Home > The Economics Profession > Austerity policies — prescribing rat poison for ailing economies

Austerity policies — prescribing rat poison for ailing economies

from Lars Syll 

How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity? Some of the dominant figures in the financial world have had a long-standing scepticism of the economic relations on which Keynes focused which is being emended only now, with reality checks being made in observations of the penalty of the neglect of Keynesian relations …

7ti40If failing to understand some basic Keynes­ian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things …

An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. And the shrinking of the Greek economy under the influence mainly of austerity has created the most unfavourable circumstances possible for bold institutional reforms.

Amartya Sen

  1. June 6, 2015 at 9:35 pm

    Yes, your conclusion is laudable, yet, your discussion of austerity is too brief. You do not mention that austerity in the Americas etc is a 600 year-old European export based on pre Grecian experiences all the way to India, millennia before Rome. Austerity is a proven, stable system. All productivity above subsistence plus a procreation bonus trickles to Oligarchon rulers backed by police and military.

    Keynesian thinking is not as old as that of Marx, yet it does not reach the heart of information age climate collapse and the criminals who are promoting it. This is proper consideration for economists who wish to comment on the real economy of today, there is no need for further proof, what is economical in a chaotic world being made ever more unstable by identifiable oligarchs.

    Greek citizens do not owe interest on illegal corporatist schemes. It is possible that adult greeks owe something for believing the expert lies of financial criminals. This is for a judge of an impartial international court to decide.

  2. June 6, 2015 at 9:53 pm

    Poisoned, hanged, and shot
    Comment on ‘Austerity policies — prescribing rat poison for ailing economies’

    Amartya Sen asks: “How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity?”

    The basic Keynesian insight is, of course, for all immediate practical purposes correct. Nevertheless, Keynes’s employment theory is indeed not general and misses a crucial point (2015; 2012).

    The most elementary version of the correct employment equation reads:

    From this follows
    • An increase of the expenditure ratio rhoE leads to higher employment. An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction or debt repayment.
    • Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
    • An increase of the factor cost ratio rhoF leads to higher employment. This implies that a higher wage rate W leads to higher employment. This is, of course, contrary to conventional economic wisdom.

    Conventional economic wisdom is, we know this from Keynes, wrong. Here is not the place for a formal proof but the actual graphics from Nick Bunker's post ‘Waiting for healthy U.S. wage growth’ gives intuitive empirical support:


    The correct employment theory tells us that Greece has not only been poisoned, but in addition hanged and shot.

    In the old days economics has been called the dismal sience. It has now become the lethal science.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
    Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL http://papers.ssrn.com/sol3/

  3. dmfant
    June 8, 2015 at 1:07 pm

    Reblogged this on synthetic zero.

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