Economic Defeatism

What is Economic Defeatism?

Defeatism is a way of thinking in which defeat is accepted without any struggle. Economic defeatism refers to a situation in economics in which policymakers and economic analysts accept the failure of economic actions and consider an economic condition below its potential. 

There is another type of defeatism in which some economic problems are seen as uncontrollable or unsolvable. Instead of solving the main issue, it focuses on dealing with side issues. 

Economic defeatism is dangerous in a way that it can spread pessimism in the economy instead of hope and make it difficult to solve economic issues at hand.

Examples

The following are some examples of economic defeatism:

The Great Depression

At the time of the Great Depression, Andrew Mellon, the US Secretary of the Treasury, advised Herbert Hoover, the US president, to liquidate banks, labour, farmers, and real estate, which caused economic distress instead of solving the depression. The expectation was that this liquidity would kick out the disastrous elements of the economic system. However, when the stock market crashed and people ran towards banks to get their money, banks did not keep enough reserves to cope up with this situation. The worst part was that backup fund providers such as the Federal Reserve were under tremendous pressure and banks were not part of the Federal Reserve System. This situation was not an adverse form of economic defeatism, but it fueled depression rather than countering it. 

The Great Recession, 2008–2013

The European Union showed less interest, ability, and devotion for its decisive actions to deal with increasing unemployment and a prolonged recession throughout the time of the great recession in 2008–2013. During that period, many governments were experiencing huge budget deficits because of decreasing tax revenues. Policymakers and economists suggested spending cuts for deficit reduction to show how serious the governments are in dealing with increasing government debt. However, spending cuts did not increase consumer and business confidence. As a result, the EU made little effort to cope with the recession and was on the verge of experiencing a lost decade. 

Understanding Economic Defeatism

Many times, the ruling parties blame previous governments for the bad economic conditions prevailing in the economy. These negative talks about the economy can be detrimental. For example, if the government is facing huge debt and is planning spending cuts to avoid further borrowing or tax increases, then consumers may also reduce their spending, leading to negative effects on the economy. 

In 2021, Kim Jong Un, the leader of North Korea, criticised and accused top officials of economic defeatism due to poor economic performance during the last five years.

Japan’s case for economic defeatism is interesting. There were many negative talks about Japan’s economy, such as the ageing population, the decline in the working population, and increasing public debt. Japan claimed to defeat economic defeatism through higher women's participation in the workforce. Moreover, an increasing number of people above the age of 65 are also actively working. 

Let’s take an example where a government is planning to spend $10 billion on improving the infrastructure of the economy. The expected benefit of this spending may be more than $10 billion. The government can fund this spending through taxes or borrowing. This spending has the potential to boost the economy through an increase in aggregate demand. But if government is already facing a huge debt and is not willing to borrow more, because they cannot afford it, then the state of the economy may not improve. 

Many economies have faced policy defeatism during economic crises when macroeconomic stimulus policies were abandoned due to the negative voices highlighting the downsides of the stimulus.

Historical Background

Defeatism is used in politics as a form of ideological stance that depicts cooperation with the opposition party. Defeatism is the synonym of treason in wartime, especially at the front in the military context.

In 1918, defeatism became a topic of debate in Germany, especially in the Nazi party, led by Adolf Hitler. He was the one who continuously blamed the defeatist mentality of the Germans.

During World War II, Hitler dismissed many of his generals due to defeatism. In the last year of war, many German people were accused of being defeatists due to their defeatist talks or acts, and their names were announced weekly in a pink poster pasted on the billboards around the country.

In economics, defeatism is the belief that economic policies will fail to bring the desired results.

Failure of Economic Policies

In developing or developed countries, there is a failure of economic policies, and its major consequences are low growth rates, high unemployment, low wages, high income and wealth inequalities, and an unstable economy.

For example, in terms of monetary policy, central banks in many countries have dragged the interest rate near zero to stimulate growth. For those economists who have already predicted economic growth, lowering interest rates in the absence of increased public spending is nothing more than a failure or pushing the economy to the verge of chaos. Central banks still use these so-called conventional monetary policies that do more harm than good to the economy. These policies are for limited use, but QE has led to an increase in bank lending for the purpose of productive investment. This is an outcome predicted by post-Keynesians economists.

The latest monetary policy tool is lower interest rates, which have also resulted in failure because they misinterpret the bank’s behaviour. Central banks hope that by taxing reserves, they can begin to lend those reserves and start different economic activities in support of growth. But post-Keynesians know that banks can’t lend reserves. In other words, banks can’t lend reserves to firms and vice versa until and unless there is an increased demand for produced goods or services in the market. Instead of this, the supply side of the economy can be stimulated for economic growth.

Conclusion

In conclusion, the concept of defeatism is present in the military, politics, and economics. In the military context, it is the synonym for disloyalty, and soldiers and commanders are labelled defeatists if they talk or act defeatist. In economics, defeatism is a mindset in which a failure of economic policies is expected or accepted. It is okay to criticise any economic policy; however, defeatism goes beyond that and spreads pessimism in the economy, leading to huge negative effects.