Nonsense From a Finance Minister is Still Nonsense

Yanis Varoufakis, a prominent European economist and former finance minister of Greece, gave a Ted Talk and was featured on NPR’s Ted Radio Hour on the episode “Democracy on Trial” that recently aired. This episode was recommended to me by a friend that thought I would enjoy the discussion as I am always interested in economics and politics. I have to say, I did thoroughly enjoy this episode, but not because I agreed with the message but because of the overwhelming disagreement I have with the message, in particular, the one by Varoufakis.

Varoufakis claims he has a quibble with capitalism, but really it’s a wholehearted objection to it as a system. I had the feeling it was deeper, but after some reconnaissance, I found out his political leanings are slightly more than far left. Despite his political sway, his economic arguments against capitalism are laughable, at best.

First, he describes how it is wasteful:

“Speaking of waste, allow me to point out an interesting paradox that is threatening our economies as we speak. I call it the twin peaks paradox. One peak you understand — you know it, you recognize it — is the mountain of debts that has been casting a long shadow over the United States, Europe, the whole world. We all recognize the mountain of debts. But few people discern its twin. A mountain of idle cash belonging to rich savers and to corporations, too terrified to invest it into the productive activities that can generate the incomes from which you can extinguish the mountain of debts and which can produce all those things that humanity desperately needs, like green energy.”

What? The mountain of debts literally accumulated by the wasteful and unproductive expenditures made by governments. The reason anyone does not pay back their debt obligations is because the investment in which the debt was to be used for ended up not being productive or valuable enough to pay back the initial investment. Assuming there is a mountain of “idle cash” why should this be used to extinguish the debts taken out for unproductive behavior? Would this not provide the incentive for this type of behavior to continue? This is like if I were to take out $100,000 in student loans to fund a degree in Canadian basket-weaving. Unsurprisingly, I end up with a mountain of debt and am not able to pay this back. So I call on my engineering, financial planner, and stockbroker pals to use their stockpiled cash to pay it back. Does this make sense?

Then he goes on:

“Now let me give you two numbers. Over the last three months, in the United States, in Britain and in the Eurozone, we have invested, collectively, 3.4 trillion dollars on all the wealth-producing goods — things like industrial plants, machinery, office blocks, schools, roads, railways, machinery, and so on and so forth. $3.4 trillion sounds like a lot of money until you compare it to the $5.1 trillion that has been slushing around in the same countries, in our financial institutions, doing absolutely nothing during the same period except inflating stock exchanges and bidding up house prices.”

By saying money is “slushing” around, doing absolutely nothing, tells me that you don’t have to know how financial markets work to be a Ph.D. economist, let alone run the finance department of a respectable European country, (which failed financially). Stock exchanges are literally used to fund productive, wealth creating ventures taken on by firms in all industries. It is a mechanism that builds wealth by sharing ownership amongst shareholders AND by using the invested funds to expand firms’ enterprises, innovate and build new products and services, and bring value to consumers. It is through this exchange that wealth is created.

Varoufakis seems to think that stationary buildings are “wealth-producing”. That’s like saying Trump’s proposed wall produces wealth for people. Does the construction of these entities fill our bank accounts somehow?

If it isn’t obvious, it isn’t the building of a school that creates wealth. It isn’t even the students going to a school that creates wealth. Wealth is created by trade, exchange; by human action. The productive actions students take from the exchanged knowledge, that sometimes happens in schools, is what creates wealth. Sure, you might have to build something to trade it, but the only way to find out what you decided to build has value is by engaging in trade in which someone pays you for whatever you built. Likewise, it is not railways, but the human action and exchange (perhaps) upon the railways that produces wealth. Structures like houses, school, stores, factories, or machines are not productive, people are.


Not only does this economist not know how the stock market works, he also has no idea how wealth is created. Yet, he seems to think that he knows where to put the “idle” cash that can eliminate the looming massive debts of countries. Ignoring the fact that debts accumulated by governments are due to wasteful and unproductive spending, let’s understand why this is overly ambitious, or more appropriately, preposterous.

First, some background information. The “economic problem” is that of dealing with needs and wants of many people and the scarce resources to satisfy them. Humans want all of the things, yet there are only a finite amount of resources. Therefore, economics exists to study the process of how these resources get allocated. Ambitious economists, of the Varoufakis type, seem to think they know how to effectively allocate these resources to their most highly valued use, in particular, through the use of government. I don’t know what is sadder, the fact that this is impossible or that economists actually think that they have the God-given know-how to make it possible. This has been tried before. All we need to do is open a history book (or even a newspaper) to find out how miserably these attempts have failed.

The beauty of markets and the price mechanism within capitalism is that it provides rapid feedback loops that can direct resources to their most efficient, productive use. The feedback loop is called profit and loss through the use of prices. Prices are the single best way to allocate scarce resources. They convey the necessary information to consumers and producers on how much to buy, invest, and produce, respectively. Prices are what motivate entrepreneurs to find profit opportunities in ways that bring value to you and me. This is inherent in the system of capitalism.

When the entrepreneur raises capital, whether through savings or loans, and decides to invest into a good or service, she quickly finds out if this is was worthwhile investment or not by whether the money comes back or is lost forever. This doesn’t happen in government. When governments invest (the hard-earned money from taxpayers) into programs, or into firms and people, the feedback loops are muddled. If programs fail to bring the desired outcomes, the reason is always “there wasn’t enough money” or “output” wasn’t enough. It’s never, “No value was created from investing into this particular program or objective.” This is where that mountain of debt comes from.

So, I’d venture to say that his quarrel should not be with capitalism, but with governments. Governments are the largest polluters (check out the Pentagon), the most wasteful spenders, and the true parasites of unfettered capitalism. It is precisely when governments meddle in markets, begin subsidizing or regulating industries, that these market mechanisms begin to break down.

Governments begin to regulate, creating barriers to competition and innovation and protecting particular industries. They put price caps on goods and services, distorting the price mechanism that shows what is valuable or where resources should be allocated. They put wage floors on businesses and quotas on how many people can come into the country to work distorting labor markets. They invest in businesses that fail, yet continue to invest because they have a money tree also known as taxpayers. They distort housing markets by subsidizing loans to people that shouldn’t receive these loans. They put up trade barriers countries and trample over emerging economies in poorer countries by undercutting local business. They waste money on war and destruction and the killing of innocent lives. They incentivize young people to become indebted by going to school and receiving degrees, saturating the market and ending up with no use. They claim to be for “public-private partnerships” but they only protect failing businesses and hinder innovation and true wealth creation. They strangle the energy industry with regulation that it keeps special interests in power stifling progress in the beloved green energy. They have become so entangled with markets that their every move sways unproductive rents (profits) to special interests and create even more market failures.

Importantly, governments are subject to the same struggles of markets, i.e.: externalities, information asymmetries, rent-seeking, etc. But, entrepreneurs in the market have the incentive to fix these problems where in government these incentives do not exist, let alone having the knowledge to determine whether or not there is a problem or a purported solution. He claims that our democracy is broken because of capitalism, but I say, it’s broken because of government.

One thought on “Nonsense From a Finance Minister is Still Nonsense

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s