Wednesday, February 20, 2013

Yanis Varoufakis on Greece's situation: "economic illiteracy has forged an unbreakable alliance with economic misanthropy"

Yanis Varoufakis in Economic illiteracy in the service of economic misanthropy: An Econ 101 reminder of the meaning of the multiplier for austerians 02/20/2013 describes the destructive alliance between bad ideas and narrow, selfish goals by Greece's One Percenters and their courtiers in the press: "It is now becoming obvious that economic illiteracy has forged an unbreakable alliance with economic misanthropy and self-hatred by certain members of the Greek Establishment's Commentariat." And he adds:

Why do 'venerable' newspapers publish such illiterate tracts? The answer, I am afraid, must be sought in the Establishment’s desperation to persevere with an austerity program that even its authors, the IMF, has abandoned. And why such a commitment? Because it is essential to the preservation of the alliance between Greece’s time honoured Cleptocracy and our newfangled Bankruptocracy.
Bad ideas do have consequences and take on a life of their own in addition to their cynical use by particular interest for ulterior motives or naked class interest. I see the case of Social Democratic economists in Germany and Austria during the Great Depression who were committed to budget-balancing and austerity policies during the Great Depression as examples of that. Sometimes people hold on to bad ideas because they believe them. And when they make policy based on them, the results are often unhappy ones.

Certainly, lots of people in Greece are unhappy with the brutal results of austerity policies there, as Euronews reports in Another austerity strike paralyses Greece 02/20/2013:

In his post, Varoufakis uses the national income (gross domestic product/GDP) equation Y = Jμ - Wλ, which he helpfully defines as follows:

  • Y is national income (GDP)
  • J are the injections into a macroeconomy (i.e. the sum of government expenditure, export income and, of course, investment)
  • W are the withdrawals from the macroeconomy’s circular flow of income (i.e. the sum of taxes paid, expenditure on imports and money saved)
  • μ is the injections multiplier, which in turn equals to 1/m, with m being the percentage of the last euro of national income that was withdrawn from the macroeconomy’s circular flow of income (e.g. taxed by government, spent on imports or saved) – m is also known as the marginal propensity to withdraw
  • λ is the withdrawals multiplier, which equals the ratio (1-m)/m

Uwe Reinhardt has provided a helpful summary of national income accounting in The, like, totally weird "Y = C + I + G + X - M" 10/12/2009, using the form of the equation in the article title, which he explains:

... Y stands for "gross domestic product" (GDP).

In their text books macro economists define GDP as the monetary sum of all final goods and services produced within the geographic boundaries of the nation within the year and traded in the organized market place. Thus, the metric excludes much non-traded but valuable production, such as that of parents in the home or of volunteer workers.

Ever searching for meaning in data, economists have broken down their GDP-metric into (1) spending by households on all things other than new residential homes (C in the equation), plus (2) what households spend in the market place on newly built homes along with what business firms spend on new structures, new equipment and inventory of merchandise (jointly lumped into variable I), plus (3) what federal-, state- and local governments spend on goods and services produced within the borders of the United States (G), plus (4) what foreigners spend in the market place on goods and services produced within the borders of the United States (X), minus (5) what American households and business firms and governments spend on goods and services produced outside of the United States (M).
The main point of Reinhardt's article is to warn his readers not to get too caught up in the magic of equations to the expense of qualitative judgments about what the real-world components of those factors are: "So my advice to you all is this: Study diligently the equations textbooks in economics try to tattoo onto your brain. But also switch on your own critical faculty, lest these equations do damage to your brain."

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