ECONOMIC  MYTHS

The dominant economic system, capitalism, has the goal of generating profit through private ownership and control of the means of production. In a few cases, this goal has resulted in benefits to a large fraction of citizens of a country, for example, as achieved by the rise of the middle and rich classes under state capitalism in China in recent decades. But even in China, the poorest people actually became worse off, because their gains in incomes were outstripped by the increasing prices of basic goods and services. 

          Under capitalism, most of the world’s great forests have been felled, biodiversity has been decimated, land and water have been polluted, freshwater has been overused, and climate change has become an imminent existential threat. 

          Since the industrial revolution, capitalism and colonialism have been business partners. Indigenous communities and nations that were once self-sufficient have had their raw materials exported, with little given back to local communities, and their labour utilised for very low wages, until they have become dependent on foreign aid. Clearly, capitalism is based on exploitation of the environment and most people.

           An extreme form of capitalism, neoliberalism, has dominated socioeconomic and political decisions by governments from the 1970s onwards. Neoliberalism is based on the notion that government spending and taxes should be small and that major socioeconomic policies should be left to the market. It is still followed by governments of many countries, despite its failures during the global financial crisis of 2008 and the COVID pandemic when, in each case, governments had to spend vast amounts of money to keep their economies afloat, violating neoliberal ‘principles’.

          Proponents of neoliberalism claim it is based on the ‘science’ of neoclassical economics. Yet several scientists (e.g., here and here) and brave heterodox economists (e.g., here, here and here) have challenged the validity of neoclassical economics, showing that it is based on foundations of quicksand.

          While capitalism is deeply entrenched, neoliberalism is beginning to totter. Now is the time to expose its poorly based myths and ideology, and push it over. In doing so, we can also build pressure to bring capitalism under control and create a new economics with primary goals the protection of the environment, which is our life support system, social justice and at least a basic level of prosperity for all. The market must be constrained to work within these goals.

          In the following concise critique, for brevity we call the ideologies and claims of neoliberalism, and capitalism in general, ‘myths’.

 

Myth 1: “Endless growth in consumption on a finite planet is feasible and desirable.”

Refutation: The myth depends on the notion that economic growth, which is measured in terms of GDP, can be somehow decoupled from physical growth, i.e. growth in the used of energy, materials and land, and in population. In other words, it assumes ‘green’ growth is possible. In reality, while improvements in efficiencies in the use of materials and energy can reduce the increase in environmental impacts per unit of increased GDP, they cannot generally result in absolute reductions in impacts. Even schools require buildings, equipment and data centres. Even growth in energy consumption that’s produced entirely from renewable sources indirectly drives more industry and directly consumes more materials.

The result of continuing economic growth is that environmental impacts have exceeded seven out of nine safe planetary boundaries.

References
Timothy Parrique et al. (2019). Decoupling Debunked.

Stockholm Resilience Centre. Seven of nine planetary boundaries now breached. 

 

Myth 2: “Major socioeconomic and political decisions should be left to the market.”

Refutation: This myth is based on the unrealistic assumption that markets are free and perfect. In practice, most markets are controlled by large corporations and a few very rich individuals. The control is exercised directly by dominating markets and indirectly by state capture to shape government policies and public attitudes using such methods as political donations, revolving door jobs, concentrated media ownership, so-called ‘think tanks’, and inadequately regulated lobbying and consultancies for government.

References 

Here is a small sample from quite a large literature in political science and political economy.

Australian Democracy Network (2022). Confronting State Capture.

George Stigler (1971). The theory of economic regulation.

Robert Reamer (2023). Which markets, whose rationality? Markets as polyvalent political devices. American Political Science Review  117(4), 1228–1240.

 

Myth 3: “Wealth trickles down from the rich to the poor.”

Refutation: A major survey of 18 OECD (wealthy capitalist) countries spanning the half-century 1965–2015 finds that tax cuts for the rich do not have any significant effect on economic growth or unemployment. However, they do lead to higher income inequality in the short- and long-term. Economic ‘development for the people’, which is based on public ownership, has a different outcome from ‘development for capitalists’.

References
David Hope & Julian Limberg (2022). The economic consequences of major tax cuts for the rich. Socio-Economic Review, 20, 539–559.

Kaicheng Gai & Yongsheng Zhou (2022). Ownership, trickle-down effect and shared development: a political economy analysis. China Review of Political Economy 5(1), 52–71. 

 

Myth 4: “The value of anything is determined by the market.”

Refutation: A few counter-examples suffice:

• How can the market put a price on runaway climate change, which could destroy industrial society?

• The networks of fungi attached to the roots of most trees have no market value but are essential for the trees and hence the oxygen supply for life on Earth. 

• Does unpaid caring of elderly, sick or disabled people have no value to society?

 

Myth 5: “National governments of countries with monetary sovereignty must balance their budgets. The consequences of failure are inflation and huge debts imposed on future generations.”

Definition: A monetary sovereign country has a central or federal government which issues a fully fiat currency, that is, a currency created and backed by government that is not convertible at a guaranteed fixed rate into any commodity, such as gold, or any foreign currency. It floats on the foreign exchange market. Furthermore, the currency issuer must not have significant net financial liabilities denominated in foreign currencies. 
For example, Australia, China, Japan, UK and USA are monetary sovereign but member countries of the EU and state/provincial governments are not. 

Refutation: Most OECD (wealthy) countries have budget deficits for most years without having high inflation. However, if total spending (public + private) exceeds national economic capacity (physical resources, workforce, skills, education, infrastructure), then inflation becomes likely. A government deficit or ‘debt’ is simply an excess of money in the private sector; it does not have to be ‘paid back’. If governments create money by issuing bonds, they must pay interest; alternatively, they can spend money into existence without creating bonds and without paying interest.

References

Stephanie Kelton (2020). The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. Public Affairs.

Film: Finding the Money. 95 min.

Steven Hail (2021). Please, no more questions about how to pay off the COVID debt. The Conversation

William Mitchell, L. Randall Wray, & Martin Watts (2019). Macroeconomics. Red Globe Press. (A textbook)