Economic change will not happen until the left understands money

Ann Pettifor, Director of Policy Research in Macroeconomics (PRIME)

Developing a sound analysis of the causes of the financial crisis, and of solutions to the crisis is essential to attracting widespread public support for a transformation of the economy.

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The global financial crisis never ended. It is ongoing in the Eurozone and now has as its epicenter in China and other emerging markets, including Brazil and South Africa. Across the world demand for finance, labour, goods and services has weakened, most notably in the United States where mainstream economists were taken aback by a recent very poor Jobs Report. Weak demand is leading to more part-time employment in the US and causing the build-up of gluts in goods and services, especially in China. For while China saved the global economy after the crisis by launching a $609 billion infrastructure-led investment after 2009, the country is now the victim of western policies for shrinking demand – i.e. ‘austerity’.

The fact is that as western economies try to recover, they are sunk again by a mountain of private debt whose repayment is made less likely by austerity policies. These are policies with the ideological aim of “shrinking the state” but which, in the process contract both public and private sector investment, employment and incomes.

The consequence of weak demand built on a mountain of debt is deflation: a generalized fall in prices and wages. Most economists, especially those in thrall to the finance sector, have an obsession with, and an aversion to inflation. The reason is that inflation erodes the value of debt. Deflation does the very opposite: it inflates the value of debt. Creditors are not disturbed by deflation, as it effortlessly, and silently increases the value of their most valuable asset: debt. So we must not be surprised when mainstream economists dismiss deflation as nothing to worry about, as its just “consumers delaying purchases”.

Economists were taken aback by the US Jobs Report because mainstream economic theory is based on flawed foundations and a flawed understanding of the nature of money, banking and debt. These are ideas that are living proof of Keynes’s point that “starting with a mistake, a remorseless logician can end up in Bedlham.”

It is for that reason that the Left really must get its act together and develop a sound understanding of the nature of money and credit, and of the operations of the private finance sector. Above all, civil society must wake up to the threat that deflation poses to millions of people with debts whose value rises inexorably, even while their real incomes are falling.

So a major priority for progressive forces is to correctly analyse economic forces, and to develop sound alternatives to the current system. There can be no point to ‘reframing the debate’ or ‘developing a common agenda’ on the basis of flawed analyses. That way lies Bedlam.

Fully a decade after the global financial crisis erupted, there are still sections of the Left that support ‘balanced government budgets’ at all times including during private sector slumps. There are some that support borrowing for investment, but oppose borrowing for current government spending on essential services (the NHS, education etc.) – including during crises. These people are doing the work of the Right – reinforcing the framing and messaging of orthodox, right-wing economists and politicians. No wonder their voices are drowned out by the more coherent Right.

The Left will never move forward if it supports Friedrich Hayek’s and Milton Friedman’s flawed monetary theories – and yet many on the ‘progressive’ end of social movements do just that.

Developing a sound analysis of the causes of the financial crisis, and of solutions to the crisis, is essential to attracting widespread public support for a transformation of the economy. I call this process ‘cutting the diamond’. Diamond cutters will take two years to examine a diamond before deciding on the cut that will provide a ‘true’ reflection of the diamond’s inherent qualities and many facets.

That is the work that must be done before progressive forces can gain credibility with the public – who are not slow to grasp the difference between a case that is ‘true’, and one whose arguments and analyses are flawed. It is hard work, but it must be done if widespread public support is to be mobilized.


This contribution was part of the Beyond the Zombie Economy conference hosted by the Political Economy Research Centre at Goldsmiths, University of London, and funded by the ESRC, for more details visit

Part of the Anti-Austerity and Media Activism series with Goldsmiths.


This article was originally published in the independent online magazine