

We have almost two million people without jobs. People whose talents remain unused.  People who want to work despite the inference by government and irresponsible media that the unemployed are lazy and feckless which has become the prevalent myth, now accepted by the public as being true. The solution therefore is to invest in building new schools, hospitals, homes and green infrastructure as well as create real job opportunities so that people can make a positive contribution not only to their own well-being but that of their communities. Remember that spending equals income to someone, and so by using the resources we have, effectively and fairly, we can improve the lives of all. The deficit will only be a problem when all available resources are being used. And we are most certainly not in this position at the moment.

And this brings me, finally, to the notion of the national debt.  If, as is noted above, sovereign governments can issue money then it begs the question why do we have to borrow?  Well the reality is that we don’t.  Sovereign governments don’t need to issue debt. The real game is about corporate welfare as Treasuries and Bonds are sold to big investors who want a nice safe, risk free place to stash their money and get a guaranteed income flow.  Much like us when we transfer money from our current bank account to a savings account.   Where governments are the primary money issuers there is no reason why the national debt could not be scrapped. We wouldn’t have to worry about ‘paying it back’.  And, after all, how could you pay back the money supply?

The important thing for us to understand is that there is an alternative to the inertia of past decades.  We don’t have to accept it we have to challenge it.

The world is a complex place and full of uncertainty but we have been bewitched by a dogma that proposes freedom and everlasting growth on the backs of the people and the planet but which, in fact, is tying us in chains to the benefit of the few.  As Keynes observed in his book written in 1936:

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

The Post War Consensus is long gone and the positive outcomes of that consensus, being dismantled as we speak.  The ascendency of individualism over cooperation and all that entails is almost complete.  As Ha-Joon Chang wrote:

‘Many believers in the individualist view would sacrifice political freedom to defend economic freedom”

It is clear that such unrestrained pursuit of self-interest through the belief in the magic of free markets has proved itself wanting and resulted in huge disparities of wealth, impoverishment, inequality and unequal access to opportunity.

Whilst we need wisdom too, knowledge is power and so the more we are informed, the easier it is to challenge the lies of politicians and their media lackeys. It is not necessary to immerse oneself in economic models and mathematical equations to understand the importance of economic policies and their effects on society but if we are to move forward we must show those who would lie to us that we cannot be fooled any longer.

 

Resources and credits:

Steven Hail

Governments do not need the savings of the rich or their taxes 

Corbyn should stop saying he will eliminate the deficit

Zimbabwe for hyperventilators

PQE is sound economics but is not in the QE family

Correcting political ignorance and misconceptions

Printing Money does not cause inflation

Summer of Unrest: The Debt Delusion Mehdi Hasan

Economics: The User’s Guide  Ha-Joon-Chang

The Angry Birds Approach to understanding deficits in the Modern Economy

http://ineteconomics.org/ideas-papers/interviews-talks/demystifying-modern-monetary-theory

 

The “Angry Birds” Approach to Understanding Deficits in the Modern Economy

 

Additional links:

Austerity is a Political Choice not a Economic Necessity

Like heterodox economists, Semmelweiss was ignored…

The riddle of the deficit or (deficits for Dummies)

The motives behind Corbynomics

Answer to a silly question about Jeremy Corbyn

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‘I have been a member of the Labour Party since 1960. I am 70 years of age. So I don’t need any lessons in supporting the Party, through thick and thin over the last 55 years. I supported Wilson, I supported Callaghan, I supported Foot, I supported Kinnock, I supported John Smith, and I tolerated Tony Blair, until Iraq. That is where I drew the line. I supported Ed Miliband, whilst the traitorous Blairites tried to undermine him.

I support the aims that Nye Bevan embraced. He spoke about the commanding heights of the economy being under public control. There is great support for the public ownership of the Railways and the Utilities. Jeremy Corbyn understands this and he wishes to re-establish Party democracy to the Labour Party.

Many people are fed up with having, the totally untalented sons and daughters of past Labour ministers and leaders, parachuted into their constituences without the consultation of local members.

So, we who support Corbyn are saying no more, enough is enough. We lost in England, and we lost in Scotland because of this. So I will be supporting the original reason for Labour’s creation, as is Mr Corbyn. That is why I will be supporting him. I hope this answers your rather silly question.’

With apologies to the unknown author for ‘stealing’ your words.  They reflect the experience of so many long-term Labour Party members and deserve to be shared far and wide as a response to the ‘increasingly charmless’ New Labour attacks on Jeremy Corbyn.  

What was the ‘silly question’?  

“So, if Jeremy isn’t elected as Leader, will you still support whoever is?”

Frankly, what a bloody cheek! 

The riddle of the deficit (or deficits for Dummies)

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Riddle: When is a ‘deficit’ not actually a deficit?

Answer: When it’s a Government budget deficit.

 

 Dear [insert name of virtually any Journalist or Politician]

It seems that you’re still having a bit if a struggle to understand what a budget deficit is, and what it does.

Let me try and explain.

Imagine that I’m the ‘Government’ and you are the ‘Private Sector’.  I give you a bar of chocolate.  Now, I (the ‘Government’) am in deficit to the tune of one bar of chocolate… but you (the ‘Private Sector’) are in surplus to the sum of one bar of chocolate.

Are you with me so far?  The government sector and the private sector or non-governmental sector, are opposite sides of the same coin.  A deficit for the government means a gain in the private sector and vice versa.  (The private sector means everything in the domestic economy, which is not government – I’m leaving out exports/imports to keep it simple).

One way or another, Government spending all goes into the private sector … payments for the NHS, Education, the military, unemployment benefits, working tax credits, child benefit, the Police, the judiciary, pensions, motorways, new infrastructure, grant to local governments and much more, are each paid for out of government spending.

OK?   So government doesn’t just spend, it also taxes.

So I’ll be the ‘Government’ again, and I’ll give you (the ‘Private Sector’) a bar of chocolate and then take back half of it, as a tax.   Now both the ‘Government’ and the ‘Private sector’ have half a bar of chocolate each but the government has a budget deficit of half a bar of chocolate whilst the private sector is increased by half a bar of chocolate.

With that extra half a bar of chocolate you have a lot of options.  For example, you could eat it (i.e. consume goods and keep someone in a job replacing them); give it to someone to mend your bike (i.e. create employment); put it in the cupboard for another day (i.e. save) or repay your friend the chocolate you owe him (i.e. pay off debts).

The way to work out if the government has a budget deficit, a balanced budget or a surplus is simply to subtract the total amount collected in tax from the total amount that government spends.   At the moment, the UK has a budget deficit, which means that the amount spent is greater than the amount of tax collected.

However, George Osborne says this is absolutely ‘frightful’ and that under his new policies, the UK will be in surplus by 2020 (!)

So what does a surplus mean for those of us in the private or non-governmental sector?

Well, if I pretend to be the ‘Government’ again, and I give you (the ‘Private Sector’) a bar of chocolate and then take it all back again … the budget will be balanced. Government spent a bar of chocolate and collected a bar back again… but you in the private sector have nothing more than you had before the ‘Government’ started spending!   (How great does a balanced budget sound now?)

To be in surplus, I as the ‘Government’ would give you a bar of chocolate and then demand a bar and a half of chocolate back from you (the ‘private sector’).  Now you have the problem of how you are going to get me that additional half a bar of chocolate?  Maybe you have some saved bars of chocolate which you can use for a year or two but eventually you may have to go into debt or even sell your house to give me, the Government, that extra half bar of chocolate!

As J.D. Alt writes in his excellent US post:

 If [government] runs a “budget surplus” for long, the Private Sector will either have to diminish its economic activity in general (go into recession)—or plunge hopelessly into debt (borrowing bank money it can’t repay, possibly causing a banking crisis)—or both.

 

Instead of creating jobs by spending, paying off debts or saving, a surplus budget eventually leads to redundancies, greater household indebtedness and greater precariousness of the workforce.

Obvious questions are raised by this simple story, like where did I (the ‘Government’) get the money to buy the chocolate in the first place?   Answer: I created it – that’s what Governments do if they’re the sovereign issuer of its own currency!   This is an incontrovertible fact – only the UK government can create Pounds Sterling – anyone else is committing the criminal act of counterfeiting.

If sovereign governments can create as much money as they want, why does the UK government need to collect tax to fund public spending?   Answer: It doesn’t – there are many essential reasons* for the government to collect tax but taxes do not pay for anything.

Think about it, if government kept on spending into the private sector without having a means of also draining the economy, we would have rampant inflation. (Literally, if it was all in bars of chocolate!)  So tax is one of the means of keeping the amount government spends into the private sector equivalent to the number of goods and services available for people to buy… thus preventing price inflation.

That is probably enough for now. I would recommend this and this for more information but please don’t hesitate to contact me if you need further explanation as to how the economy really operates.

Kind regards

Yours sincerely

Syzygysue

* Tax is important for lots of reasons including giving value to the currency but it does not fund government spending.

PS.  We’re constantly told that the deficit means that future generations will have to pay off our debts. This is simply rubbish.  Which would your children really benefit** from?   Half a chocolate bar (deficit budget), no chocolate bar (a balanced budget) or increased household debt and a potential recession (a surplus budget)?  It would be no contest in my family!

(** Obviously, caveats re: inflation apply)

 

DIAGRAMS & DOLLARS: modern money illustrated (Part 1) 

DIAGRAMS & DOLLARS: modern money illustrated (Part 2)