Beyond “Austerity vs. Expansion”: Elements for a Structural Theory of Liquidity Policy

Recent years have been marked by a sustained, often inconclusive, debate between two opposing views of economic policy. Economists mainly concerned about the economic fluctuations associated with inflationary pressures, credit bubbles and bankruptcies, have turned to "austerity policies" as ways to restore confidence and make investment decisions attractive. On the other hand, other economists worried about deflationary pressures, liquidity shortages and unemployment have turned to expansionary policies designed to create a virtuous circle of consumer and investor confidence, leading to higher overall spending and self-sustaining growth. This article argues that a conceptual shift is needed to provide an adequate explanation of the fluctuations in a modern industrial economy and to provide effective guidance for stabilization and growth policy in the short and medium term. The article draws attention to the structural theory of economic fluctuations and crises formulated at the turn of the 20th century and suggests that this theory provides the conceptual elements needed to overcome the micro-macro dichotomy and understand the differentiated response patterns to shocks characterizing industrial economies. The article lays the groundwork for future discussions, highlighting the central role of aggregation levels and sectoral interdependencies as a mechanism for generating macroeconomic relations. It then examines the structural asymmetries that characterize economic dynamics, as well as the resulting opportunities and constraints of economic policy. The article concludes with the presentation of the elements of a structural theory of liquidity policy and its implications for the relationship between austerity and stimulation as a means of stabilization.