Ross Gittins finally comes aboard the debt-deflation train, with an article in today’s (December 8 2008) Sydney Morning Herald entitled “It’s not inflation that did us in, it’s the borrowing”. For non-Australian readers, Ross has been a regular economic commentator for Sydney’s leading newspaper for about forty years.
His economic position in the past could be described as predominantly neoclassical, with occasional dashes of Keynesianism, the odd infrequent jibe at the unrealistic assumptions under neoclassical economics, and a socially concerned orientation that was critical of both income inequality and excessive consumerism.
He is, in that sense, somewhat of a wind-vane. He is unlikely to lead debate, but if he switches direction, then maybe the debate itself is changing direction too.
His article opens with the following quite apposite statement: “WARNING: The following comment benefits from the wisdom of hindsight. It’s an idea that’s crossed my mind several times in the past decade but now I’m sure of it: for all that time the world’s central bankers have been on the wrong tram, worrying about inflation when they should have been worrying about excessive borrowing.”
Indeed. Most of his writings have gone along with the “Inflation Public Enemy Number One” position that typifies neoclassical economists in general, and those running Central Banks and Treasuries in particular.
There are aspects of his analysis in the article that I would dispute–attributing success in containing inflation not to Central Banker’s adroit manipulation of interest rates, but “microeconomic reform”, for instance, when I expect that the globalisation of production has had rather more to do with it.
But the basic message is consonant with the one I have been running on Debtwatch for 3 years now, and in my academic research since 1993.
Now I hope to see future articles discuss the upshot of this: that conventional economic theory–especially Neoclassical economics but also stock-standard Keynesianism–is completely incapable of advising how to cope with a debt-induced crisis, since private debt plays no role in its analysis, and it presumes the counterfactual that the economy is in disequilibrium.
Finally, if you read this Ross, can I suggest some follow-up readings for you: Irving Fisher’s “The Debt Deflation Theory of Great Depressions” (Econometrica 1933 Vol 1 pp. 337–357); Hyman Minsky’s “The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to ‘Standard’ Theory”, Challenge 1977, pp. 20–27; and my own “Finance and Economic Breakdown: Modelling Minsky’s Financial Instability Hypothesis”, Journal of Post Keynesian Economics 1995, Vol. 17, No. 4, 607–635.
And of course, this blog.