Change the world

#FeesMustFall

11/10/2016

This opinion piece appeared in the Herald of 11 October 2016, written by the Executive Dean of the Business and Economic Sciences faculty, Dr Ismail Lagardien

In times of crisis it is often necessary to increase state spending on public goods to prevent recurrent social crises

I FEAR debt. I avoid buying on credit. I own a credit card, but I never use it. I usually save until I can afford something, and then pay for it in cash. I have bought cars, appliances, items of clothing, paid for overseas travel, and even purchased a plot of land using only cash. I made one exception recently, but that’s another story.

I realise that one should not generalise from personal experience, but I have seen too many people hurt and destroyed, and too many families ripped apart by debt.

Of course, some people get away with it and enjoy the trappings of our acquisitive society, albeit somewhat joylessly in what is, essentially, a debt economy.

Membership or citizenship in this economy is effectively a move from one set of confinements, say a university, to another, the shop floor, with debt being one of the constant factors of discipline and control. (I’m trying to avoid using the word “captured”).

Anyway, in this sense, debt has become one of the most powerful controlling mechanisms in society.

For instance, in the United States, which is considered to be the cynosure of liberal capitalist society, high levels of personal debt have contributed to the creation of a subdued populace.

People rarely take to the streets en masse over extended periods because they have mortgages to pay. University students rarely protest for extended periods because they have mounting debt, and when they eventually graduate they tend to take jobs because of the pressing need to repay student loans.

In some of the most prosperous social democratic societies, like Norway, debt has become part of the life world of people. By one count, (Statistics, Norway 2013) an estimated 83% of households in Norway are in debt. Credit card debt in Norway increased from 41% in 2007 to 65% in 2011.

It does not matter, then, whether you live in a liberal capitalist society or a social democracy, chances are you will become one of the docile bodies produced by capitalist society.

In some ways, then, debt has become a means to discipline and punish.

Personal debt should not be conflated with state debt, though. There is some sense in my belief in saving money and avoiding debt, which may contradict my claim of irrationality, above.

The standard economics argument is that if everyone avoided debt and saved, it would lower aggregate demand and increase unemployment. Debt makes it easy to buy things that other people are employed to manufacture or provide.

A government, on the other hand, can always pay back old debts with the issue of new bonds (which is just new debt). Public debt is not like private debt; private persons are compelled, by law, to repay debt.

Government debt is a debt to itself and its citizens. Interest paid on the debt is usually paid by taxpayers, and interest on the bonds that finance the debts, usually, goes to those who lend out the money. It gets rather complicated after a while.

The main argument I submit, here, is that states can go into debt – especially if it is part of an investment in shoring up the national interest, like infrastructure and energy supply, or promoting the common good like, say, education, which can go a considerable way to secure inter-generational prosperity and stability.

It seems strange to say, but there is a mainstream argument which suggests that an economy requires a certain amount of public debt to function relatively well.

Who or what determines the amount of debt is shaped to a large extent by trust and credibility.

The standard approach suggests that debt encourages disciplined management. In other words, if the state cannot be trusted, and has no record of discipline, then incurring debt is dangerous.

Some of the largest economies and most trusted states have been in debt for centuries following the industrial revolution.

In conclusion, then, one of the clear lessons that have been learned from the current crisis, especially in Europe, is that in times of crisis it is often necessary to increase state spending on public goods to prevent recurrent social crises.

The appeal to prudence and fiscal responsibility may work at an individual level (I do not like spending money that I do not have), but the economy, encompassing all the relations among all actors, institutions and agents in society, cannot be approached in an atomistic manner. This, anyway, was a conclusion drawn by John Maynard Keynes in his Treatise on Probability.

 

One of the biggest problems we face, at least in my mind, is not increased state debt, or “not having money” for education, but whether we can trust the state to spend wisely, manage debt, restore faith in government, and (possibly through debt) secure the common good for future generations.

 

Contact information
Dr Ismail Lagardien
Executive Dean: Faculty of Business and Economic Sciences
Ismail.Lagardien@mandela.ac.za