More people are waking up to the truth about the economy

The quickening march to consumption-led climate catastrophe is bringing much-needed light to heterodox economists' real-world views. 

Last week, the FT’s energy editor wrote a column outlining that “capitalism won’t deliver the energy transition fast enough” to avoid the worsening effects of climate change.

This week the FT’s Labour Editor, and guest on episode 66 of SCOTONOMICS, tweeted a thread that included the line “GDP does matter, but let's not confuse the means with the ends”. In disconnecting GDP from wellbeing, and capitalism from saving us from human-induced destruction, the FT seems to be slowly slipping towards a more heterodox view of the economy. And they are not alone. 

Last week, Olivier De Schutter, the United Nations special rapporteur on extreme poverty and human rights, released a report on a Job Guarantee - the effective positioning of national governments as "employers of last resort". He said that a job guarantee “can protect workers from the biggest global employment challenges of our time” The United Nations sees that conventional wisdom needs to be challenged in promoting work as a human right. A job guarantee has long been a policy recommendation by Modern Monetary Theory economists, who are as far from the conventional wisdom as you can get!

READ MORE: How Modern Monetary Theory could help indy Scotland – in the short term

Organisations with even more neoliberal-minded outlooks are questioning the mainstream economic view

The International Monetary Fund deputy managing director Gita Gopinath said last week that: “All else equal, if inflation is to fall quickly, firms must allow their profit margins — which have shot up during the past two years — to decline."

Christine Lagarde, president of the European Central Bank, last week admitted that corporate profits drove up prices in 2022. 

National governments are also squinting their eyes at the orthodoxy. Since the start of the year Spain, led by its socialist government, has been taking a different tact to fight inflation from most Western democracies. Windfall taxes on banks and energy companies, price caps on power generation and new laws to cap rents have been adopted. The Spanish government directly challenges the orthodoxy by taking a more proactive role in markets. The result? At the end of June, Spanish inflation was 1.9%. It was 9.7% in the UK. 

The actions by the Spanish government might sound obvious to you as a way to limit inflation in a cost of living crisis, but they are fundamentally challenging to the orthodox models. In a perfectly competitive market, competition between firms would quickly remove inflation and return to its "natural level". As we covered last week, according to their model, if inflation persists, it must be the fault of workers' wage demands. Even the orthodoxy is admitting that this is not the case. More policymakers are realising that the models they rely on are broken.

A job guarantee is an even bigger challenge. It is the ultimate heresy if national governments actively empowered labour in economic downturns: it would push orthodox models out of the discussion. 

The cost of living crisis is the tip of the (slowly melting) iceberg

Since the 2008 financial crisis, it has become more obvious that capitalism is teetering on the edge. Financial crises, huge government subsidies, rising inequality, inflation and interest rate spikes are not anomalies of the system, they are built into it. Capitalism is structurally weak. No system can survive that is built on perpetual growth. A cost of living crisis, as damaging as it is to millions of us, is a minor symptom. It is the ecological crisis that could signal our demise. And it is caused by the growth paradigm. 

Climate Scientist Will Steffen and colleagues stated in 2015: "The pursuit of growth in the global economy continues, but responsibility for its impacts on the Earth System has not been taken."

It is worse than no one taking responsibility. Policymakers are trying to make it worse. The UK political parties are like rabbits, caught in the glaring headlights of growth. Last year Keir Starmer said that the UK needed “growth, growth, growth”. The Conservatives embody the growth paradigm more than any UK party.

READ MORE: Stephen Flynn: SNP need to stop talking about independence process

But Scotland has its own growth devotees. Last week the SNP Westminster leader said that as an independent nation, Scotland would “invest in sustained growth to secure a prosperous future". Independence is possible. But the conventional wisdom of “sustained growth to secure a prosperous future” is impossible. Just because enough people say something doesn’t make it so. 

In 1958 JK Galbraith wrote: “A strategic advantage lies with what exists.”

“Because familiarity is such an important test of acceptability, the acceptable ideas have great stability”, he added. The growth paradigm is familiar but doesn’t look so stable in another sweltering European summer. 

In Beyond Growth, written at the end of last century, ecological economist Herman Daly wrote that mainstream economics “provides an array of arguments and techniques that can be used to avoid rethinking the fundamental model”. These arguments and techniques have been used for the last half-century to fog the clarity provided by heterodox economists like Daly, Keen, Lee, Raworth, Weber, Pettifor, Jackson and many others. They have blinded policymakers to the causes of inflation, inequality and the climate crisis. 

Last week, in parts, gives some cause for hope. Heterodox economists are no longer being ignored. But it is time that policymakers act. 

Join us on July 26  at 2.30pm to discuss his month's topics in the Economics of the Real World newsletter.