As Greece approaches what might well be her final hour (in a long string of last-minutes and ultimatums and bluffs), I wanted to write something more about it. And add to the already long-winded catalogue:
- Germany: History has more lessons that just inflation (because the Germans have lost their minds).
- Grexit: The Costs and Impossibilities (because the journalists have lost their minds).
- Syriza: Are You Actively Trying To Orchestrate a Grexit (because Syriza have lost their minds).
- Syriza, turning Left, and is there any evidence for it? (because the Troika has lost its mind).
- What Yanis Varoufakis’ Dad Said (because Yanis Varoufakis’ dad has lost his mind).
In the past few years of writing and thinking about the Greek crisis, it seems to me that the key issue is this: for some reason, we all labour under the delusion that an economy is like a household. Mainly: when you’re having a tough time, you tighten your belt.
That analogy is ridiculous. And I say that having used it inappropriately on this blog many times before.
I’ve changed my mind.
Here is why:
- A household is not a contained economic system. It is not even a partially-contained economic system. A household is fundamentally reliant on forces outside of its control.
- It relies on an external bank for credit, on an external employer for income, on an external (super)market for sustenance, and on an external governance system for the maintenance of law and order.
- This means that there is no option for a household but to tighten its belt in the face of difficulties.
- That doesn’t make “belt-tightening” a moral imperative. There is nothing moral about it. It is simply the balance of power – and the household has none.
- In short: the household is a completely open economic system, with almost no natural resources (other than the skills of its labour force) and virtually-zero competitive advantage.
- Yes – you get exceptions and people that go off the grid. But when we are using the household metaphor, we are talking about the general household, and the general household is fully an economic subject.
- National economies, on the other hand, are relatively-contained economic systems – even when they have some reliance on external debt and foreign trade.
- You cannot equate them. You can barely compare them.
- When you do, it makes almost as much sense as saying: “The cells of my body absorb glucose by osmosis to continue living. Therefore: the entire human body, because it is comprised of cells, should simply reside in a bath of high fructose corn syrup in order to optimise itself.”
- That would be a bad idea.
- And how do we know that’s a bad idea? Well, not necessarily through trying the bathing technique (although we’re free to risk death in the attempt). But we can observe what has happened empirically to people that didn’t eat. In fact, we can also observe what happened to people that maintained a diet of near-to-pure refined sugar. As it turns out, the sum is a lot more complicated than its parts.
- And often, what’s good for the part is only remotely connected to what’s good for the sum.
- We’ve also seen what happens historically when economies are treated as though they are households.
- It doesn’t work.
And in Greece’s case – all the years of austerity have not made a single iota of difference in the debt burden.
The Greeks have slashed spending. They have achieved a primary budget surplus. They have accepted bailouts from Germany and Co to repay Germany and Co’s banks. And nothing has changed:
Which is actually the other important point: when households have tried and failed to tighten their belts, they are allowed to go bankrupt without losing their citizenship or their basic human rights.
We need to find a better metaphor, and punish politicians for being so folksy with their non-wisdom.
Here’s a suggestion:
- Economies are like lap top computers.
- When the lap top keeps freezing up, you sometimes have to delete your music library to free up the space.
- And if that doesn’t work, then you can start deleting other things.
- But what is the point of a lap top if you start deleting Microsoft Word, and Microsoft Excel, and disabling the wifi connectivity?
- Sure, the device may turn on and off, and you can type some things into the notepad – but when it comes to getting work done, it’s now useless.
- There comes a point at which you need to do a hard reboot, clear out the memory banks, and re-install the operating system. Because then you stand a chance of doing the real work that might allow you to pay for a new lap top with better specs.
And forcing Greece out of the Eurozone in order to do that? It’s like confiscating the power cable and insisting that they try and do all the re-booting on battery reserves.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Vaughn Schmidt May 22, 2015 at 20:41
I hold this blog in higher regard than I do my years subscription to the economist.
I can’t stop learning.
Thanks for the amazing material. Oh, and for the newly found addiction to podcasts.Reply
Jayson May 22, 2015 at 23:16
Thanks Vaughn! I appreciate that 🙂 And enjoy the podcasts!Reply