Austerity Isn't the Answer
European Straits #25
Dear all,
Do you share my impression that we’re forever stuck in the trade-offs of the past—between households and businesses, spending and slashing, the demand-side and the supply-side? Even France’s Emmanuel Macron has recently seemed to renege on the revolutionary ideas of his campaign as his government converts to what looks like outright, uninspired austerity. In the past few days, every French minister has been asked to dramatically reduce spending, while some tax reforms were postponed for fear that the French deficit would spiral out of control.
Yet, as Mark Blythe once argued in this Foreign Affairs article, the advantages of austerity are highly contingent on a country’s trading position. Germany, an export powerhouse, has the luxury of practicing austerity at home because most of its businesses depend on foreign demand. Likewise, the Canadian government effectively implemented austerity in the 1980s and the 1990s because it could rely on the fast-growing US economy where most Canadian products were sold. France, alas, doesn’t have that kind of luxury as a larger part of its economy relies on domestic demand: hence the less money that is spent domestically, the harder it becomes for French businesses to prosper.
What’s more, the challenges in a world eaten by software are different from those of the Fordist economy in the 20th century. Today the main macroeconomic problem is not so much consumer market instability as it is the stronger ‘Wal-Mart Effect’ of our time: ever-lower prices and ever-lower wages due to digital consumers’ exponential bargaining power. It’s a trend that is only aggravated by jobless innovation due to the difficulty of imposing technology-driven value proposals in legacy sectors.
The origins of modern macroeconomic thinking date back to the 1930s. For the first time since the Industrial Revolution, large industrial corporations started to manufacture complex products to be sold on large consumer markets. The likes of Henry Ford had to tackle difficult challenges: lowering prices and designing a new approach to consumer credit to make their products affordable for mass consumption; improving quality to make sure customers wouldn’t return too many faulty products to the stores; and deploying a new kind of infrastructure for marketing and distribution.
Yet one challenge still represented a lethal threat to the sustainability of the new mode of growth: market instability. For all its qualities, including mass and depth, consumer demand still presents a major disadvantage: it fluctuates from one extreme to another in reaction to macroeconomic trends and subsequent adjustments.
Several times in the 1920s, the manufacturing giants of the day had to deal with that unsolved problem: once depressed consumers stopped buying their products, they had to lay off thousands of workers and close factories down. And when manufacturers realized how uncertain consumer demand really was, they found it impossible to plan new investments over the long term. This is the reason why the world economy remained trapped in a state of crisis for much of the 1930s.
It took John Maynard Keynes’s powerful intellectual framework to finally solve that problem. While the state was previously refrained from intervening in the economy, its main mission eventually became to stabilize large consumer markets in the face of a macroeconomic recession. Governments also took charge when it came to putting in place institutions such as labor law, the welfare state, and a well-regulated retail banking industry. Thanks to Keynesianism and its related institutions, manufacturers wouldn’t have to cope with extreme instability again.
After contributing to widespread prosperity for several decades following World War II, Keynes’s thinking became passé sometime in the 1980s, following structural changes in the economy—notably the oil shocks and the growth of international trade. The new, monetarist orthodoxy was not about stabilizing consumer demand in the common interest of both households and businesses, but about reducing public spending and renouncing monetary policy as a stimulus instrument.
As we now enter a new techno-economic paradigm, we’re still waiting for a contemporary Keynes to step up and provide us with the policy toolbox of the Entrepreneurial Age—one that could help Macron and others avoid the trap of the austerity delusion. Many are working on it, including me with my new book HEDGE, but obviously there’s still a long road ahead!
So stay tuned, contribute, and in the meantime here are a few articles for you to read:
New Order, Old Metrics (by my co-founder Oussama Ammar)
The New Value Stocks (part of our Scaling Strategy series)
Behold Mohini Dey (a very short reflection on learning inspired by a bass guitar prodigy)
Warm regards,
Nicolas