Governments of all stripes base their policies on mainstream economics. Powerful challenges to the mainstream, especially from ecological economics and modern monetary theory, explain why we are in a hole and can’t seem to get out.

If this article is largely correct, we can conclude that the economics profession is a major cause – directly or indirectly – of most modern evils.

In saying that, I draw heavily on the work of Australian academic economists Professor Robert Costanza, Associate Professor Philip Lawn, Professor Bill Mitchell and Dr Steven Hail.

Taken together, their work – in conjunction with colleagues overseas – claims that mainstream economics is fundamentally wrong left, right and centre — although I don’t mean to imply that these four scholars agree on every point.

Mitchell – a co-originator of modern monetary theory (MMT) – shows that we could have full employment quickly with a job guarantee, that federal budget deficits are normal and desirable, that the federal government never needs to borrow money, and that federal taxes do not fund anything.

The Federal Government should focus on non-inflationary full employment and not budget outcomes, because we can run deficits forever without borrowing.

In short, the Federal Government does not have the budget constraints of a household, business, or state government, because it can create unlimited money — but should spend prudently to avoid inflation and ecological overshoot.

For ecological economists like Lawn, increasing the size of high-GDP economies is now producing uneconomic growth rather than economic growth, because these economies are past their optimum size, as measured by a marginal cost-benefit analysis.

So our politicians, their advisers, the economics profession, lobby groups, the media – in fact, society as a whole – is trapped in a mass delusion that is buttressed every day by things like bandwagon effects and cognitive biases, even while Earth’s life-support systems face collapse.

It can be argued that economics, as now mostly practised, is largely self-reinforcing rather than self-correcting as neoliberal vested interests dig in.

The only way out is to re-examine first principles, which is what ecological economics and MMT tries to do.

First principles include acknowledging that the economy exists within society and society exists within the biosphere, which has physical limits.

Further, the purpose of the economy is to maximise human well-being and we need a measure to determine our progress, such as the Genuine Progress Indicator (GPI) or the Sustainable Wellbeing Index.

GPI adds benefits, like improved health and education, but subtracts costs, like pollution and traffic accidents. GDP, on the other hand, simply adds monetary transactions together as one welcome achievement.

GDP is supposedly a proxy for economic well-being, by measuring flows (while ignoring stocks), but it may not even be that, let alone a proxy for actual wellbeing.

Lawn’s work shows that, by drawing marginal cost and benefit curves, in the context of the biocapacity of a nation, there is a maximum size for any economy if you want to have ecological sustainability.

That is the carrying capacity.

But importantly, the optimal size of any economy will be less than the point of ecological sustainability.

The optimal size is where net benefits are the greatest — that is, where GPI is the greatest.

Australia’s economy is now larger than its optimum size (we peaked in the mid-1970s) and, more worryingly, is probably larger than its ecologically sustainable size (although there are problems with global footprint measurements).

This dilemma is probably true for most high-GDP countries, meaning degrowth is now logical, with the aim being a qualitatively improving steady-state economy.

As a global species, we are well and truly into uneconomic growth and ecological overshoot, even as measured by the optimistic Global Footprint Network.

Of course, improved technology can shift the benefit and cost curves, meaning that the optimum size of an economy could then safely increase – say by increasing the population and/or increasing consumption – but there are limits to efficiency gains, such as where fewer primary resources are needed to produce a given amount of goods and services, with less waste.

Fundamental errors in mainstream economics explain why our politicians seem unable to fix many major problems, including environmental degradation, unemployment, the cost of housing, wealth inequality and private-sector debt.

Because their base assumptions are wrong, their policies are necessarily wrong — they do not identify the core problems, let alone the solutions.

Consider, for instance, the current debate about retirement age. Should it be 65, 67 or 70? The concern is that welfare payments will increase relative to tax receipts (as the median age increases), meaning budget deficits will be more likely and surpluses will be less likely. This is seen as “unsustainable”.

But MMT teaches that federal deficits and surpluses are never good or bad in themselves, and should never be a target. Moreover, the Government’s real fiscal capacity in any year is not affected by the budget outcomes – deficit or surplus – of previous years, as the outcomes do not carry over into the next year as they would for a household.

As Mitchell explains:

‘For sovereign nations, the current deficits do not determine next year’s fiscal capacity. The governments can run whatever deficits they choose.’

And:

‘… the sovereign government does not save. What sense does it make to save in the currency that you issue? Households save to increase their capacity to spend in the future. How can this apply to the issuer of the currency who can spend at any time it chooses?’

So, politicians spend most of their time targeting non-problems such as the budget outcome and the federal government (discretionary) debt, while trying to increase uneconomic GDP, and while ignoring more important metrics such as GPI and biophysical overshoot.

Sure, we have signed up to the Sustainable Development Goals, but we are not doing very well. Why?

The solution seems to be in two parts: First, acknowledging biophysical realities to help determine the optimal size of any economy (ecological economics) and, second, understanding how macroeconomics actually works (MMT), which tells us what the fiscal capacity of currency-issuing governments actually is. Money and budgets are never a limiting factor, but real resources are.

(By the way, MMT explains why EU counties like Greece are in a mess — because they no longer issue their own currency.)

MMT says that governments should spend until there is full employment (1% to 2% unemployment and no underemployment), then stop. This government spending will be non-inflationary, so long as it does not exceed the production capacity of the economy and as long as taxes, which destroy some private spending, are adequate.

How mainstream economics went so wrong, from the early 1970s onwards, is another story, but it boils down to:

changes in currency rules (abandoning the gold standard without rewriting the textbooks properly);

the scares from the inflationary oil shocks of the 1970s;

the rise of neoliberal propaganda in the 1970s;

human irrationality;

the fact that economics is not a physical science, open to experimental proofs;

cultural inertia; and

that ecological overshoot is a relatively recent phenomenon.

Moreover, there’s lots of money to be made in maintaining the status quo, as long as you can weasel your way into the 1% who benefit (in the short term at least) from all the rackets that flow from our dystopian predicament.

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