PART III: On failed and dogmatic economics
AI hysteria in an age of stagnation: a polemic essay on contemporary society
← Go back to Part II: On automation and fake jobs
How can this continue? Fifty years of crony economics
According to many mainstream economists something like a fake job should be impossible. Markets would not allow them and gravitate towards efficiency and equilibrium automatically1. As we saw in Part II, this supposed trust in markets drove a huge shift in the economic and political order in the late 70s and in particular in the 80s and 90s. Market fundamentalism pushed for the use of markets, not just within the capitalist system, but everywhere in society2. But also within the capitalist market itself we saw a switch. An emphasis on financial markets (financialization), financial deregulation, globalization and shareholder value were supposed to encourage these market forces and economic growth3. However, as we will see, the promised goals were often not achieved. Markets failed all the time, and the ‘free market’ rhetoric often did not match how the system actually worked.
So what happened exactly? To answer this, we have to go back to the final years of world war II. It was during this time, at the Bretton Woods conference, that many countries agreed to use the US dollar, pegged to gold, as the global exchange currency to uphold financial stability and allow international trade. With this in mind, some international institutions and agreements were also established, most notably the IMF to monitor exchange rates and as lender of last resorts to nations. The general consensus was that financial instability had been a catalyst for the world wars which should be prevented in the future using regulation and agreements while facilitating trade around the world. In addition New Deal policies in the US, and social democratic policies in Europe, were revived because poverty and inequality were implicitly believed to be responsible for the turbulent 19th and early 20th centuries as well. The theoretical foundation that drove this economic system was based on Keynesian economics, which basically meant governments were not afraid to stimulate the economy to aim for full employment and finance welfare states. In addition, progressive taxation of high incomes and capital was normalized to keep the economy healthy under these conditions, while also maintaining a high degree of equality. All of this actually worked rather well, which should not be too surprising since the same strategy was essentially used to finance the war effort quite successfully. The industrial powerhouses erected by governments during the war - particularly the US government - were capable of producing an unprecedented amount of industrial output, growth and prosperity4. However, in the background problems started to occur. To start, so many dollars accumulated abroad that US gold reserves could be depleted. For this reason - and also because it became harder for US industry to compete with Europe and Japan - the US abandoned the dollar-gold standard in 1971. This effectively turned the US dollar into a FIAT-currency.
The now free-floating currency exchange rates (from 1973 onwards), persistent inflation – and later even ‘stagflation’ during the oil crisis - did not do the Keynesian economic order any favors. Stagflation is the surging of both inflation and unemployment, as well as slow economic growth, which should not happen according to Keynes’s theories. Or at least according to how many people interpreted Keynes’s theories. When things started to deteriorate it was the window of opportunity for more conservative fiscal and monetary policies - focused on controlling inflation and ‘freeing’ financial markets - to be implemented. In addition, the policies included lower taxes for multinationals, high incomes and wealth, offshoring and outsourcing of industry to low-income countries (deindustrialization), privatization of state assets and austerity. Some scholars argue that the underlying reason for this radical shift was that economic elites felt seriously threatened by the economic downturn of the 70s and the oil crisis. Especially because their wealth was mostly based on the ownership of capital. So with quickly diminished real interest rates and dividends, their income was evaporating, while a substantial share of the economy had to go to the strong welfare states to protect the working- and middle classes under the postwar consensus5. If economic elites were to survive as a class, the wealth pie could no longer be shared so equally. Thus the public had to be convinced that the postwar welfare states, public spending and financial regulation were the problem and that privatization, deregulation and unrestrained borrowing - essentially allowing unrestrained capital accumulation by the ‘very wealthy’ and big enterprises - was the solution. These policies, often described as ‘neoliberalism’ by adversaries, became especially dominant under the governments of Raegan and Thatcher6. That is not to say that all of the reforms were unnecessary. However, as mentioned, one major problem was that, in practice, the rhetoric did not quite match the actual real-world policies. For example, the population was persuaded that public spending and high taxes on wealth and high incomes were unsustainable. However, in return everyone would profit from the accumulated wealth at the top to trickle down to the bottom; i.e. trickle-down economics. But that never happened. In fact, between 1975 and 2018, 50 trillion dollar went from the bottom 90% to the top 1% in the US7. And upon closer inspection governments often did not really spent less and were very much involved in subsidizing and protecting big capital as part of the so-called supply-side economics philosophy that came along with the reforms, fundamentally defying the “government is the problem” laissez-faire free market rhetoric. Another concept popularized at the time, known as monetarism, meant that central banks were involved in managing the money supply to control inflation. In the 90s, under influence of the New Keynesians and after monetarism proved problematic, this approach was altered in favor of central banks actively manipulating the interest rate to achieve price stability and stimulate the economy. Although central banks are usually independent on paper, we can question to what degree they really can be. In practice, we could argue none of this is precisely the hands-off approach that was preached. Needless to say, as mentioned, many of the other promised goals did not materialize either. Instead of government debt, private debt bubbles occurred8 and economic growth actually decreased in many countries as well as the global economy on average9. Ironically, in the long run this often resulted in a lot more government debt as well. In the West the new financial and fiscal freedom was often not used to increase domestic production but for financials speculation while industry was offshored to low-income countries. Moreover, real wages virtually stagnated, inequality increased in most, if not all, advanced economies, and economic crises became five times more prevalent between 1973 and 1997 as compared to the postwar period (1945-1971)10. What arguably was achieved was the restoration of class power. After the 90s and into the 2000s the speculation and unregulated financial trickery went off the charts producing problems such as the .com bubble. But the worst had yet to come.
The post-2008 Ponzi economy
After a lot of (ignored) warning signs and problems the game came to an abrupt end in 2008. The entire financial system essentially crashed, pulling down entire countries with it11. This was of course the Global Financial Crisis (GFC) of 2008.
Many mainstream pundits failed to see the crisis coming and yet many of them were tasked to solve it afterwards. According to some heterodox economists, who did see the crisis coming, the fundamental problem was, in fact, never solved. Some of them argue that inflationary FIAT currencies controlled by centralized institution are intrinsically prone to political or even corrupt decisions12. Many also argue that the mainstream economic theories, roughly based on neoclassical economics (new neoclassical synthesis)13, are problematic and rely on mathematical models that overstate their ability to describe the economy. Others even argue that mainstream economists have very fundamental principles completely backwards14. For example, according to professor Steve Keen the role of money creation, private debt and public debt are misunderstood. Looking at public debt things actually looked good in 2007, just before the Global Financial Crisis, and this is exactly what mainstream economists told us15. However, Keen and some other heterodox thinkers warned that private debt showed an entirely different story and of course we know how it ended. One way this can be understood is that surging private debt can lead to a speculative Ponzi-like situation in the market. With favorable credit conditions, money availability and little regulation16, prices of assets like real estate - the trigger of the 2008 crisis - are pushed up because it is so easy to borrow money. Subsequently, investors get excited, so they borrow and speculate on this very growth to continue, pushing the prices up even further. Borrowers at some point keep refinancing with more debt, only paying their interest, which during euphoria may be lowered by lenders, until that is also not possible anymore. The borrowing stops, so demand decreases, credit availability contracts and the rising prices on which speculators are betting stagnate. To make matters worse in the lead-up to the 2008 crisis, a lot of high-risk and bad loans (subprime mortgages in particular) were hidden inside overly complex financial products17 that lacked proper supervision. Regulators and credit rating agencies all failed to do their jobs. Obviously we run into a major problem once everyone realized the bubble is based on hot air and so the whole debt pyramid collapsed. This mechanism is nicely described by Minsky's financial instability-hypothesis18. Basically ever since the switch in monetary policy in the 70s it could be argued that the entire economy has this Ponzi-like speculative nature and the 2008 crisis is an extreme example of that.
The ‘cure’ that was eventually used for the 2008 crisis was equally mindboggling. Because the financial system was on the verge of collapse, governments – particularly G7 governments - bailed out “too big to fail” financial institutions. Even though they did not have a lot of choice, governments did this ‘saving’ of the economy in a way that causes a lot of problems to this day, namely with a huge amount of money creation that ended up in the wrong place. Money creation can essentially be done with a keystroke but the actual accounting of the operation can be implemented in several ways19. Although government deficits did go up, too much formal public debt was still very much against the doctrine of mainstream economics. So many governments resorted to austerity to keep the deficits under control initially. But the economy still needed those extra trillions and this is where some creative accounting comes in. The method G7 leaders eventually used to inject the necessary trillions into the economy is known as Quantitative Easing (QE). QE involves central banks buying bonds and other securities on a large scale. This not only resulted in a huge amount of available money but also favorable conditions for borrowing and speculation due to artificially low interest rates20. Since the economy is still oriented on capital accumulation and shareholder value, the stimulation ended up primarily in the asset market (stocks, bonds, real estate)21. So much so that financial institutions hardly knew what to do with all that money, which produced huge bubbles in that asset market – i.e. the prices of assets went through the roof. One could say that a big part of the global financial system appeared to be a Ponzi and that central banks simply re-inflated that Ponzi. These practices were further accelerated during the lockdowns of 2020 when similar methods to flood the economy with money were used. We now have a speculative Ponzi situation the likes of which we have never seen before. One of the things people notice in their daily lives is that home prices have absolutely skyrocketed in many places since a lot of that money and artificially low interest rates on mortgages, pushed those prices up as well. And this happened while wages were left behind. The endless amount of cheap money was also instrumental in helping some big tech companies dominate markets as rent seeking intermediaries22. It also turned some asset management and private equity into absolute behemoths and because they now have so much money they keep attracting investors for that reason alone, which, again, looks a lot like a Ponzi. It remains to be seen whether many of these financial companies really add anything to the economy or whether they are actually damaging the economy as whole in the long run. Expecting ever more free money and government bailouts when things go wrong produced a different psychological paradigm for big capital as well, it means they see making profits any time soon of secondary importance. Rising asset prices keep the market optimistic but arguably also lazy, because why would you go through the hassle of being productive if you can just speculate on those assets prices? Why would investors even care about what a company actually does? Once started, it is hard to see how this “everything bubble” can be sustained without constantly bringing back stimulation from central banks and/or governments at some point. All of this also greatly accelerated inequality even further since the wealthy are usually much more exposed to the asset market23 (Figure 3). In essence, just as in the post-war period, Keynesian stimulation is back, but this time to support welfare for the already wealthy.
QE left the real economy of goods, services, labor and energy stranded, it essentially seems it did little to really boost the economy and produce demand. Although it did probably prevent mass unemployment. The asset bubbles are encouraging rent seeking behavior on a massive scale. In real estate, for example, that is quite literally the case. At this point it seems that whenever governments stimulate, money just flows to the bubbles, because that is where the value is believed to be24. Even within bloated financial assets, such as US the stock market, we see everything accumulating in just a few S&P 500 companies at the time of writing25. A slightly alternative or complementary interpretation is that a lack of actual demand in the real economy, and all that money accumulating in assets, is symptomatic of what is sometimes called secular stagnation. In fact, according to economists Harry Magdoff and Paul Sweezy26 the boom and bust cycles of the speculative bubbles are merely hiding that the underlying stagnation had been a problem all along.
Economic dogmas undermine innovation, academia and prosperity
According to our prevailing economic dogmas, GDP growth is central to prosperity. We thus fall back to the paradigm of producing and consuming as much as possible. Sometimes even if it is not particularly useful production or consumption. In fact, the uselessness is possibly worse because dogma’s on manipulating interest rates to control prices - as well as monetary expansion benefitting banks and the financial sector instead of direct investment - persisted after the crisis. As banks largely failed at truly stimulating the economy prior to 2008, now too it seems increasingly hard to produce anything useful as ever larger parts of the economy simply fall into passive rent seeking behavior - trying to milk and justify overvalued assets, pumped up by QE, that merely seem to mimic a booming economy. We supposedly need growth continuously because we use debt in order to consume right now, deferring the payment to the future. But even on a fundamental level this reasoning is strange. As Bertrand Russell put it “(..) a man cannot eat a loaf of bread that does not yet exist”27 [27]. We are limited by what we can do, not some abstract monetary system. In fact, I hope one can see that the entire political-financial system is questionable. What all of this suggests is that we are just wasting energy to pretend there is “growth” and the market is “doing well”. There are all sorts of financial mechanisms, like stock buybacks, that are ultimately smoke and mirrors. As a consequence ever smaller parts of the economy are truly productive or innovative.
From this perspective it makes sense why some view population decline or even a stable population as a problem as well. A declining or aging population is generally believed to result in suboptimal productivity and also suboptimal demand, especially when a big part of the economy is essentially busy maintaining a Ponzi. One can raise a lot of ethical points around birth rates and migration, and there are cases to be made for and against population growth. One argument is that in the absence of innovation in energy usage (see also Energy Return on Energy Invested), there are obvious physical limitations to endless economic- and population growth. Everything is energy and big innovative jumps were made when we were essentially able to harness more energy. Energy use may also be a good way how we can classify how advanced alien civilizations are, as Kardashev suggested (Kardashev Scale). As for population growth as a goal in itself, this made more sense in industrial societies where demand for human labor was directly proportional to productivity and many things could not be produced in abundance. The truth is, today many industries have excess capacity, many things can actually already be produced in abundance and some of the biggest industries, like big tech, are not labor intensive. So in many cases upholding demand is actually the challenge. Moreover, as we have seen we can automate more and more production as well, possibly more than we actually do. Machines are orders of magnitudes more productive than humans and in postindustrial societies the bulk of the work force arguably does not even directly produce anything for which there is demand28. A recent paper has shown that population decline could not even be correlated to GDP decline – many countries with declining populations did just fine, had GDP growth (especially per capita), and even saw all kinds of advantages, especially for the middle class29. Yet it is also true that in some historical cases, baby booms were followed by wealth explosions. Thomas Malthus’s observation back in 1798 suggested that living standards should eventually decline as more people share a fixed amount of resources. The reason the opposite happened is generally accepted to be, indeed, due to innovation. And there are quite some signs that our current economic system and its dogmas produce a climate where true innovation and therefore prosperity for many people stagnate. Many research institutes and R&D departments are dealing with share- and stakeholders demanding low risk- and short term returns on investment while widespread counter-productive bureaucratic practices on universities as well as in companies do not help either30. In my own experiences in academia, universities and the academic system have also been seriously coopted by market fundamentalism (see also PART II). Universities do not really operate as companies, so they mimic this, focusing on profits, enrolling as many students as they can, attracting as many external grants as possible, and submitting to all kinds of hollow marketing targets and self-audits to justify financing. Mimicking this market fundamentalism often requires a huge amount of bureaucracy in order to abide to the managerial orthodoxy. Moreover, the bureaucracy has become a business model in itself, which essentially means public money aimed at doing research is being sucked away. When this slowly became the norm from the late 70s onwards we can also discover a decline in output and quality in some areas31. Perhaps because we are simply wasting time, money and possibly also talent. If anything we should cultivate the most capable among us better and not subject them to endless bureaucracies around grant proposals, short term targets and financial worries due to unstable jobs. But this is exactly what we are doing. Because this system is so deeply ingrained in our society, institutions are relatively powerless to bring about change, although the problem is widely recognized. Private grants and philanthropy schemes from big capital are also a bit of a joke because, as we have seen, a lot of wealth in capital originates from central banks and is thus public money anyway.
On the surface startup culture does look like a step in right direction. But many startups aim for low hanging fruit and short term financial success, trying to get some of that excess money floating around in the speculative market by focusing more on marketing than actual innovation. It is exactly what one would expect in a highly speculative economy. Convincing people of a good story is the way to operate in such a market. Because of a remark by Goldman Sachs32, economist Paul Krugman already played with the idea of AI being able to get us out of our predicament and pay for our ‘debt’. Perhaps AI will increase our productivity in useful ways, but for now making sure everyone believes (or fears) it, might be enough to maintain the extremely high stock values. The financialization of everything in combination with mass media, the digital world, and the fact that the postmodern West now lacks any stable narrative33, is the ideal fertile soil for influencing consciousness and keep the Ponzi going. And this brings us to the world of PR, marketing and advertisement (PART IV).
→ Continue to Part IV: A little less PR a little more action please
This is besides the theoretical question whether market failure can actually occur in pure decentralized laissez-faire free markets. Hitherto, we have never seen truly free markets and it remains questionable whether they can exist in a capitalist system. There are arguments that cronyism and interference will always occur and with government policy to prevent this, it is no longer a free market.
The idea was that individuals were self-interested rational actors. Mathematician John Nash played a big role in formalizing this in Game Theory. Moreover, Public Choice Theory argued that everyone, including politicians, only acted out of self-interest. Thus markets, in which every player competed and continuously shows and measures their productivity would be more efficient way to encode what everyone wanted into society than democracy. Later research showed that much of it is based on a series of wrong assumption, which predicts market failure. Not least because ‘players’ constantly game the system and are nog only self-interested and rational.
Commonly as part of a policy called ‘neoliberalism’, especially by adversaries. Economists Milton Friedman and Friedrich Hayek were inspirations, particularly Friedman.
See also the Marshall Plan
David Harvey (2005). “A Brief History of Neoliberalism” pp. 15-16
Specifically, the goals of the deregulatory measures were to cut public spending, curb the power of unions, increase global private investment, lower high income- and capital-taxes, increase entrepreneurship and overall encourage economic growth.
Carter C. Price, Kathryn A. Edwards (2020). An article by the RAND Corporation showed that 50 trillion dollar was transferred from the bottom 90% to the upper 1% of the wealth distribution. https://www.rand.org/pubs/working_papers/WRA516-1.html
https://www.imf.org/external/datamapper/datasets/GDD (IMF Global Debt Database). Private debt has surged from 60% to a peak of 180% of GDP since world war II.
The failure of neoliberalism (Steve Keen): Economic growth was essentially slashed, especially in Western countries.
Financial crises numbered 38 between 1945-1971 and 139 between 1973 and 1997 (source: Wolf, Martin (2009). Fixing Global Finance. Yale University Press. p. 31.)
For example, Yanis Varoufakis: Greece is even more bankrupt than it was at peak of the crisis. https://www.palatinate.org.uk/yanis-varoufakis-greece-is-even-more-bankrupt-than-it-was-at-peak-of-crisis/
e.g. Austrian School economics.
New neoclassical synthesis to be precise, also influenced by New Keynesian economics
Steve Keen (2001). Debunking Economics: The Naked Emperor of the Social Sciences. ISBN 978-1856499927
“the global economy remains on track for continued robust growth in 2007 and 2008.” IMF (2007)
It is often stated that the repeal of the Glass-Steagall Act in the U.S. (1999) accelerated this problem.
Notable financial derivate: Collateralized Debt Obligations (CDOs) had a lot of loans in them that were “subprime”. Credit Default Swaps (CDS) were used to insure against bad loans but could never cover the risk when it became clear the risk determination of the loans made no sense.
See Hyman Minsky - financial instability-hypothesis
This is one reason why deficits and government debt are often misunderstood. For example, treasury bonds are often sold to the private sector to cover deficits. However, with money that governments created for them, so it is not really debt, it is just how money creation works.
Quantitative Easing (QE) involves central banks was inspired by Richard Werner and involves buying a large amount of bonds (and sometimes other financial assets) from banks and in some cases also other parts of the private sector. The value of bonds rise, thus their interest goes very low, while central banks also kept interest of reserves around zero. Note that treasury bonds are simply a way of accounting for government deficits, so the financial instructions buy them with money they got from the government.
Asset price inflation happened for a couple of reasons. First, financial institution, like hedge- and equity funds, got a lot of that cheap money but are not allowed to buy goods and services in the real economy. So instead they used it to buy assets, e.g. shares, real estate or even entire companies (https://profstevekeen.substack.com/p/how-to-mangle-money). Another reason is that - contrary to what central banks anticipated - private banks held on to their excess reserves. Supposedly, they create their own credit money when issuing loans (https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy). Although there is still debate about how this works exactly, most central bank economists stress that private banks do need reserves and assets before they can lend out but Keen claims they are wrong. Finally, the wealthier part of society - who often work for the financial institutions – got higher bonuses and salaries. And they are also incentivized to put those excess savings in the massively pumped up assets.
Yanis Varoufakis (2023). Technofeudalism: What Killed Capitalism
Of course Thomas Piketty warned for this years ago: capital is increasing faster than output, i.e when returns on capital is greater than economic growth rent seeking becomes a primary method to acquire wealth. Those who already own capital will slowly but surely acquire more and more of it. Studies (such as https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2170.en.pdf) also underline this problem, though they generally suggest that QE reduces unemployment. However, all of this only reinforces the thesis that this incentivized rent seeking and BS jobs and the real economy is basically stagnant. People work while they get poorer, while owning assets and doing nothing is very lucrative.
Technically one could say that the real economy is deflationary compared to the asset economy. So the velocity of money in the real economy is only slowed down by this effect and by extension economic growth is as well.
The Buffet indicator shows more 200% of market value to the entire GDP of the US in the start of 2025.
Magdoff, Harry; Sweezy, Paul (1987). Stagnation and the Financial Explosion. New York: Monthly Review Press.
Bertrand Russell (1935). In Praise of Idleness
One reason why rich post-industrial countries get away with this is that the low-income countries are heavily invested-in and dependent-on the financial system of the speculative economies of the rich countries. As long as the speculative economies are doing well - even if only on paper - low-income countries are willing to keep producing cheap goods for the FIAT-currencies (especially the dollar) of these rich countries. Within rich countries we also see that jobs that actually need to be done pay the least, meaning the local population try to stay away from these jobs and thus employers look for immigrants.
Theodore P. Lianos, Anastasia Pseiridis, Nicholas Tsounis (2023). Declining population and GDP growth. https://www.nature.com/articles/s41599-023-02223-7
Many authors have described the academic bureaucracy. Also, this is my own personal experience: universities are run like businesses, grand proposals chase after low hanging fruit and researchers need to engage in endless bureaucratic endeavors to report progress. Creativity is squashed.
Peter Cauwels, Didier Sornette (2022). Are ‘flow of ideas’ and ‘research productivity’ in secular decline?
Paul Krugman in a tweet “Having a bit of fiscal fun with AI. What if it really is a massive game-changer? Goldman says 1.5 points added to productivity over the next decade. If you believe that, should change your views about everything — including fiscal outlook 1”
This can be at least partly understood by studying the postmodern condition and its rejection of historicism. Although historicism - such as the theories based in Hegel’s thought - claim to reject the enlightenment presumption that everything functions based on deterministic mechanics, thinkers like Hegelians nevertheless do claim that some system underlies history. This can have an absolutist tendency. Treating such grand narratives as prophetic may indeed lead to totalitarianism as several postmodernists have argued. This ontology more or less originates from the post-structuralism position that there is no underlying structure described by abstract signs – particularly language - but that language is, in fact, producing the structure itself and is thus relative and subjective. Perhaps even largely subjective (Roland Barthes (1967). “The Death of The Author”). However, we also struggle to define meaning and understand our own history in any stable way without any coherent narrative to ‘believe’ in and extrapolate to the future – we are left with nothing to strive for. We keep running in circles. Popper (Popper (1945). “The Open Society and Its Enemies”) criticizes historicism from a philosophy of science perspective – arguing that consensuses should be found on the basis rational argumentation, which should be falsifiable. Precisely this is now also under thread from multiple angles. Science is treated as just another ideology, a product of certain power structures. The “alternative facts” are just as valuable in the postmodern age, where the scientific method is not even under rational investigation but often rejected on ideological grounds. Perhaps, because scientism did overstep its boundaries but that should not be a reason to abandon science altogether. Popper foresaw the problem of ideologues rejecting rational discourse and found that there should be a limit to tolerance when such discourse becomes totalitarian. What we see is that with postmodernity - in its aversion of totalitarianism - an emphasis on multiplicity and smaller narratives occurred, which itself became an overarching grand narrative. Incidentally, the postmodern conditions seemed very effective in supporting the goals of neoliberalism (Fredric Jameson (1991). “Postmodernism, or, the Cultural Logic of Late Capitalism”). Other Prominent writers reflecting on the postmodern condition: Jean-François Lyotard, Jacques Derrida, Michel Foucault, Jean Baudrillard, Gilles Deleuze and Félix Guattari.