Austerity is like 'bleeding' the patient – and may be as deadly
IN the late 18th Century in the court of Louis XIV, the Sun King of France, a doctor named Francois Quesnay met Adam Smith. Adam Smith wrote the founding text of economics in 1776 and influenced Quesnay as much as Quesnay influenced Smith. Quesnay was a scientist, one of the first of the medical profession who learned from scientific experiment as much as from direct, clinical experience.
Quesnay wanted to bring Smith's ideas and the new scientific mode of inquiry together. The circulation of blood around the organs of the body had just been discovered, and Quesnay wanted to apply this thinking to the economy. He produced the first national accounts for France, then the largest economy in the world, based on the idea that all wealth comes from surpluses generated by agriculture. Money was the blood that flowed around this system and the "pulse"' of the nation, in a sense, was how much output it was producing, or how much people were spending, or how much income people had. Because the economy was a closed system– much like an unpunctured human body – these three things, output, income, and expenditure, would amount to the same thing.
The "economic table" Quesnay produced still underpins the national accounts we use today. Statisticians and economists use these national accounts to measure the value of the economy's output over some time. These accounts are quite complicated, but imagine that the economy produces only apples, for one euro each. If last year the economy produced 100 apples, the value of its output is obviously €100. If this year the economy produces 120 apples, then we can say the economy "grew" by 20pc.
By convention, we say the economy goes into a recession when it shrinks for six months.
The Irish economy is in a recession. The generally accepted method of calculating the value of output of the economy, called Gross Domestic Product, or GDP, shrank by 0.6pc relative to the same quarter last year. Measured on a quarterly basis, GDP is about €40bn. Taking the "pulse" analogy suggested by Dr Quesnay, the economy's pulse slowed somewhat.
Now, you might be looking around, thinking to yourself "were we ever out of recession?"
The reason it didn't feel like the economy grew last year, or the year before, was that domestic demand, the amount of stuff people buy in the domestic economy, has been flat since 2010. Exports have been growing, but because we don't really see the effects of exports, the average citizen probably hasn't noticed a huge bump in their living standards.
Digging a little deeper into the statistics, over time GDP has fallen by over €17bn in real terms since its peak at the end of 2007. In the same period, investment, which is an important part of GDP, fell by €22bn.
In percentage terms, GDP has fallen almost 10pc while investment is over 58pc below the end-2007 level.
Things are pretty grim. Retail sales, which were looking up only a few months ago, are falling, no doubt as a result of sustained austerity, which reduces disposable income, and uncertainty surrounding the property tax.
Three things explain the decline. First, austerity is working: personal expenditure fell by 3pc. This is down to austerity, pure and simple.
Second, credit constraints are biting: Capital investment dropped 7.4pc.
Third, the international economy is weakening somewhat, people are buying less of our stuff, and Ireland's pharmaceutical sector is falling slowly off a patent cliff, so the value of net exports also fell. Amazingly, government expenditure was about the same – no real drop at all.
The story of the Irish economy is one of sustained stagnation in key areas. The pulse is weakening. Doctors in Quesnay's time let their patients bleed to let out harmful "humours."
This weakened and sometimes killed the patient.This was later recognised as barbarism and abandoned. Ireland's policy of austerity is exactly like bloodletting, and history will recognise it is just as barbaric.