Many modern economists claim to pay homage to John Maynard Keynes, but they are at best only hemi-Keynesians. If you actually read Keynes, you are struck by the breadth and flexibility of his thought. In particular, while Keynes talked a great deal about financial issues – money, interest rates, taxes, things like that – he also respected physical reality, especially demographics. Keynes is effectively the most famous disciple of Malthus. Keynes, like most old-school economists, realized that no matter what sort of fiscal policy was set, it could not cause physically impossible things to happen. If you need X tons of coal to keep people warm this winter, and you have ½ X tons of coal available, people are going to be cold. Financial incentives can cause new coal mines to be dug, or other sources of heat developed, surely, but even with the most optimized monetary incentives there are strong limits to how fast flesh and blood human beings can perform this task – and digging new coal mines itself requires resources which may also be in physically limited supply.
However, today the idea seems to be that finance is king, and that physical reality can be ignored. It is not that economists believe that paper money can create real goods out of thin air: it is just that they believe that human abilities are so great that as long at the correct financial incentives are in place people are guaranteed to be able to create ever more goods and to adapt to all circumstances. Hence, resource constraints and population growth can be ignored: only maintain the correct financial incentives and all will be well.
This view of finance as omnipotent is sometimes codified by aracana such as the “Solow-Stiglitz production function”, but most economists simply assume it to be true without even thinking about it.
There is some truth to this view. Finance is indeed powerful. While fiat money is a fantasy with no intrinsic value, by providing incentives and focus for human labor it can help to create new resources and allocate them effectively. Even with abundant resources and tools, if you totally mess up finance you can still create poverty, although you really have to work at it (the old Soviet Union, with one of the most ill-managed centrally planned economies ever, with abundant resources still managed to create a standard of living that was a lot higher than modern dynamic capitalist third-world countries. Compare East Germany in 1970 with modern India). But finance is not omnipotent, and as resources become scarcer and more expensive to develop, you can easily get to a point where the best that flesh and blood human beings can do is just not enough. We can ignore the real world, but the real world is still there, and still powerful relative to human ability.
To some extent this blindness of modern economists may stem from the period in America and Western Europe, foreshadowed by the industrial revolution but reaching it’s highest development from around 1940 to 1980 where it must indeed have seemed that finance was king. During this period, to grow the economy all you had to do was drill more oil wells, build more gasoline engines and diesel generators, dump more chemical fertilizer on the crops, pump more fresh water from the aquifers, and economic growth was automatic. You could keep doing the same thing over and over and always get the same increment of economic growth for the same costs. As long as the financial incentives were correct, economic growth was guaranteed and sustained population growth of as much as 1%/year (historically a very high value) could be readily accommodated. It must have seemed that humanity finally had all the answers, and that all that mattered was managing the business cycle. Unfortunately this is no longer true, you cannot keep doing the same thing over and over again to get the same results, yet your economists remain mired in the same fantasy world where all that matters is money…
The notion of omnipotent finance is related to the idea of neoliberal uber-capitalism: only allow everyone to pursue their own interests without restraint and the invisible hand of the market will solve all problems. The logic of these uber-capitalists is strange. Imagine I say that being thrown off a cliff is not a problem, because human beings are guaranteed to be able to flap their arms hard enough to fly. I throw someone off a cliff, and they fall to their death. However, I do not apologize, but blame my victim: obviously, it was their fault, because they did not flap their arms hard enough. This is a double lie: there is no record of anyone being able to flap their arms hard enough to fly, and I said that it was guaranteed that people could fly by flapping their arms, and never pointed out the downside of their not being able to do so. Similarly, uber-capitalists often proclaim that rapid population growth is not a problem, because more people are guaranteed to be able to produce more goods. And effectively without exception, when a population is rapidly increased, poverty increases, but the excuse is that the people didn’t work hard enough! Or perhaps because they did not have the correct tax laws. Never mind that success was supposed to be guaranteed, or that nothing was said about rapid population growth being a problem if you didn’t have the correct tax laws, and never mind that the most dynamic capitalist economies in history have routinely failed to keep up with rapid population growth. There is no arguing with neoliberal economists.
To add insult to injury, the same neo-liberal economists who claim that more people can always produce enough to accommodate their increasing numbers, are typically the same people demanding that the central bank choke off economic growth to a level below what is needed to accommodate more people (to avoid the economy “overheating”). It’s as if I threw you off a cliff claiming that you are guaranteed to be able to flap your arms hard enough to fly, and then cut your arms off to avoid your becoming overheated.
And don’t get me started on when the neoliberals insist that market capitalism requires that the rich need to be bailed out with public funds when they make bad investments…
Neoliberal economists claim that you don’t need to think or plan ahead, because the invisible hand of the market will magically make everything balance out. Indeed it will. If there are too many people and not enough food, wages will fall below subsistence for a brief period, until enough surplus people have died to restore the wages to subsistence, thus keeping the balance. That works.
It is suggested here that often, when finance seems to be responsible for poverty, instead it is physical reality, and finance is only reflecting this as a side effect. Suppose that, in modern Bangladesh, you raised the minimum wage to $10/hour in an attempt to give everyone a Western European standard of living. That is physically impossible: Bangladesh does not currently have the resources or capital to provide this standard of living to all of its people. So it won’t happen. But how will it not happen? It could be, with more money chasing scarce goods, that there would be hyperinflation which would thus cancel out the effects of the higher wages. But from this to conclude that the problem is purely monetary, that if the central bank would only limit the money supply then all would be prosperous is clearly nonsense. Another possibility is that the newly rich (on paper only) Bangladeshis would invest their money in speculative financial investments, which would grow rapidly as all that money chased other money, until the Bangladeshis tried to actually spend some of their paper profits on something real, at which time the financial system would collapse. But claiming that if only financial speculation would be regulated all would be wealthy, is also clearly false. Or the high wages could create massive unemployment, and the government could drastically raise taxes on those few with jobs in order to fund aid programs to make sure that everyone has enough food – again, claiming that people are poor because of high taxes would be to miss the point.
Humans have long tried to build perpetual motion machines: clever assemblages of pulleys and gears that produce useful energy out of nothing. None of these machines has ever worked. As far as you currently understand physics, it is impossible to build a perpetual motion machine. However, figuring out why a specific perpetual motion machine does not work can be extremely hard: forces and energy are shunted in complex and subtle ways, but in the end always arranging themselves so that no net energy is created.
By rough analogy, it is proposed that much of what is commonly ascribed to a failure of finance has its roots at the level of physical reality, and the financial effects are simply how the system of money accommodates itself to the brute fact that physically impossible things cannot happen. But tracing these effects could be very difficult. Especially if you humans stubbornly refuse to acknowledge the possibility.
I can see how you could be seduced into thinking that it’s all about money. Finance is so outrageous, so volatile, so obviously powerful on a day-to-day basis: and for any professional economist to talk honestly about population effects would be professional suicide. On the other hand the pressure of population growth is slow, gray, inexorable, its effects mostly indirect as supply and demand ripple through labor and capital markets. But as the years turn into decades, it is demographics that rules the show.
Consider: in the United States the population is being deliberately increased by nearly 4 million new people each year. At the same time, not only is there no new investment, existing industries are being sent overseas. More and more people; less and less means of production. The standard of living will go down. Even if the American financial system were not so obviously corrupt, any attempt to stop this decline in living standards via purely financial means would be doomed to failure: raise this tax, cut that one; increase the money supply, decrease the money supply, it won’t matter, every financial intervention will simply create countervailing forces as money slips and slides out from under our grasp.
In summary: money is powerful. Money is important. Money, by providing incentives to real human beings to do real things, can change the real world. But money by itself does not provide any direct information about the real world, and if you only restrict yourself to thinking about money you can be blindsided. One is reminded that the stock market has a perfect record of predicting disasters after the fact, but essentially a zero record of predicting disasters before the fact – which is when such predictions would be useful. Money accommodates itself to changes in the real world after the fact. So pay attention to money, but, like Keynes, never forget the real world.
I have here discussed finance as it relates to the overall production of sufficient material wealth for a population. A slightly different issue concerns the use of financial tricks to scam a population out of wealth. This can indeed happen, and history is littered with examples wherein an elite used financial instruments both subtle and gross to grab money from the working people and dump it into their own pockets. This possibility is not denied. Yet even here, it is argued that demographic issues are more important than might first be apparent.
If there is not enough material wealth to go around, then financial scams are irrelevant: most people will be poor, period. But what if there is plenty to go around, and the balance of supply and demand favors labor? It is possible that financial scams could impoverish workers even under these conditions, but supply and demand are hard to beat, and there are countervailing forces that will tend to undo them.
First, suppose that the rich raise taxes on workers to very high levels and funnel the proceeds into their own accounts. With a tight labor market, you will still have employers competing for workers: this will raise wages even higher, and also lead to employers providing significant non-cash benefits, which will tend to undo the maldistributive effects of the oppressive tax policy. Ultimately only slavery can beat a tight labor market.
Second, it may be impossible (or at least very difficult) to create a grossly corrupt tax or fiscal policy without first creating a surplus of labor. Consider a journalist in a tight labor market. The journalist’s skills are valued and in short supply. If the owner of a newspaper or media outlet insists that the journalist print something false or misleading because it is to the advantage of a rich friend, the journalist could simply quit in protest and easily find another job at a competing institution, leaving the offending institution without a valuable talent. Now consider a journalist in a flooded labor market. The journalist is frantic to stay employed, knows that if they get fired they are unlikely to find another job, that losing a job is likely a permanent ticket to poverty, and they have a family to support. Now the owner wants something printed: it gets printed. If not, there is no loss to the institution: talent is in abundant supply, the journalist gets fired and is easily replaced with a more accommodating one of equal ability.
Currently in the United States the elites have spent trillions of government dollars bailing themselves out of bad financial investments, and they propose to pay for this largess to themselves by gutting social security for the middle class and raising taxes on wages and productive enterprises. This is totally a scam. Yet it is routinely defended by any number of journalists all of whom serve at the pleasure of the rich and powerful. Should any of these journalists not read the approved script, they would be instantly fired, instantly replaced, and they and their families driven into (likely permanent) poverty. It is suggested that financial scams of this sort may depend to a surprising extent on first creating a balance of supply and demand that favors employers. Certainly in the United States, efforts at maximizing population growth preceded these ongoing financial scams by about a generation, and only when the labor market was really beaten down did the rich dare to try scams of this sort.
It may be the working class can only successfully defend themselves from financial scams in a tight labor market, because only in a tight labor market can we expect more than the occasional saint to take a stand on principle.
Recall that in Europe after the Black Death, the rich tried forcing wages down via various statutes and scams, but they were always defeated by the effects of a tight labor market.
Nobody beats supply and demand (you can sum it up in a single word if you like: scarcity). The rich favor low wages, and it is proposed here that much of history concerns their efforts to lower wages by increasing the supply of labor by forcing population growth. But certainly the rich can also push down wages by reducing the demand for labor, and at times they appear to have done so. During the great depression in the United States during the 1930’s, there were abundant resources and low fertility rates, yet poverty was endemic due to financial collapse. However, even with a devastated economy, the resulting low wages were very profitable for some number of wealthy people. The great depression does not appear to have been deliberately planned as such; but many rich people fought like scalded cats to prevent the depression from ending.
It does appear that the rich will sometimes try to artificially limit economic growth to a level that does not cause wages to rise. However, this does not mean that the effects of population growth should be ignored. Limiting an economy via financial manipulations can, at least in principle, be easily reversed (consider how fast the United States bounced back from the Great Depression after the stimulus of WWII government spending kicked in), but the effects of creating a population explosion are rather more enduring. Consider also that, while the rich may profit from a stagnant low-wage economy, they make ever so much more money from a dynamic and growing low-wage economy, which can only be achieved with high rates of population growth. So the incentives are on the side of forcing population growth. And something about which we need to be particularly careful: just because the rich have sometimes limited economic growth via financial measures, does not mean that without restrictive finance the ability of an economy to grow is now without limit: there is no historical basis for this assertion. Physical reality must always be respected, and left unchecked, population growth will cancel all other factors.
In the long run, demographics is the only economic factor more powerful than money.