J.B. Say at Bay: Some Lessons from the Greek Crisis

Mon, 01/29/2018 - 12:52

J.B. Say at Bay: Some Lessons from the Greek Crisis


Dr. I. Arapolgou

Professor of Economics

New York College


 It was not a long time ago that I came across an article in a well-respected Athenian newspaper which purported to explain the causes underlying the protracted plight of the Greek economy. Given that the author is a top economic adviser to one of Greece's principal political leaders (a self-proclaimed “reformist” one, to boot), I thought it would be worthwhile to read it. And so it was, though not for the reasons one might have expected.  Indeed, if one had anticipated novel ideas and innovative policy proposals such were not forthcoming; instead, the author's proposed explanation reiterated the anti-austerity mantra that has been incessantly repeated since the (perceived) onset of the crisis in 2010. But is it not astonishing that, after all these years, the country's perception of itself and of the outside world has remained virtually unchanged? And shouldn't one wonder as to what kind of shock(s) it will take for that perception to come nearer to reality?


     In what follows I do not wish to be technical though certain elementary macro-accounting relationships are necessarily in order. For it is clear that the main, though hardly the only, fallacy of the anti-austerity fringe is to reason as if Greece were a closed economy. But if it were there would have been no Greek default crisis in the first place since foreign borrowing would have been impossible. And, since Greece's access to international capital markets depends on its external debt relative to the size of the economy, it appears that the reduction of the country's external debt-to-GDP ratio is sine qua non. But how is this accomplished? The key relationship here (which is explained in any good international economics textbook) is as follows: Δb=b(r-y)-σ where b=external debt-to-GDP ratio, σ= non interest current account surplus as a share of GDP, r=real interest rate, y=growth rate of real GDP. The above relationship should serve as a dire warning to votaries of the Greco-centric view of the world: for  Δb<0, i.e. , for the much-touted “return to normalcy”, it is imperative that (a) foreign creditors be reasonably confident about Greece's willingness  “play by the rules” so that the country can borrow on acceptable terms (a “low” r) (b) the global economy continues to be open and prosperous rather than fragmented into increasingly autarkic national units, of self-centered supra-national blocs, so that y and σ move in the desired direction.

     But surely, even readers who do not subscribe to the Greco-centric view of the universe will complain at this point, there must be something that we Greeks can do to make things better? Well, may be. To assess the available options we need to look into another macroeconomic relationship though, happily this time, a rather intuitive one: NS=I+NICA where NS=national saving, I=private domestic investment, NICA=non interest current account (we ignore interest payment for simplicity). What the above relationship states is simply that a country's saving can be used to finance investment either at home (I) or abroad (NICA). From Greece's current perspective, it would be highly desirable to have a combined and sustained increase in both domestic investment and net exports which must necessarily entail a rise in national saving (as our relationship above clearly shows). But this is precisely the point at which our anti-austerity critic feels duty-bound to protest: “Accounting (he says) is no substitute theory! Can you not see that the economy is trapped in a vicious circle? Saving depends on household's disposable income; but how is it possible to generate to the extra saving given fiscal austerity? With pessimistic expectations predominating, and this on account of deficient domestic purchasing power, home investment must remain weak, whereas the limited increase in the country's international competitiveness from previous deflation cannot possibly generate enough exports to offset austerity's impact. Hence the crisis feeds on itself” (here the mantra ends).


Before we side with the chorus of anti-austerity critics, however, notice that it is entirely possible for domestic investment to rise without a corresponding increase in national saving if the financing of such investment derives from foreign sources. In particular, if inflows of foreign direct investment (FDI) were to jump upwards and remain at the new higher level, there would appear, in the country's account, an increase in domestic investment (ΔI>0) accompanied by an equal decrease in the current account (NICA) which, in turn, would be offset by a sustained surplus in the private capital account with the overall balance of payments largely intact. The difference between this (hypothetical) state of affairs and the one prevailing prior to 2010 in this country is that, in our scenario, the current account deficit would be matched by an increase in the country's productive potential, whose variegated benefits could result in a comprehensively beneficial outcome, in stark contrast to the pernicious one of the pre-2010 period, when the artificial rise in living standards was predicated on the reduction of the welfare of future generations. Furthermore, it goes without saying that the anti-austerity crowd's call for its suspension amounts, in its bare essentials, to the recrudescence of the unsustainable import demand of the pre-crisis years whose inevitable outcome, this time around, would be a truly catastrophic one. (Let me hasten to add that the above is not to imply that there is no room for changes in the current fiscal policy mix but only to suspect that such changes as are currently feasible are hardly as significant as some observers appear to believe).


How, then, do we attract FDI inflows that would benefit domestic residents as well as foreign investors? Evidently, we need to align the private and social rates of return of such investments. Remember, however, that ideologues on the far sides of the political spectrum (i.e., neo-liberal and neo-communist) tend to be dismissive of either the need for, or the feasibility of, this sort of alignment: the former reject almost out-of-hand the possibility of extensive divergence between private and social returns in a market setting, while the latter assert that the social return from capitalist investment amounts to barbarism. A moment's reflection, however, must reveal that both extremist positions, though not equally sophisticated, are equally fallacious.


  1. Consider the neo-liberal claim first. If I invest time, effort and money in mastering the latest burglary techniques, then, provided I am endowed with sufficient innate ability in the art of thievery, I can certainly hope to attain a rate of return which might more than offset whatever risks are associated with my would-be vocation. Nevertheless, from a social viewpoint, the fact that such investment, if successful, results in pure redistribution, and this at the expense of honest men and in favor of thieves, amounts to sheer waste of productive resources. Furthermore, if my actions are anticipated so that homeowners, shopkeepers etc. commit valuable resources to the defense of their (threatened) properties, it should be obvious that the social return from my investment is downright negative [And remember that the above is a social accounting of a rather narrow type in that it strictly excludes ethical considerations which, if taken into account, could render the indicated social return boundlessly negative (at least for some people)]. Now, in the history of capitalism, there has been no dearth of investments with widely divergent private and social returns much like in the above example. Thus, in his remarkable book Capitalism and Slavery, Eric Williams has documented several cases of fabulous private rates of return from investment in the Atlantic slave trade and then went on to claim, rather controversially, that such profits provided the basic source of financing for England's Industrial Revolution. In the present context, however, we are only interested in the validity of the sweeping neo-liberal claim of a virtually spontaneous alignment of private and social returns in a free market setting. But can anybody seriously maintain, in view of the immense human suffering and the fairly comprehensive destruction of material and cultural values associated with the Atlantic slave trade, that private and social returns were, in this case, even remotely related? Nor are investments with strikingly divergent private and social returns merely a thing of antiquarian interest. In this regard, perhaps it suffices to recall the fast-and-furious ,energy-intensive, global-scale investment of the past several decades, with its massively destructive environmental impact, which presently threatens the planet's fragile ecological balance; or, to cite just one more example, the outburst of investment in “innovative” financial products whose blatant disregard for the adverse impact of one party's (especially a large party's) “fire sales” on others net worth, and thus on the perceived (in)solvency of the entire financial system, led straight to the global financial meltdown of 2007-08. We must also keep in mind that the shoe can well be on the other foot, i.e., that there exists, at any one point in time, a plethora of investments whose social returns far exceed their private ones and which, “human nature being what it is”, would therefore never take place or, at best, would only be undertaken on an entirely inadequate scale in an unalloyed market setting. Such investments abound in, but are hardly limited to, the areas of health, education and research and development. Is it all that hard to imagine what the consequences for social welfare in western countries would have been without sustained public investment in the indicated fields over the previous 100 or 150 years?
  2. Nowadays, claims advanced by the Far Left, being of a rather crude sort, are easier to refute than those made by the neo-liberal fringe. In fact, in so far as the growth record of capitalism is concerned, no more eloquent testimony can be had than that of Karl Marx himself who, being a keen student of history, gave a glowing appraisal of capitalist economic performance: “The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization... has subjected the country to the rule of the towns... and has thus rescued a considerable part of the population from the idiocy of rural life... the bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together... what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?” [The Communist Manifesto, pp. 13-14]. To be sure, Marx was convinced that, due to what he perceived to be its inherent defects, the “capitalist engine of growth” could not sustain its stupendous productivity performance and it was only a matter of time before it would break down . It was then left to history to demonstrate the empirical inadequacy of Marx's prognosis and to a host of formidable critics to expose the shaky foundations of his theoretical structure (For a devastating criticism of Marx's theoretical system the reader is referred to Joseph Schumpeter's Ten Great Economists: From Marx to Keynes). And yet, no matter how faulty his technique or defective his vision, we must not forget that Marx did most of his work in the middle decades of the nineteenth century. Thus, it may not be altogether surprising that he did not foresee (just like his illustrious classical predecessors did not foresee) the staying power of capitalist economic performance, which heralded the end of the millennia-old Malthusian era with its ghostly life prospects for humankind's greatest part. But, if there were extenuating circumstances in Marx's failure to discern the sustainability of capitalist growth, what possible excuse, other perhaps than deeply-felt psychological needs of a rather unflattering kind, can his self-professed disciples have who, 170 years later, continue to cling to outdated doctrines and false forecasts?


History demonstrates that the task of aligning private and social rates of return from innovative investment presents a formidable challenge to which capitalist institutions, in striking contrast to their pre-capitalist predecessors responded with historically unprecedented success (though even capitalist countries seem to have fallen short of the theoretical optimum in this area). But, to return to the topic at hand, what about modern-day Greece? Do we have reason to believe that an approximate alignment between social and private returns can be achieved so that FDI inflows could help break the vicious cycle in which the Greek economy appears to be trapped? A moment's reflection will show that this is an unlikely prospect. The reason is, of course, that Greece is a thoroughly Malthusian (pre-capitalist) society whose realized investment has been frequently characterized by widely divergent private and social returns as a consequences of warped institutional arrangements and attendant individual incentives. Ubiquitous investment in rent-seeking activities must, of course, redistribute benefits and costs. Our previous analysis makes clear, however, that this is hardly a zero-sum game as some people are prone to think: with social returns to rampant rent-seeking very low or even downright negative, the cumulative impact can well be devastating. [Again, for readers who feel that, given Greece's performance in terms of a number of internationally comparable economic indicators, the above assessment is unduly dismal the following comments are in order: first, one should not confuse aggregate consumption with productive performance. In Greece's case as in others, economic failure was not plain from the outset (at least to the layman) only because, due to the distorted workings of international capital markets, the day of reckoning could be postponed for quite some time and the attendant damage shifted, in large measure, to future taxpayers. Furthermore, aver an extended period of time, there have been massive transfers of capital to Greece from the (universally despised) European core which, in spite of the country's appalling record of waste and corruption, have partially offset the disastrous impact of unbridled domestic rent-seeking. Finally, and most importantly, the truly decisive criterion in this context is the country's  relative economic performance. Indeed, in the post-1970 period, Greece's relative performance was, to put mildly, lackluster. Not only did it not converge economically to the European core (as economic theory predicts should have been the case and as several countries formerly of the European periphery had done even as early as the late 19th century) but its relative international standing appeared to be slipping]. If, in fact, rent-seeking behavior in present-day Greece were limited to an extent comparable to that of bona fide mixed economies of the western type, then it would be primarily a matter of economic (in)efficiency and/or (un)fairness; given its rather comprehensive scale, however, its curtailment is nothing less than a matter of survival. But can anyone seriously believe that a society whose mental habits are inveterately Malthusian and whose principal rent-seekers view mercantilist distributional practices as the high road to constrained bliss can reform itself in the direction of a level (social and economic) playing field and all this for the (perceived) benefit of foreign “imperialists” and “loan sharks” to boot?


The long-term persistence of a Malthusian intellectual and normative outlook in an ostensibly western country -the cradle, according to some, of European civilization!-is, indeed, a striking phenomenon. It may well be due to the inertia of mental habits which Schumpeter emphasized in his criticism of Marx's economic interpretation of history; or to the fact that, as Robert Nozick and Gregory Clark have pointed out, the envious have inherited certain portions of the earth; or perhaps to some combination of these or, again, to something entirely different. In any case, such speculation transcends the limited purposes of the present article. What can not be doubted, however, is the intellectual and moral bankruptcy of the (so-called) political elite in this country, inasmuch as its apparent mission is to shamelessly reiterate the most vulgar and self-serving delusions of the almighty voter. Thus, somewhat paradoxically, it is the experience of present day Greece, i.e, the experience of a society which abhors the market to the bone, which confirms the latter's irresistible force: for it is in Greece that Demand has created its own supply with a vengeance, namely, demand for politicians (and assorted pundits) who are sufficiently cowardly to do nothing but pander to the median voter. Apropos of our economic adviser's obsession with stale Keynesianism I suggest we call this phenomenon the Hellenic version of (the inverse of) Say's law.