The Public Deficit Debate as a Conflict Between Ethical Systems

Hinted at in the introductory post on ethical dynamics in economics, the debate between deficit hawks, both sincere and hypocritical, and the defenders of deficit spending can be very clearly understood as a competition between two orientations that use different ethical tools to understand the world.  The competition is on the level of the tools (meta-ethics) and the content of professed and/or real ethical commitments, so therefore on two levels of abstraction within ethics.  To analyze the ethical dynamics that either underlie or coexist with conventional economic arguments, I believe one has to assume something like a meta-economic stance, a stance that sees economics as embedded in a larger scientific and philosophical enterprise.

To underline the point above, the most contextually well-grounded economic arguments did not win the day in setting the terms of the policy debate or the development of an academic economic consensus; economic arguments were supplemented or supplanted by what I would describe as statements of ethical probity.  These ethical orientations may either be open to or immune to empirically grounded arguments either for or against fiscal austerity, so an ethics does not necessarily undermine rational or scientific understanding.  It appears now that increasing numbers of economists are realizing that empirical evidence supports continued deficit spending.  Nevertheless, I would submit that the power of this meta-ethical conflict was triggered first within academic economic and political circles without a primary reference to empirical or relevant historical comparative study and has set the debate on a course that makes it relatively immune to evidence-based discussion.

Ethical Conflict and Old and New Class Conflict

A competing and not necessarily contradictory explanation of the debate, popular on the political left, is that the deficit debate is motivated by a form of a narrowly-defined class conflict, a conflict of economic interests between “haves” and “have nots” and that it is therefore not premised on a conflict between universal ethical orientations.  In terms of a conventional class conflict, on the one side of the conflict, those who want to cut deficits are attempting to prevent a re-distribution of wealth downward via deficit- and tax-funded social and economic stimulus programs.  The cutting of deficits in this view functions as a means for the wealthiest to hold onto a concentration of money and power that has dramatically increased since the advent of supply-side economics in the 1980’s.  On the other side of this conflict, those who are attempting to maintain deficit spending as a public policy tool do so as defenders of the middle and working classes or as defenders of the social contract that emerged from the Great Depression and Second World War, in which the wealthiest would accept higher tax levels, government regulation of business and government-funded social programs in exchange for social stability.

An alternative or emerging view of classes that has its clearest theoretical grounding in post-Keynesian economics is that the fundamental class conflict in contemporary capitalism is between a new financial class and almost all the other classes in society, including the traditional owners of productive assets.  It is striking how many popular and economic discussions now refer to this division without using the still unfashionable “class” moniker.  As in traditional class conflict this is not exclusively an argument between ethical world views but a power struggle between interest groups.

While this class or distributional conflict may or may not be the primary cause in the conflict over deficit spending, it is not the field upon which the political conflict over policy has been fought, at least in the United States.  I would submit that the arena of conflict is public debate about and internal ethical struggle over ideals of individual and social economic probity and the ultimate purposes of economic activity.

Debt as Sin; Fiscal Austerity as Virtue

The urging to cut deficits, with or without empirical grounding, has been couched in terms of personal and/or national virtue as regards debt and repayment of loans.  This virtue, based on the simple transactional morality of loan and repayment, has been generalized to the situation of a number of governments around the world, including the United States, as these governments face mounting public debt in the aftermath of the financial crisis of 2007-8.  The complexity of the situation and its historical context for many, who did not bother or wish to think through the economics, was distilled down to a simple morality play of the debtor attempting to reclaim virtue for him or herself by repaying loans.  As it is difficult to appear as though one is ignoring this simple, seemingly basic morality, those who advocated a more nuanced response were drowned out or have been, until recently, politically marginalized.

Furthermore a generalized discourse about debt both private and public has perhaps spurred deeper social and individual psychological dynamics in which many people around the world seem to be at times blindly seeking to purify themselves of the “pollution” of debt.  In this effort, government is held up at the avatar or scapegoat for a sometimes personal or motivated effort to get out of a world of “bailouts” and what appears to be economic and political corruption.  While it is convenient for those in the private sector that lived off and helped spur this debt crisis for the focus to shift to government debt, the popularity of the discourse of cutting public debt draws upon the simple ethics of debt repayment and the worries about personal moral pollution and self-disgust that may be stirred up by the economic crisis.  The “qui bono” (who benefits) approach to explaining the stirring and deployment of this morality tale does not explain its popularity, the depth of feeling or the apparent rationale with which governments around the world and various individuals attempt to purge themselves of debt and, in so doing, may make their economic situation worse.

On the level of what’s called “normative ethics” there are three generally recognized classifications of ethical system, deontological (dutiful compliance with ethical rules is good), consequentialist/utilitarian (what produces the most happiness or pleasure overall is good), and virtue ethics (what encourages the development of good characteristics in people is good).  The argument for cutting deficits now is based on both a simplified deontology (the duty of the debtor to the lender is primary) and most strikingly a virtue ethics.  Those who have worried most, or appeared to worry most, about the reaction of bond markets, are making an argument that is premised almost entirely on a virtue ethics:  bond markets, i.e. lenders or buyers of debt, need to be convinced of the virtue of a nation before they buy its debt, i.e. lend it money.  Furthermore the display of this virtue is supposed to forestall or appease the imagined or real retribution of bond markets.

Virtue ethics is not entirely irrelevant to a simplified lender-borrower relationship: the lending relationship is ultimately one that involves decisions about whether someone or some entity will repay, which involves both the borrower’s circumstances and the borrower’s will.  That a borrower is regarded as “virtuous” in the area of repayment of loans is then a key, though not the only ingredient, for determining whether money will be loaned and, if so, at what rate.  Various bond, investment, and credit ratings are modern efforts to assess the “virtue” of borrowers or sellers of debt.  These ratings can be unreliable and have an element of subjective judgment as well as motivated under- or over-rating by the raters but they are an effort to apply a number to and evaluate this type of virtue.

The repeated argument by those preaching fiscal austerity after the crash of 2008 has been that debtor nations must appear to be virtuous borrowers or sellers of debt to avoid punishment by nervous or finicky bond buyers.  For a borrower in a simplified borrower-lender relationship, virtue involves either timely or accelerated repayment of debt or a show of abstemiousness that signals an intention or capacity to do the former.  The latter however can become simple ritual self-laceration, without benefit to the lender other than maintaining a sense of moral or financial superiority.

The implicit model of a virtue ethics is that ethics is a property of actors and their identities rather than a function of rules or actions in the world.  While attaching moral valuation and judgment to the identities of actors themselves is itself highly motivating, it obscures systemic issues, complex histories and interactions.  To spur harmful actions through fear of losing virtue is not an effective financial morality.  Not all of economic “goodness” inheres in actors themselves but in a complex interaction of factors.

Richard Koo, in his description of the long Japanese “lost decade”, sketches out how the focus of individual economic actors (in this case corporations) on repaying debts simultaneously, leads overall to an exacerbation of the economic downturn for the system as a whole.  As, due to a variety of factors, each Japanese corporation focused on its own balance sheet in the period 1997 to the present and attempted to pay down debt rather than invest in productive activity led to slackening demand for services from other companies and therefore economic contraction and increased unemployment.  While in Koo’s description of a “balance sheet recession”, each actor could explain their behavior using a justifiable microeconomic rationality, their behavior was analogous to the pursuit of individual economic virtue implied by the current worldwide drive towards fiscal austerity.

Counter-Austerity:  Deontological Commitment to Addressing Human Needs

The economists and observers of the debate (including myself) who are most appalled by the rush to austerity are generally operating with a different conception of how economics and economies should work.  While those who are counseling austerity start with a rule (deontological ethical systems start with a priori rules) about duty to lenders to repay their loans, much of their argument is based on a virtue ethics, the idea that nations who borrow should demonstrate virtues to lenders to avoid an escalating spiral of debt.  The appearance of debt as a sign of a lack of virtue is as, or more, important than the ethical rule “you must repay your debts” in their arguments.

By contrast those who are pre-disposed to question the logic of fiscal austerity are often starting from an assumption that economies and economics exist to serve widely-shared human and social needs as a primary goal.  While not often discussed explicitly as such, there exists for them a duty by economists to design or steer economic frameworks so that the likelihood that these needs are either directly fulfilled or as a byproduct of economic activity are largely fulfilled is increased.   Starting from a commitment to “needs first” generally leads to favoring government intervention in markets or direct government investment to supplement the work of markets or even, though this has become unfashionable in an era in which markets have been viewed as a panacea, replacing private market activity in areas where it has become entirely dysfunctional.

Those who preach fiscal austerity would counter-argue that their position is about serving human needs better in the long run, because they feel that the inculcation of the virtues of prudence and fiscal discipline will enable prosperity for more people over a period of decades.  This counterargument however depends upon an assumption that markets and the individual relationships of buyer/seller and lender/borrower can manage themselves and produce optimal outcomes without “steering” by governments and the influence of “external” actors to these basic transaction types.  If the unregulated market economy is prone to break down, destroy its own natural basis or shrink for endogenous reasons, the basis for this counter-argument would prove to be illusory.  Koo’s “balance sheet recession” is also an uncomfortable counter-example for this argument.

There is then a clear demarcation between those who reach for fiscal austerity and those who argue against it during this downturn in the area of their preferred meta-ethical systems and specific ethical commitments they endorse.  The deficit “hawks” call upon an ethics of commitment to lenders and a display of virtue to lenders and to the world at large.  Those who are opposed to the austerity campaign point out the human and other damage that would be caused by this effort and renew their call for a economists’ and broader social commitment to fulfilling basic human needs.  For them the display of virtue to lenders is outweighed by the use to which the lent funds will be put.  Furthermore, for them, any economic means should be applied to avert a human catastrophe.

Events Redefine Virtue for Government Borrowers

While this “classic” conflict has been playing out, events in the world have seemed to redefine the virtue of government borrowers, at least temporarily.  It now appears that bond markets are more trusting of debt issued by countries that continue efforts to stimulate their economies, rather than those countries, like Ireland, that have been engaging in efforts to display the virtue of a private borrower.  As Krugman has pointed out, bond ratings for countries that continue to run deficits are at very low levels.  The bond investment company PIMCO has expressed concern about governments cutting their stimulative efforts, inclusive of running more budget deficits.

That this has occurred either temporarily or for a longer term does not erase the conflict of ethical and meta-ethical systems established above.  Economists will continue to be divided by differences in their ethical commitments and the means by which they arrive at the valuation of different economic tools.  However, making these differences a matter of reflection and public discussion may enable more self-reflective consideration of which tools are appropriate and which valuations are best justified.

Addendum:  Where is Utilitarianism in the Deficit Debate?

Economics, especially the dominant neo-classical school has operated largely within the third normative ethical system, consequentialism, of which utilitarianism is the predominant school.  Utilitarianism can have an individualized or a larger social scope:

  1. for the individual, what is good is what maximizes pleasure and minimizes pain
  2. more commonly a utilitarian framework is used by ethicists and macro-economists applied to society as a whole to attempt to “achieve the greatest good for the greatest number”.   Various macro-economic indicators like GDP are efforts to create a numerical utilitarian method of evaluating “the Highest Good” for an entire economy.

While there have been criticisms of  measures like GDP in particular the fact that it hides social inequality and also endorses growth for growth’s sake,  the broad middle of economics continues to use some version of a utilitarian framework by attempting to find measures of social welfare that assign a number to some composite happiness, usually an aggregate of individual “happinesses”.

An argument can be made that critics of fiscal austerity are solidly within the utilitarian tradition, in that they are sensitive to the woes of mass unemployment and marginal employment, and the harms caused by an unsustainable overhang of household financial debt.  If they have made a case using both notions of greater social welfare through deficit spending and also now via continuing “approval” by bond buyers for the bonds of many deficit-spending nations, they would seem to have shown themselves to be “better utilitarians” (and therefore economists) than their deficit hawk opponents.

However, I would argue that while many economic arguments will necessarily take place within a utilitarian evaluative framework, these arguments are by their very nature backwards looking:  utilitarian value judgments are almost always a posteriori or after the fact.  Therefore policy advice must either contain a rule-based or virtue-based component that may derive from a utilitarian argument and analysis but nevertheless requires some a priori assumptions about what is “the Good”.   While confirmed utilitarians and those convinced that all of their beliefs are entirely based on established facts may find the reliance on a priori assumptions suspect these assumptions are absolutely necessary for anybody to act in a policy or business context under the usual or, especially under unusual, conditions of uncertainty.

As an example, to act on climate change or to structure an economy around an agenda to address energy shortages and irreversible environmental damage means to, of necessity, use some form of rule- and duty-based decision-making structure.  The endangerment of pleasures and pains in the future is highly abstract in comparison to the weight of past and present pleasures and pains that are the basis of utilitarian calculations.  It is therefore no accident that among established economists, that James Galbraith and other economists who see economics as primarily an instrument to fulfill human needs, incipiently or explicitly within a rule based ethical framework, have the clearest argument for a future effort to address as yet unknown but extremely probable disasters.  The natural scientific results upon which an argument for decisive action on climate change and oil depletion is based, are most compatible with a deontological commitment to human and planetary welfare, rather than other two major systems for arriving at “the Good”, virtue ethics and utilitarianism.   Why this is so is beyond the scope of this piece.

Much more can be written on the normative and meta-ethical dynamics that underlie social and economic conflicts and debates but this is all for now….

The Case for a Metaeconomics Pt. 5: Tracing the Origins of Demand and Economic Preferences

In the previous post in the “Case for a Meta-economics” series, I explored the possibility that the interface between economics and ethics has a significant impact on economic arguments and the division of economics into schools.  Ethics is supposed to contain, develop, and communicate our higher and better selves.  Crucially, though, economics is also supposed to account for the effects of our more basic or amoral drives, for which there are not necessarily traditional ethical justifications.  Economists are tasked to explain how human wishes, no matter how trivial or “primitive”, become economically important and shape economic institutions like money and “demand”.

Neoclassical Economics and Demand

Neoclassical economics, the dominant school of economics in most of the world, assumes that one of the prime drivers of economic activity is “demand” along with its complement “supply”.  Within this paradigm, demand is thought of as the result of the search of individuals and organizations to maximize their “utility” through a rational process of calculation of the relative benefits of one consumption or investment option over another.    Utility is a “black box” of wants and needs which is supposed to remain inscrutable to economists though is best observed by its behavioral effects after the fact:  what maximizes utility is that which compels monetary transactions to occur.  While everybody can imagine and infer what they think constitutes the basics of utility (the satisfaction of recognizable wants), economists are wary of defining what actually drives people to want one product or service over another.  Instead, the argument remains the rather circular and somewhat limited notion that what people want is what they want (to buy).  Like many aspects of neoclassical economics, the notion of “demand” suggests that it is a dynamic force but in its actual measurement it is an outcome rather than the force itself.

While in underdeveloped or pre-consumer societies, demand for essential goods is more likely to “chase after” supply, in affluent societies, supply tends to chase after demand making demand the more powerful of the two main economic entities in neoclassical economics.  Economic success depends, in consumer societies, on being able to figure out what people want or might want then being able to supply those wants at an affordable price.  Occasionally in consumer societies, either a monopolist or a highly successful market leading company (like Apple) can shape to some degree what people should want by creating new appetites and leading in product design; sometimes supply can create its own demand.

Marketing and Demand

While within the “high church” of conventional economics, demand can be represented as a “demand function” or “demand curve“, theories of how demand itself actually arises are pushed outside the main body of theory into fields like marketing or consumer psychology, within which numerous ideas about people’s wishes and how to address them compete.  Neoclassical economic theories of demand therefore have not much to offer businesspeople in the way of guidance about how to figure out what the market wants and need to turn to the diverse and sometimes confusing toolkits of marketing and related social sciences.

Marketing then might be considered the craft and/or science of demand, either assessing its pre-existing form or creating demand by sending messages to potential buyers of a product or service.  Furthermore, more on the supply side, marketing can help in product design and refinement by embarking on an iterative process of improvement by continual communication with existing and potential buyers.  Even though marketing can be credited with many of notable business successes in the last century, marketing, like other business economics disciplines, is not in regular communication with the abstract formulations found in academic economics.

Despite its location outside the “High Church” of neoclassical economics, many human activities critical to the functioning of the economy fall under the rubric of marketing.  So a meta-economics or a more complete economic theory would need to be able to incorporate both the domains of human experience associated with marketing as well as shed some light on the techniques themselves that are used in marketing.  Splitting off marketing as either slightly “sub-rosa” and entirely unproductive or as an art beyond economic theory does this critical domain a disservice.

Keynesianism and Demand

Though John Maynard Keynes did not break decisively with neoclassical economics on all issues, he did formulate theories which suggest that there are qualitative as well as quantitative dimensions to demand.  Keynes suggested in his General Theory, that “animal spirits”, presumably their tone and energy, were key in determining how willing people are to engage in economic activity.  These emotional states kept people in the Great Depression and other economic crises from spending money, when in fact, if people as a group did spend, the economy would recover sooner.  The theory of “animal spirits” is thus linked to another concept revived by Keynes, the paradox of thrift.  Furthermore Keynes pointed to the insufficiencies in overall measurable (aggregate) demand after an economic crisis, pointing to the need by governments to step in to stimulate or substitute for the weakening of private demand after a financial crisis.

While economists since Keynes have been more accepting of his observations about aggregate demand (though these are still disputed by conservative economists who wish to reduce the role of government in management of the economy), his ideas about animal spirits are other qualitative dimensions of demand are sometimes treated as “sui generis” musings of a great mind but not part of what came to be called Keynesian (as well as neo and new Keynesian) theory.  In general Keynesian economics has been characterized overall as “demand-side” rather than “supply-side” economics.  “Supply-side economics“, a now somewhat out-dated term, focuses on whether investors have enough money after taxes to invest in productive assets (therefore “supply”) and is used as a justification for cutting taxes on the wealthy and on businesses.

Wants, Needs and Economics

Attempts to translate the experience of “demand” in terms of utility and utility maximization has presented a problem for the dominant neoclassical economics in that the political actors who help shape economic policy have been unable to take such a distanced view of their own subjective experience of wants and/or needs.   Folk or popular economics of almost every kind must draw in the vernacular to relate economics to lived experience and as I have posited in an earlier post, all schools of economics have to in some way grapple with the interaction of their abstractions with how people feel and think about the economy.  Economics students might think of themselves as “maximizing their utilities” by satisfying their wants but very few others will relate to this language.

The part of English vernacular that addresses the experience of “demand” (and there are close analogues in other languages I know) deals with “wants”, “needs”, and “desires”, most of which are used to describe what presumably is an internal or a social experience of needing and wanting things and experiences.  In addition to these subjective experiences, technically “demand” involves an additional component, the ability and readiness to pay for a good or services that addresses the perceived need or want.

While the collection of human material strivings in “demand” papers over the distinction between wants and needs, the latter distinction has extremely important political economic effects that motivate conflicts between economic schools despite their nominal commitment to the neutral language of “demand”.  Wants or desires are subjectively experienced states but needs are a subset of wants that are socially sanctioned and recognized by others.  Paradoxically “needs” though they contain this additional component are usually more primitive wants without which we would not survive.   So “wishes” are analytically simpler (a wish is a component of a need) but “needs” are a complex combination of phylogenetically and biologically more basic strivings within a social web of relationships.  Needs, which evoke the dependence of children in childhood, imply a web of social interdependence while wants can be ascribed to the individual, self-responsible social “atoms” of neoclassical theory.

Laissez-faire or neoliberal economics tends to emphasize that all of “demand” is individual wants or freely chosen selections from a variety of wishes, which an unregulated market is supposed to supply.  These economists make an exception for national defense and criminal law which they think of as vital social needs, especially in defense of property rights.  Meanwhile Keynesian and leftward economic commentators operate with a both a conception of optional wants and an implicit or explicit concept of individual human and social needs, which most often are being insufficiently served by the market for at least the more vulnerable parts of the population.  In left-of-center economics, there is the implication or statement of social responsibility for partially or completely fulfilling certain basic wants, i.e. needs.  By contrast, neo-liberal economists subscribe in theory to a doctrine of individual responsibility for one’s personal wishes.

An instance of this conflict between economists who conceive of individual needs being primary versus economists who believe that wants are primary is found in the recent conflict between “deficit hawks” and that group of economists that oppose them, mostly from left of center.   The more leftward group of economists and their supporters who oppose the efforts of deficit hawks seem to be operating with an implied socially-validated concept of needs, which their opponents in the US like to call, “entitlements”.  They believe that the moral imperative to care for the needy as well as provide some level of universal social benefits is threatened by the drive to cut deficits at all costs.  For example, James Galbraith has recently stated that the fulfillment of human needs as the ultimate purpose for economics and government fiscal policy in both the US and in Europe.  Other opponents of deficit hawkery might disown the idea that they are operating with a concept of human needs, perhaps to continue to be included in a mainstream economic discourse that is inimical to the idea of needs. In fact, most opponents of immediate action to cut deficits are operating with a political-economic hypothesis that the primary reason that deficit hawks have started their assault on deficits is to undermine government support for needs.  In fact, some deficit hawks have shown inconsistent support for the idea of cutting deficits (by insisting on maintaining tax cuts), apparently tipping their hand that cutting social services is the prime objective of their campaign.

By contrast, deficit hawks suggest that a show of responsibility for one’s wants is required to reassure bond markets or other lenders to the US government by either denying those wants, or it seems, less frequently, raising taxes to pay for the fulfillment of those wants.  Their idea is that the need/want for social services needs to yield (soon) to some form of scarcity, be that a scarcity of tax revenues or a scarcity of the ability of government to run budget deficits.  The troubling aspect of this insistence on an apparent universal rule of individual responsibility and management of scarce resources is that, as mentioned above, the vulnerable are those who are supposed to yield to the principle of scarce resources, while the wealthy (and most of the deficit hawks are personally wealthy) will seemingly keep both their personal wealth (via continued low tax rates) plus the public services that they value and use, including a government that will bailout the well-connected and powerful.

Demand, Sustainability and Growth

Another area of challenge for understanding the current economy as well as some future economy is how such an economy would deal with a net zero material growth state, an economic steady-state.  Most rational observers of the growth of humanity both in terms of number but also in terms of consumption put some hard limit on the size of the human footprint on the world.  Those who assume our continuing propensity to grow exponentially as an immutable fact sometimes turn to idea of the colonizing of other worlds as a means to continue humanity’s current rate of growth and consumption, though how this would happen in physical and biological terms currently resides almost entirely in the realm of science fiction.

Moving simply by successive approximation to a no-growth state from where we now stand however is also unworkable.  The set of tools upon which our current economy would be unsustainable under any conditions because of their dependence on the irreversible conversion of depleting fossil fuels into their constituents some of which additionally undermine the sustainability of the biosphere.  Thus certainly in the next several decades there will and should be robust economic growth in the sector of developing sustainable alternatives in the area of energy as well as industrial production.  Further along in this process, facing the hard choices associated with achieving a steady state economy would seem to be inevitable.

Demand, our wants and needs, is one of the key drivers of our economic system.  If our wants and needs, are, as some claim or imply, rigid and hard-wired in their objectives and intensity, we will be unable to move to a society where most economic activity is focused on either maintenance of material well-being or the development of cultural and non-material products and goals.  If our wants and needs are responsive to (elastic) the encroaching externalities of our ways of consumption and production, then it should be possible for human beings to evolve towards the next stage of our species’ “wild ride” on this planet.  A comparative anthropological perspective indicates that an economy that grows meteorically and then plunges is not necessarily part of our genetic code.  A meta-economic perspective will enable the relevant portions of philosophy, comparative economics and economic anthropology to at least inform such Big Picture theorizing about “what’s next” for humanity.

Needed: A Multi-disciplinary View of “Demand”

I hope the foregoing has suggested to readers that a view of demand as simply a quantitative record of past expenditures and investments or a projection of those numbers into the future compresses what is a more complex and dynamic reality.  I am proposing that a meta-economic framework can bring to bear insights from biology, biophysics, psychology, and philosophy to capture some of the causal factors that drive purchasing and investment behavior in both the private and public sectors.  Additionally such a framework can help explain or at least clarify the existing divides in economic theory and popular economic debates.