6 responses to “Classical economists don’t understand real people or real economies.

  1. I would estimate that Greece needs wages and prices to be about 30% less than they are for Greece to regain international competitiveness. I agree with you, the process of internal devaluation does not work, then what other

    • options are open other than Greece exiting the euro?

      • That’s the big question, of course. The first step towards finding an answer is defining the question properly itself. The second step is understanding the extent of the real problem. So far the narrative has all been about “sticking to the rules”, or “honouring previous agreements” etc. About how to get blood, or euros, out of a stone basically!

        If the EU governing class can’t move on from that, and I’d agree there is little sign they can at the moment, then a Greek exit is the only option. Surely they can’t be so dense as to believe their own propaganda though? If they do have any intelligence, and it’s difficult to believe they don’t understand it all as well as anyone else, it should be possible to find a workable solution to keep Greece in the Eurozone. Just what that will be, I can only speculate. Biig changes to the SGP rules for instance! The Eurozone will have to function more like the USA with a workable system of surplus redistribution and a common taxation system.

        We’ll see how it all pans out from here!

  2. Canada isn’t really your best example here. The CAD is a petro-currency, and tracks to changes in oil prices; the recent currency change is tied to the drop in oil prices, and the deflationary impact is felt in a single industry (and those closely connected to it) and one or two regions. Canada has been suffering from Dutch Disease for a few years, as oil-inflated currency prices put the squeeze on other export industries (i.e. manufacturing) and created a national labor shortage by driving technical wages through the roof. Contrary to the model, when the tar sands slow down, you should expect Canadian employers to expand operations & hiring, not shut them down. But that’s just on the supply-side. If you flip the page and look to the demand side, you’ll discover legions of cash-rich young oil field workers going back to their home communities. Come the Spring thaw, look for a construction boom in rural communities, complete with new company-creation and capital investment.

    • I did think of choosing Iceland. A relatively small economy which saw the value of its currency crash – but this fall has allowed Iceland to recover well from the GFC whereas similar small economies like the Greek part of Cyprus have stagnated. I could have chosen the UK or Japan. They both have problems but still benefit from having a freely floating currency. I don’t believe that Canada is a worse example though. All economies have their own peculiarities.

      Australia has a similar economy to Canada and its dollar is a very volatile currency – its fortunes depend on the price of iron ore, wheat, etc on the world markets. Naturally manufacturing industries in both Canada and Australia will find that volatility to be quite difficult. They’d prefer a stable and lower valued currency.

      A freely floating non-convertible currency is still the best option, on balance, for both Australia and Canada. If either tried to tie their currencies to the US $ they’d end up with even bigger problems. Just like Greece and Spain have big problems now.

  3. Its even worse than you suggest. I’ve just a seen a statistic that Greek wages have fallen by 32% since the 2008 GFC. So their attempt at internal devaluation has just stuffed their economy with SFA to show for it

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