While Presidents Fiddle in the White House…

Flat-earth economics, as taught in America’s universities, will exercise a fatal influence over the fate of the United States as today’s super-power manoeuvres in response to the shifting structure of global power. How the misdiagnosis shapes political and diplomatic perceptions may be seen from the conclusions in a new analysis offered by two American scholars who claim to explain why civilisations fall.

Glenn Hubbard of Columbia University, a former chairman of the President’s Council of Economic Advisors, and Tim Kane, chief economist of the Hudson Institute, reject the thesis made popular by Paul Kennedy in The Rise and Fall of the Great Powers. Kennedy attributed the fate of civilisations to imperial overstretch and external threats. Wrong claim Hubbard and Kane. Their competing thesis is that governments over-tax their people. Their prime example is the fall of Rome.

The city of Rome was sacked in 410 CE. Was the turning point the battle of Adrianople in 378 CE? Rome was defeated by Gothic tribes that were supposedly clients of the Empire. But the Roman army proved to be incapable of enforcing its will on the tribesmen. But Rome’s defeat is a misleading indicator of when the decline began. Roman society, explain Hubbard and Kane in Balance: The Economics of Great Powers from Ancient Rome to Modern America (New York: Simon Schuster) had been rotting internally for centuries.

The power of Rome ebbed away because of a self-inflicted economic imbalance. Cross checking with references to other economies in different times and places, including the state of California today, these two authors conclude that the imbalance was a simple function of excessive taxation. No discussion on whether it was the kind of tools for raising revenue that fostered the problems. No discussion on whether governments were driven to over-tax because they refused to employ the optimal revenue-raising instruments. No discussion on the asymmetrical relationship between public demand for services and the level of provision by government. It was all down to a crude assertion that governments are bad for business, they dislocate free markets and they over-tax the people.

Such a crude analysis is made possible because these two authors are victims of the vulgarisation of economic theory. Their analysis stems logically from the post-classical approach to the economic paradigm, which excludes consideration of property rights in land and the social significance of rent as the optimum source of public finance.

Why does the misdiagnosis matter? Because they claim that the future of America is at stake. But if we were to swallow their analysis, we would end up with policy prescriptions – simply aimed at reducing current levels of taxes – that would for certain lead to the weakening of the American economy and society.

Flat earth economics has the effect of distracting the social elites away from the root cause of their problems. That’s what happened in Rome. And it’s happening again today, not just in America but in Europe as well. On the basis of current economic wisdom, the future presidents of the United States might as well spend their time playing their fiddles in the White House as agonise over the influence of America as the new centres of power emerge in the 21st century.

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