Beyond “austerity vs. expansion”: Elements for a structural theory of liquidity policy

?Recent years have witnessed a sustained, and often inconclusive, discussion between two opposing views of economic policy. Economists primarily concerned with the economic disruption associated with inflationary pressures, credit bubbles, and bankruptcies have leaned toward ?austerity policies,? seen as ways to restore confidence and to make investment decisions attractive. On the other hand, economists concerned with deflationary pressures, liquidity shortages, and unemployment have leaned toward expansionary policies seen as ways to rescue the economy from the slump, and to trigger a virtuous circle of boosted consumer and investor confidence, higher aggregate expenditure, and self-sustained growth. This paper argues that a conceptual shift is necessary in order to provide an adequate explanation of the upswings and downswings of a modern industrial economy, and effective guidance to short- and medium-term stabilization and growth policy. It draws attention to the structural theory of economic fluctuations and crises formulated at the turn of the twentieth century and suggests that this theory provides the conceptual building blocks needed to overcome the micro-macro dichotomy and to understand the differentiated reaction patterns characterizing industrial economies facing shocks, be they externally or internally created. The paper lays the foundations for the subsequent discussion by outlining the central role of levels of aggregation and sectoral interdependencies as the generating mechanism of macroeconomic relationships. It then examines the structural asymmetries characterizing economic dynamics and the opportunities and constraints for economic policy that derive from those asymmetries. The paper closes by outlining a structural theory of liquidity policy and its implications for the relationship between austerity and expansion as means toward stabilization and growth.?