Causes and Lessons of the Current Economic Crisis

by Michael Federici on April 28, 2009 · 10 comments <span>Print this article</span> Print this article

in Economics & Empire

m
ERIE, PA. As a new contributor to the Front Porch Republic, I would like to thank Mark Mitchell for his invitation to participate in what is shaping up to be a thoughtful exchange of important ideas.

My April contribution is the result of a panel debate held at Edinboro University in Pennsylvania regarding the current economic crisis. I was asked to participate on the panel because I am known as an intellectual conservative. It was apparent the evening of the debate, and it seems to be the case with the Front Porch Republic, that categories like “liberal” and “conservative” require qualification and clarification. Why?

For one thing, intellectual conservatism is not a monolithic community. At its best, it treasures genuine diversity and deplores a stale uniformity that tends to characterize much of today’s politics. This is partly why many conservatives refused to defend the economic policies of the Bush administration that violated both the principles of sound economics and the prejudices of traditional conservatism.

My reaction to our recent economic troubles is influenced by several thinkers who are known less for their technical contributions to the field of economics than they are for their imaginative conception of economic life. They include: Wendell Berry, Wilhelm Röpke (A Humane Economy), Joseph Schumpeter (Capitalism, Socialism and Democracy), E. E. Schumacher (Small is Beautiful), Karl Polanyi (The Great Transformation), and Pope Leo XIII (Rerum Novarum).

What they share in common, and what Americans in general seem to have lost, is a concern for a humane scale and thus what Röpke calls the humane economy. Röpke’s book by that name is an excellent starting place for understanding what he considers a third way or middle path between the statism of totalitarianism, socialism, and the welfare state and the economic anarchy of libertarian capitalism or neoliberalism. Both extremes cause what Röpke called the “enmassment” of society. Whatever the shortcomings of my arguments, my purpose is to join Röpke in advocating a humane economy, and Schumacher in insisting that the humane requires attention to the problem of scale. Generally speaking, small is apt to be more beautiful and more humane than the scale of mass culture.

Because the humane and human scale are my standards, I part company with those on the left, like Keynesians and the Obama administration, who tend to argue for big government as the solution to the economic crisis. Generally speaking they believe that more government control of the economy, property, and wealth will lead to a more just and a less volatile economy. Their tendency is to view economics through the prism of classes and egalitarianism and to use economic policy as a means to develop social policy.

Both the Bush and the Obama administrations have responded to the recession by assuming that significant government intervention in the economy is the correct approach to cure the sick economy. Unlike President Obama, I see little evidence that a new New Deal, a Keynesian approach, will work in helping the economy recover. Even if it can work in the sense of bringing economic recovery sooner, I have problems with its consequences. As Wendell Berry argues, efficiency and wealth are not the greatest goods. Science and technology, if divorced from a concern for the humane, can alienate individuals from community and dignified work. Robert Nisbet calls such people “loose individuals” because they have been ripped from social institutions that have a civilizing and harmonizing effect. Polanyi’s notion of “embeddedness,” (i.e., the economy does not exist outside social, political, and religious community) is a reminder that economics is merely one dimension of several inseparable aspects of human life. The unintended consequences of grand economic policy may include multiplying the number and degree of loose individuals.

I also, however, part company with big business conservatives, neoliberals, and libertarians who cling tightly to unfettered capitalism and who tend to believe that economic efficiency is one of the primary objectives in human life. The notion of a “free-market” is an abstraction that tends to obscure the reality of life in its many dimensions. Moreover, as Burke might have argued, we ought to know what individuals are going to do with their economic liberty before we give license to it. The fruits of economic liberty must be measured against the standards of the good life. Like Röpke, I believe that there is a third way, a middle path that centers economics on community and the spiritual character; it leads to the humane economy and more complete human beings. In short, the mass economy is dehumanizing.

As a general principle, I oppose big government bailouts of big companies and industries that behaved irresponsibly. Both John McCain and Barrack Obama supported President Bush’s bailouts because they argued with most other American political leaders that we cannot afford to let AIG or other companies fail. If they fail, we were told, the economy will fail.

What sense does it make, in the first place, to allow companies to get so large that the economy cannot survive without them? In my view neither business nor government should concentrate power. The American Framers defined concentrated power as the very definition of tyranny (Federalist 47). We have lost sight of this enduring wisdom and need to remind ourselves that bigger is not always better. We would do well in the current environment to revisit Schumacher’s and Berry’s arguments for a smaller scale in economic life and to remember that mass society breeds not the beautiful but the ugly. James Howard Kunstler’s work provides numerous illustrations of the ugliness and vulgarity of mass society.

Part of the problem is that there is a tendency to view the economy as a machine that government can control by pushing the right levers. Economics, however, is not a science at least in the way Keynesians think it is. When I was an undergraduate studying economics, we performed economic computer modeling that required mathematical exactness to “fix” the broken economy. We were given certain conditions and numbers regarding unemployment, inflation, interest rates, etc. and had to adjust interest rates, taxes, or government spending accordingly. When we did, the numbers were plugged into the computer and the results were formulaic. Such exercises condition the imagination to conceive economics in a way that divorces it from the texture of concrete human beings and communities. Unintended consequences, like the loosening of individuals or ugly commercial development, tend not to be part of Keynesian economic models.

Economies don’t work like machines; they do not exist in a realm of mathematical abstraction and certitude. And yet both past and current economic policy makers act as though they are mechanics working on a great economic engine. In the year or so leading up to the 1929 stock mark crash, government cut the money supply by one-third. In the current economic crisis, President Obama assured us that we will see progress in employment numbers, if his stimulus plan is working because he accepts the Keynesian belief in government’s ability to manage economies. It is worth remembering that when FDR came to office he faced double digit unemployment. After seven years of the New Deal, unemployment stood somewhere between seventeen and twenty percent. We were led into this economic mess in large part because of reckless spending; we will not find our way out by spending in an even more reckless way.

It should be remembered that like so many things in life, recessions have a life of their own. Although they do not follow as clear a pattern as the weather, the winter of recession is always followed by the spring of recovery. This recession will be no different. This does not mean that nothing should be done while we wait for recovery, but it does mean that we need to realize that only part of life, including economic life, is in our control. Some things get better on their own, others require a bit of nudging or even aggressive action. When a gallon of gas was more than four dollars a year ago many screamed that government should do something. Government didn’t do much of anything and the price dropped to two dollars a gallon. Our economic well being should not be left to market forces alone, but we also need to acknowledge that, like the weather some things are out of our control and it is possible to make a bad situation worse by trying to do more than is humanly possible. It is possible, as some have argued, that Keynesian policies deepened and lengthened the Great Depression. Hubris feeds the desire to control the uncontrollable; it fosters an impatience with things as they are that often leads to rash and imprudent public policy. At its extreme this disorder takes on a gnostic dimension and attempts to change not merely existing public policy but the very order of being in which we live.

It is a mistake to repeat the New Deal strategy and use the economic crisis to engage in grand social engineering. President Obama indicated in his 2009 State of the Union Address that he wants to:

a) End the Iraq War
b) Accelerate the War in Afghanistan
c) Fix the Economy
d) Fix Healthcare
e) Clean up the environment
f) Fix Social Security
g) Fix Medicare
h) Rebuild American infrastructure
i) Create a new energy policy
j) Reform American schools
k) Cut the budget deficit
l) Rid the federal government of fraud and waste, and make the federal budget more transparent

The president said that he wanted “to ensure that a crisis of this magnitude never happens again.” Like FDR he declared war on the broken economy, a war apparently to end all major recessions. Such attitudes move beyond policy reform to what Eric Voegelin calls metastatic faith, i.e., an unrealistic belief in the transformation of human nature and human society.

George Bush exploded federal spending and doubled the national debt in eight years. If massive government spending was good for the economy, we wouldn’t be debating what to do about the economic crisis.

The danger of creating new government programs is that, like with the New Deal, they become entrenched whether they work or not. They burden future generations of Americans just as the Wars in Iraq and Afghanistan have. We seem to have come to our senses about Iraq and realized that we can’t create a viable democracy in a culture that does not possess the prerequisites for constitutional government. The same kind of realization is necessary when it comes to big government and the welfare state. The War on poverty did not end poverty, as it promised; the war on drugs has not ended drug use in America; the war on terror has not ended terrorism; the world wars were not able to end all wars. These are promises engendered by metastatic faith.

The current economic crisis is not so much a problem of public policy as it is a problem of imagination. If we continue to conceive of politics as the answer to all or most of our needs, then we will repeat the mistakes of the previous century and rest our hopes in institutions that are led by individuals who are men and women, not gods. We should help those who are struggling in the current economic climate and take greater responsibility for our communities rather than turn reflexively to government. It may be that a Wendell Berry novel contains more wisdom about economic life than a room full of government economists. If forced to choose, I side with Berry, Röpke, and Schumacher and place my emphasis on returning to a humane scale in both government and the economy.

{ 10 comments… read them below or add one }

avatar John Médaille April 28, 2009 at 3:05 pm

I think it is necessary to ask why gov’t expenditures are so high, and why administrations of both the left and right think this is the key to economic stability. The truth of the matter is that they believe it will work because it has worked. Since the Great Depression, the Federal budget has run 17-24% of GDP, and during the war it ran 40+%. Before the depression, the budget might have consumed 2-4% of GDP.

According to both standard neoclassical and Austrian theories, this should disrupt and destroy an economy. Yet for 60 years, the opposite has been the case. In the period from 1853 to 1953, the economy was in recession an astounding 40% of the time; since then (that is, since the dominance of Keynesianism) it has been in recession 15% of the time. The question that rarely gets asked is, “Why is such a high level of gov’t expenditures required to stabilize an economy?”

Economists often speak of an “equity-efficiency” trade-off. That is, we can have a just economy or an efficient economy, but not both. Let me suggest that the truth is exactly the opposite: without justice, the economy can not be efficient, and without this efficiency, inefficient state intervention is required. For the last 30 years, the median wage has remained stagnant, yet productivity has exploded. That is to say, each worker now produces a great deal more than he used to, but has no increase in purchasing power with which to absorb the excess goods. Hence, the economy has resorted to three expedients to dispose of the excess, each of them worse than the last.

The first is to put more family members to work or to work longer hours. This keeps family income up (but only by about 18%) but destroys the family life that the economy is there to support. The second is to have the gov’t absorb the excess goods through high spending. This works, sort of, but increases statism in gov’t and gigantism in industry. In the end, it converts the citizen into a mere client of the state, with each of his needs attended to by a gov’t department. Further, since the 80′s, we have demanded high expenditures, but refused to pay for them in the form of taxes. Hence, ballooning deficits which further fuel consumption but not production. In any case, this Keynesian solution started to be insufficient some 20 or 30 years ago. So another method was needed to absorb the excess.

The third expedient is usury, or consumer credit. Those with excess funds simply lend it to those without. This also works, but it is a ponzi-scheme; you can increase consumption by a dollar today only by decreasing it by that same dollar tomorrow, plus interest; the money has to be paid back. This requires even more lending in the next period, until sooner or later the whole thing collapses of its own weight.

The Just Wage is regarded by most economists as a romantic notion, at best, with no real measure. But the opposite is true: it is a necessary notion and has a fairly precise measure, at least in the aggregate. Namely, can we distribute the bulk of goods through wages, or do we need the three expedients: more work, more gov’t, more usury? If we must rely on these to balance the accounts, then there is a failure of equity. And equity here is a practical problem; without it there will not be a working economy, and we must rely on the other, non-economic means.

The Obama administration wants to do what has been done in the past, and they want to do this because it used to work. But this will no longer work, because it has ceased to work for some time now. As you say, if it was going to work, it would have worked under Bush. It didn’t work for him and won’t work for Obama.

We have a big gov’t because it seemed to be–at a practical level–the only way of dealing with big business. The one feeds the other in an endless spiral until the point of collapse, which may be the point we are at. The key to getting rid of big gov’t is to get rid of big business, which is the problem of scale you mentioned. And it will turn out that reducing one will reduce the other, but both must be reduced, must be re-scaled.

avatar Robin Goodfellow April 28, 2009 at 7:47 pm

“We seem to have come to our senses about Iraq and realized that we can’t create a viable democracy in a culture that does not possess the prerequisites for constitutional government.”

Err, what? What sort of a “culture” possesses the “prerequisites for constitutional government.” Is this something intrinsic to a “culture”? A white european “culture”? I’m sure the reason Iraq was mired down has nothing to with neo-colonial imperial crusades of humanitarian interventionism that belies numerous corporate interests. Or, y’know, other historical features of Iraq’s oppressed state in the last 20-30 years. But, no, I think a benighted “culture” sounds about right.

“If forced to choose, I side with Berry, Röpke, and Schumacher and place my emphasis on returning to a humane scale in both government and the economy.”

And how exactly does one plan to do this — absent the vast framework of capitalist interests, we just magically conjure this like a rabbit out of a hat? Sounds like metastatic gnostic faith to me.

avatar Josh Cooney April 28, 2009 at 7:59 pm

We can’t conjure a new economy out of a hat. This is where Wendell Berry plays an important role, should we let him. The artist can still create an image of what we want our society to look like. This is especially needed when most of the population lives distant in time and place from any economy of scale. Economists should read more poetry.

avatar Casey Khan April 28, 2009 at 10:14 pm

If anyone is interested in good old fashioned economic prose, check out the works of Garet Garrett.

avatar Mark Shiffman April 29, 2009 at 4:35 am

The best answer to Robin Goodfellow’s petulant question can be found by reading Tocqueville. I think RG’s incredulity results from too narrow a sense of what constitutes “culture”. Culture in the broad sense means the habits of living that a people shares widely. One of the primary cultural requirements for sustaining constitutional government is a robust civil society, with institutions and practices that encourage responsible management of one’s own affairs on a familial and local level. These cultivate habits of responsibility and good judgement, as well as what Tocqueville calls “the spirit of liberty,” or a felt and informed sense of the dignity of active self-rule. Pretty much everything Tocqueville says about this is consistent with Aristotle’s emphasis on the need for active habituation both to form virtues of character and to rightly shape practical wisdom.

The reduction of the notion of culture to some sort of mental content and external trappings goes along with the reduction of our image of the human person to a calculating and choosing being. It abstracts from the concrete institutions, practices, habits and immediate social relationships that form us.

None of this is to deny Goodfellow’s point that “democracy-building” in Iraq was vitiated by the venality of the corporate interests involved and by lack of vision and genuine good sense.

avatar Kate Dalton April 29, 2009 at 8:24 am

My thanks to Mr. Medaille for being one of those reviving the term “usury”–so quaint and so apt–and emphasizing that it is most evident in our rates of consumer credit. It also lies behind our recent expectations as to reasonable rates of return on investments, as some of us hope to benefit from it as well as pay it. I hope some of the economists on this site will grab that bone and worry it.

avatar Dan April 29, 2009 at 8:29 am

The title, I believe, is misleading. At know point does the author mention the causes of the current economic crisis or any lessons one can learn from examining these causes. What this is in fact is a meditation upon the government response to the crisis through the lens of traditional conservatism. Not a bad thing, just not what I was expecting.

If, “The current economic crisis is not so much a problem of public policy as it is a problem of imagination.”, it would seem public policy had no role in causing or enabling the crisis and cannot in any way be amended for the better. It would be something akin to a natural disaster, an act of God.

If this indeed is the opinion held it needs an argument more substantial than this meditation.

avatar Empedocles April 29, 2009 at 8:32 am

Robin’s knee-jerk indignation is what makes any kind of discussion almost impossible on the Internet, and is something I hope we can avoid on FPR. He jumps straight from culture to racism to outrage. Of course, he then suggests that the problem could be explained by “other historical features of Iraq’s oppressed state in the last 20-30 years” without considering that culture could be the result of historical features, that culture and values are the result of the lessons a people learn from history.

In contrast to this view, it is often thought or assumed that values are apprehended a priori, that they are written in the structure of the universe and are apprehended by pure reason rather than learned through the bitter lessons of history. Western nations, under the continuing influence of Kant, are one and all in the sway of this view. This results in the continuing inability of Westerners to understand cultures whose history has taught them very different lessons (or even the inability for one western nation to understand another). After all, if morality is a priori, and thus universal, all of humanity must concede to identical values. Much of our continuing conflict with Middle Eastern countries comes from this misunderstanding—we simply can not understand how they could fail to adapt western values when they are so obvious. But of course, these values are anything but obvious and what we now think of as “Western values” had an extremely painful birth in the previous centuries where they were often conceived in conflict, born in bloodshed, and nursed through many devastating wars before emerging today where we assume they should be obvious to all.

avatar D.W. Sabin April 29, 2009 at 4:01 pm

Being of infernally consternated bent, I am twisted enough to actually enjoy the few windows Mr. Goodfellow breaks on his terrifying forays through the porches. That is, as long as the broken windows are repaired. I’m still waiting to hear what the vandal might be “for” though…..that is, if he is for anything…not that this is a requisite thing in this besotted age. I’m not for a lot myself..besides, well…never mind.

“Enmassment”……of society. We likes this one, it rhymes with “debasement” and creeps up near “emasculate” or “engorgement”. This is the perfect term…..a bit of genius. No matter how one cares to flip this rock, a culture that suffers from “enmassment” aint got much to offer besides “mass”.

When there is no political agency urging chaste restraint in fiscal matters, one can be sure that penury will be developed as a national past time for all but those who participate in the High and Mighty Bunko Program as Bagmen For the State. It’s not that spending money is all bad, nor is making it….its just that there is a minor problem with indiscriminate spending, something usually only practiced by those who don’t give a rats patootie about much of anything besides empty gizmos and a quick exit plan out the back door.

Democracy at gunpoint……..one of the more ridiculous things ever concocted by a group of thinkers who are so professionally ridiculous that they possess the most effulgently patriotic and smarmy names of all the grand name tags of the various dens of institutional brigandage hovering about the rotting corpse of Washington D.C. . What are these “thinkers” called you might ask? Well, hold your sides now, in august tones we shall utter the terrible name of the “Neo-Conservative”. A fine double negative, self- canceling…kind of like a “Shy Whore”. ….except, in their case, one can subtract the “shy” part and add a Marketing Department and a few paid junkets to the Levant.

Oh, I did it now, dinst I.

avatar freeman April 30, 2009 at 5:57 pm

I get the sense that some people believe that a libertarian economy would be dominated by megacorporations, but we have no evidence of that from history. Megacorporations benefit from megagovernment in many ways. Some economic researchers have found, for example, that avoidance of taxes is one reason for vertical integration; two units of the same corporation pay no tax on intra-corporation transfers. High taxes encourage corporations to be larger than they otherwise would be. High regulatory burdens also harm smaller entities more than bigger. The cost of full-time staff to deal with regulations can be easier to amortize for a billion-dollar business than for a mom-and-pop operation. Before we turned everything into “a federal case”, America was a vast network of human-sized organizations. The exceptions – such as big railroads – had good reasons for being innately larger than other organizations ( who would want to transfer between rail lines at every city? ), but were also some of the first recipients of corporate welfare, in the form of huge land grants, bond issues, and government bailouts – none of which were actually necessary, as other entrepreneurs successfully built railroads without government welfare.

In short, a human-scale (vastly smaller) government would tend to encourage human-scale organizations.

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