Posted by: michaeldavidpower | May 3, 2010

The Akupara in the Room

Musings of a late 18th Century Scottish political economist (and not the one called Adam Smith!)

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. ALEXANDER FRASER TYTLER[1]

Tytler believed that, on average, the world’s greatest civilizations have had a life-cycle that has lasted about 200 years. During that period, nations tended to evolve through the following stages, starting at bondage. If so where is the West now? At Complacency, Apathy or even perhaps Dependence?

Tytler's Cycle of Democracy

Having spent time campaigning in Britain during perhaps the most important General Election in 30 years, in the moment, one cannot help but be swept away by the excitement surrounding the event. But then, once one thinks about the deeper issues at stake, one cannot help but be appalled by it too. Juxtaposing the so-called debate that has taken place in Britain with events in Greece highlights the profound problem that all modern Western democracies (including Japan) now face.

And the problem is this. In the run-up to the British election, there was almost no acknowledgement by any of the three main party leaders of the elephant in the room – what to do about the enormous Black Hole (some £163bn large) in Britain’s finances. Watching the leaders in the economic debate quibbling over a ‘trifling’ £6bn made me realise that, like John Cleese in Fawlty Towers, they simply dared not “mention the war”, the war fighting the deficit that still lay ahead. Of course, they may have been blissfully ignorant of the enormity of the problems they faced (with Cameron at least, unlikely; with Brown I really am not so sure), and there was a touch of denial even amongst those who have recognised that a problem does indeed exist. Although relative to the size of its economy, the Greeks face a decade of (ahem!) cold turkey, in absolute terms, the British face a far larger problem. Yet, as the Institute of Fiscal Studies painfully illustrated during the election campaign, no party was willing admit to that problem’s true size for fear that the voters may punish honesty in the polling booths. Perhaps it is as if, as Jack Nicholson famously barked in the film A Few Good Men, the voters simply “can’t handle the truth!

In Hindu cosmology, the earth rests on the backs of a group of elephants which in turn stand on the back of the turtle, Akupara. (And if you are thinking “What is beneath Akupara?”, as the quip goes, it is “turtles all the way”!) In the above phrase “voters may punish honesty” lies an indication of a far more monumental challenge than even the largely unacknowledged deficit elephant in the room, the figurative turtle Akupara on whose back that jumbo deficit stands. This Akupura is quite simply that democracy as we know it may be heading for a fall.

So heavy is the debt burden now facing Britain and indeed most Western nations and especially Japan, it is not impossible to think that before they too will start to do a Greece and threaten to break the back of the democratic foundation on which their sovereign debt now stands. (How ironic! Greece, which gave the world democracy, is now the nation most clearly revealing its limitations – that the sovereign debt of the Greek state may yet be brought low by demos by the demos.) This capitulation will happen either by way of outright default as could still happen in Greece or disguised default via devaluation as is already happening in the UK, US, Eurozone and Japan.

To put this seemingly apocalyptic forecast on a sounder footing, let me back track.  Keynes’s great achievement in the Great Depression era 1930s was to devise a mechanism that could finesse the economic problems of the time and engineer a way of saving democracy from the grasp of communism or fascism. By first throwing off the fetters of the Gold Standard, he then identified an escape route – deficit spending or the creation of fiat money unbacked by gold – that would allow governments to borrow from the future in order to kick-start the present. What this enabled them to do was to re-ignite demand artificially with money borrowed from future generations; this practice gave us the term “demand management”, the predecessor to macroeconomics. Though Keynes died before the longer term (and broadly negative) consequences of Keynesian jump-starting would become all-too-apparent, there is ample evidence in Keynes’s writings that suggests he would have used the subsequent surpluses of the resultant good times to refund the temporary expediency he recommended be adopted to escape the bad times.

Sadly, and perhaps this defines the ageing gene written into the DNA of democracy, those politicians who followed Keynes’s advice as to how to end the bad times could not, when the time came to do so, bring themselves to take back in the good times (for instance Harold Macmillan’s “You’ve never had it so good” times of the 1950s) what they had effectively borrowed from that now improved future. Instead they rolled the debt they had incurred and actually added to it, even in the good times. Over the 65 years that followed WW2, in Britain as elsewhere in the democratic world, the essential pattern has been that, whatever the party in power (yes, even the parties of allegedly small government on the Right: who can forget the Military Keynesianism of Reagan or Cheney’s devil-may-care dismissal that “deficits don’t matter”?), the ruling party expanded the role of the state in the economy and so increased the accumulated debt that became the detritus of that now near-permanent fiscal expansionism.

Note that, unlike in the US where the Republican “right” often vied to be more Keynesian than the Democratic “left”, in Britain the “good guys” were usually the Tories but only because they expanded the state and the National Debt more slowly than Labour. For all her penny-pinching reputation, Margaret Thatcher’s achievement was that, during her time, the state’s share barely expanded at all: but even the tight-fistedness of the Iron Lady herself could not contract it.

Democracy as it is practiced seems to confirm – at the macro level – the central finding of the behavioural school of economics that surrounds Prospect Theory: Humans have an irrational tendency to be less willing to gamble with gains than with losses. This insight also means we are extremely reluctant, often to the point of being bull-headed about it, when it comes to giving up what we already have even if there is a high chance that, by so doing, we might get even more. Or, as the old proverb has it, humans do indeed believe and behave as if we believe “A bird in the hand is worth two in the bush“.

The political point here is that democratic electorates are loss averse: once they have something, they are extremely reluctant to give it up. In reality what this has meant is, over the past century or so, that once the democratic state has expanded into a particular economic space (frequently using deficit financing to do so), electorates have been extremely reluctant to support a party who subsequently campaigns on a policy that it intends, if elected, to then withdraw from that space. So, as time passes, democracy ratchets up a deficit-expanding state’s involvement in the economic life of its people: when Blair became Prime Minister, the state accounted for 42% of Britain’s GDP; when, 13 years later, Brown resigned as Prime Minister, that ratio had risen to 52%!. As the state expands, state spending becomes an addictive drug that the electorate seemingly cannot live without, as the Greek tragedy playing out today amply illustrates.

In 55BC, Cicero warned us about the growth of the size of the state, state debt and the level of addiction of the populace on state spending arguing that: “The budget should be balanced, the Treasury should be refilled. Public debt should be reduced. The arrogance of officialdom should be tempered and controlled.  The assistance to foreign lands should be curtailed lest Rome become bankrupt.  People must again learn to work, instead of living on public assistance.” But apparently to little avail!

Democracy would be sustainable even in the long run if it lived within its means and did not fall for Alexander Fraser Tytler’s curse and, giving in to the electorate, consistently spend more than it earned. The result is default overspending what I think of as the Keynesian rounding error, a deficit whose annual cost is typically 3%+ of GDP. But perhaps my belief in the idea of a forever young democracy without the age-lines of rising deficits is naive: given the competitive nature of democratic politics and its shortish electoral cycle of 4 to 5 years, each new election not only sees politicians promising “A better life for all” (the slogan used first by the ANC and then by Blair for Labour in the 2005 UK General Election), but also sees those few brave politicians advocating fiscal prudence being cast in the role of being political Scrooges so rendering themselves most likely unelectable.

The result has been a slow but steady rise in the accumulated national debt measured against GDP for almost all democracies over the past 70 years. And, as if this were not enough, the killer blow has been the fact that the population pyramids of these same democracies have aged materially during this same period. These democracies have borrowed more and more from their grandchildren but then had less and less grandchildren that would eventually be obliged to repay those intergenerational debts. This pincer has all the hallmarks of an accident waiting to happen.

Only more recently have the longer term, negative consequences of spendthrift Keynesianism, in good times and not merely in bad, started to be realised, and in both senses of the word ‘realise’! (To her credit, Joan Robinson, the 1950s Cambridge economist who was the unofficial guardian of Keynes’s legacy, saw the first stages of the political hijacking of Keynes’s Big Idea happening and, despite her leftish sympathies, dubbed these policy refinements to be “Bastard Keynesianism”; one imagines JMK, for his part, probably seething somewhere on a cloud Up There given how modern democracy has perverted his beautiful insight).

Meanwhile, the ticking of the demographic time bomb has got louder. The size of the accumulated debt has got bigger. And, now, for most Anglo-Saxon nations, the intermediate funders of this debt, who have been foreign, now appear to be in the early stages of realising that, rather than parking their savings surpluses in US T-Bills or UK Gilts, recycling their surpluses domestically (usually this means therefore in the East) is an increasingly attractive opportunity. If this trend continues, this redirection will gradually constrict especially the current account deficit running Anglo-Saxon nations.

Keynes actually warned of this outcome in his The Economic Possibilities of our Grandchildren albeit in a roundabout and back-to-front way. (I regard this brief, 7 page opinion piece to be one of his most underappreciated masterpieces.) The central observation he made was that, if each of us could save but a relatively small amount every year and see those savings compound at 2% real per annum, year in year out, and then let compound interest sprinkle its magic dust on our savings pot, we would have enough money to retire on. How ironic that the politicians should then take his Big Idea and subject it to this exact same logic except on debt rather than savings and instead end up with a nightmare.

Since the late 1950s, the typical Western nation (especially the Anglo Saxons) has run a deficit of at least 3%, year in year out. It has let it compound over time, rarely reducing it rather occasionally running much higher annual deficits in the wake of periodic cyclical downturns, Great Society-style programmes or wars. This has left them today with deficit to GDP ratios approaching and sometimes above 100%. The magic dust of compound interest has produced not a savings miracle but a debt monster.

What has gone wrong? Keynes’s most famous saying was “In the long run, we are all dead”. It was a response to the warnings issue against his fiscal spending, which suggested the best route would have been to let matters mend properly even if it took time to do so. One almost imagine someone saying to Keynes, “Do not intervene, the situation will right itself naturally in the long run”. To this, Keynes replied – tacitly acknowledging that this might well be true but that such delay was just not good enough –“(That may be, but) in the long run, we are all dead”.

And therein lies the fatal conceit of democratic Keynesianism. We may well all be dead, but our children and especially our children’s children will not be, and when the music eventually does stop, they will have to pay. The tragedy of the present is that today, now, is the generation of Keynes’s children’s children. And as Reinhart and Rogoff’s study points out, the music could very well stop in this generation, not in the long run, not even in the medium run but in the short run. But given the mañana of the fatal conceit, the current generation in the West bumbles on, its capitalists trying (in Karl Marx’s words) to sell the hangman the rope that will eventually close round the neck of democratic capitalism as we know it.

Perhaps I am being too hard on Western politicians. Perhaps they are all walking down the one-way street of destiny, a street from which there are no paths back to the Yellow Brick Road. Perhaps, as that great supporter if doubter of capitalism, Joseph Schumpeter, foretold and with fear in his words, the great game of democratic capitalism would eventually collapse under the weight of its own internal contradictions, contradictions that would only be revealed with the passage of time.

Schumpeter’s fear was the one above: that the more mature a capitalist democracy (underwritten or more accurately undermined as it would be by those Keynesian error accounts) became, the less pain it would be prepared to endure. To the extent that pain could be postponed, it would be through borrowings both public – think quantitative easing! – and private. Schumpeter also foresaw the result as being one where, as the lifecycle of the Janus of democratic capitalism aged, we would see more of its democratic face and less of its capitalist one. But by undermining capital by postponing destruction and instead borrowing more and more to maintain the illusion of creation, the delicate balance that required both to interact would be destroyed and so too would capitalism.

Here I part ways with Schumpeter – I think rather that democracy will die. Capitalism, the wily old fox that it is, will likely to live on in a different political combination or, in the title of a book by a Chinese author Kellee S. Tsai, Capitalism without Democracy.


[1] There is some dispute about whether Tytler ever said these exact words, but the sense is very much in keeping with what he wrote in his various treatises on the subject of democracy.

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Responses

  1. Michael,

    Thank you for alerting me to the ideas of Alexander Tytler; I have muddled around this concept recently in my Business Day blog, but he captures it most succinctly; in trying in effect to please all, Democracy encodes in the DNA of its inevitable failure.

    Thank you.

  2. There was a time when the certainty of the connection between Democracy and economic well-being was almost immutable.

    America was the land of the free, the brave and the rich; but this certainty is now very much frayed at the edges; what has changed to bring this about, and if Democracy is no longer the universal panacea to both economic and moral well-being, what is?

    To answer that we firstly need to look back at the rise of Democracy over the past two hundred years that has totally changed our World.

    Britain led the charge in the nineteenth century both blazing the way with the Industrial Revolution, but also bringing in its wake the abolition of slavery, the extension by increments the right to vote to encompass all males over eighteen, and by the early 20th century, likewise all women, as well as Trade Unions, and the plethora of legislation protecting the perceived weak sectors of society from the ravages of poverty, illness and the perceived rapacious demands of big business.

    America largely took up the cudgel in the 20th century as the First Great World War propelled that country to global economic leadership, leading the world culturally through Hollywood, financially through Wall Street and what came to be known as “The American Dream” inspired the World that their definition of a consumer-driven suburban nirvana was what we all aspired to.

    It is not just the global hiatus that has brought this about, though this and the coming even deeper second bite of the double recession, that many informed pundits now see more clearly, are certainly major contributors.

    It is equally not just that the World can see that the American military might can no longer bully and cajole with the same sense of moral certainty, as the World can look into American society and see that the previous aura of self-belief no longer binds all its citizenry into the red white and blue of what it is to be American.

    The American business model, the seeming ability of American ingenuity to rise to all challenges, that John Wayne swagger are likewise all looking tired, clichéd and irrelevant for today’s pluralistic, complex World.

    Likewise in Europe; Democracy has allowed Silvio Burlusconi to run Italy as his personal fiefdom and plaything with just as much impunity as the personal renaissance families of earlier, non-democratic centuries, and the recent Murdoch shenanigans in Britain likewise challenge the assumptions of democracy that real power resides with politicians elected by the people as it seems the media more and more call the shots and set the moral tone.

    And if democracy really is the key, why are so many European economies now on the knees with a begging bowl held out in supplication asking the rest of the World to bail them out?

    All of this challenges the cosy assumptions and moral certainties that previously held sway.

    Is China an answer? Should we roll back the advances of individual liberty and democracy and all embrace a communal approach? China is certainly no longer communist as any recent visitors there can attest; in many ways it is more capitalist than anywhere else on our planet, but certainly economic planning is driven from the centre, and decisions taken and predicated upon a national master-plan.

    It certainly has pulled China up by its bootstraps from the Mao Zedong truly Communist days where intellectuals were slaughtered, free thought trampled and the country was as grey, bland and dirt-poor as anywhere on our planet, but can it be the answer to taking the broader, pluralist world of today to greater heights?

    Do we need an all-powerful Global government that runs a similar global master-plan, allocating economic resources to those areas and peoples who can most efficiently, and cheaply manufacture, produce or make those things, products and foods that the World needs?

    Can well-being be simplified down to pure economics, or are there broader, feel-good components that need to be factored into any equation?

    We are seeing a major global crisis unfolding in East Africa and up into the Horn of Africa. There a major famine is threatening the 167 million peoples living there with a famine pestilence of Biblical proportions; yet little more than a generation previously the population was only a quarter of that of today, and even then we had the Ethiopian famines that gave birth to Live Aid and Bob Geldorf. Clearly the World needs to act, but in truth are not contraceptives more needed than corn?

    What would we be “saving” these peoples for if the outcome of saving them would be to propel that region’s population to a billion by 2050 which will be the case unless patterns of behaviour are not changed?

    These are all hard, and very much inter-locked questions we need to answer if our World, individual freedoms, democracy and global economic well-being are to flourish.

    Unquestionably we are running into real resource ceilings; there is only so much land, water, resources, air et al that we can draw upon, unless we really can take and make the quantum leap of science fiction and colonise another benign planet, and the present inexorable rise in the price of foodstuffs, threatening to price many staple commodities beyond the economic reach of many underscores this.

    Can democratic societies, under pressure from demographics increasing the median age of such societies with all the cost implications that extended lives into old age bring, and with the pressures of economic austerity arising from their profligacy of expenditure over the previous two decades, really both pull their horns in, spend less, deliver more to their aging and compete with the low-cost, none welfare state economies of the East?

    I certainly wouldn’t bet on it and the entire West, including America are heading that way, if not there already. How long will China sit patiently by whilst America, and almost all the West, deep in debt, still fail to rein in expenditure, still pile on further layers of debt rather than giving their “bankers” – China and the oil-exporting countries of the Middle East – the rate of return their high-risk exposures should be demanding?

    Our World is on a collision path on many fronts; history informs us that war is a likely outcome, though should a war break out between two modern, highly sophisticated and weaponised countries then these two or more elephants will do more than just trample the grass; the impact would devastate us all and leave a legacy of toxicity that could imperil us all. Let us hope it does not come to this, but grounds for hope are running out and our leaders are as yet not even beginning to talk and come to terms with these global realities.

    Rather Democracy, the supposed Nirvana to which we all seemingly aspire assures that in each and every country the relatively short term aim of being elected, re-elected or hanging onto power hold sway.

    We need the think globally, act globally and at times recognise that individual, or country pain is necessary in order for progress to continue and for the greater good of all.

    The West is vastly over-consuming and this must stop; allow others to have their fairer share.

    Can Democracy, the bedrock of Western civilisation really deliver that?

    http://blogs.businessday.co.za/quirk/2011/07/20/is-democracy-doomed/


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