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Paul Craig Roberts sold supply-side economics to the U.S. Congress and to President Reagan as the way to overcome stagflation (simultaneously rising inflation and unemployment) and renew economic growth. Why does he now write that growth might be the problem instead of the solution? “I dealt with the problems of my time. Supply-side economics worked, and the worsening trade-offs between inflation and unemployment disappeared for two decades. Today’s problems are different, and they are dealt with in this book.”

On the one hand there are theoretical problems in the growth model. On the other hand the growth model is not being applied in Europe to what is euphemistically called “the sovereign debt problem,” but in reality is the problem of reckless lending by private banks. Austerity is being imposed in order to free resources with which to pay the banks, and the austerity is driving growth into the ground. In other words, the West itself does not believe that its growth model is the solution to the problem.

Another problem is that the growth model no longer works for many people. For example, in the U.S. income growth is only experienced by a small percentage at the top. In much of the Third World the growth model imposes monocultures that deprive people of independence and self-sufficiency. Yet another problem is that the growth model is not sustainable as it is exhausting nature’s capital and is polluting our planet. When one thinks about such things as the economists’ assumption that man-made capital is a substitute for nature’s capital, one realizes that this unrealistic assumption (known as the Solow-Stiglitz production function) is the basis of the belief that economic growth is infinitely sustainable. Growth cannot be infinite when earth’s resources are finite. “Therefore,” writes Roberts, “we must think anew prior to the exhaustion of nature’s capital. Long-run thinking must supplant short-term thinking.“

Many industrial, agricultural, and food-producing processes pollute air, water, and soil. Corporations avoid costs by imposing them on the environment. In some instances these external costs exceed the value of the corporations’ output. The quality of food, its nutrition and safety are sacrificed for yield.

The exhaustion of nature’s capital has begun to bite. Surface water and aquifers are threatened by fracking, mining, and chemical fertilizer run-off. Even some pastures have become deadly to cattle. Many cities have many days during which air pollution is a health threat. The notion that the entire world can live at a 20th century American consumption level seems farfetched and unobtainable. Yet, it remains the goal of the world’s policymakers. Drawing on the work of others, such as former World Bank economist Herman Daly, Roberts suggests that a “steady state” economy that provides adequate material means for material life and preservation of nature’s capital, not mass consumption societies, is the only sustainable economic model.

Clearly, this empirically based, theoretically challenging book is one of the most important works of our time.

Note to reader: This book was first published in the German Language in July 2012 by Weltbuch Verlag in Germany, Austria, and Switzerland under the title, Wirtschaft Am Abgrund. A Chinese language edition is forthcoming from SDX Joint Publishing Company in Beijing, China.

The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower remuneration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.

For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents.

The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.

Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.

Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.

When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion--a sum larger than US GDP or the US public debt--in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.

The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.

The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.

Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.

This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.

The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.

The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.

I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.

Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?

From the Anglo-American perspective, economic theory originated with Adam Smith in the 18th century. In the early 19th century, Britisher David Ricardo made the case for free trade based on comparative advantage. Another Britisher, Alfred Marshall, explained the formation of prices in the late 19th century, and yet another Britisher, John Maynard Keynes, gave us macroeconomics in the third decade of the 20th century. A couple of decades later, an American economist, Milton Friedman, gave us monetarism. Of course, Germans, Austrians, Italians and Frenchmen made contributions, but Smith-Ricardo-Marshall-Keynes-Friedman provided the economic corpus, encompassing free trade, price formation, and the stability of prices and employment.

In the post-war 20th century the economics that most affected the public was macroeconomics. Unemployment and inflation were the two rival problems.

What follows is a brief account of how post-war economics, initially successful, fell into problems from its neglect of the supply-side of the economy and from an uncritical acceptance of a country’s transfer of its capital, technology, and jobs to another country. This transfer continues to be misinterpreted as the mutually beneficial workings of free trade. In fact the transfer is the result of the pursuit of absolute advantage--the antithesis of free trade.

Economics can successfully explain the efficient allocation of resources by the price system and the allocation of investment by profitability. Relatively speaking, these successes are new. It was Alfred Marshall at the end of the 19th century who explained price formation. Prior to Marshall, economists debated whether price was determined by the cost of production or by demand – what people were willing to pay. Marshall ended the controversy by pointing out that supply and demand are the two blades of the scissors. Together they determine price.

Profit is the return on capital. A normal profit depends on time and circumstances. It is the profit necessary to retain capital in an activity. If capital cannot earn a normal rate of return in an activity, capital is not supplied to that activity. This ensures that capital is not wasted in low value uses. Whenever capital earns a higher than normal return, it is a sign that it is employed in a high value use. The excess profits will lead to an expansion of investment in that use until profits are reduced to normal.

Without price and profit signals, there is no way of knowing how to efficiently use resources to produce the highest valued output. The Soviet economy failed because the system’s gross output indicators, the main signal of managerial and plan success, could not tell if outputs were more valuable than inputs.

The study of the price system is known as microeconomics. It is the soundest field of economics. “Free prices” simply means the freedom of prices to change with supply and demand. It does not mean laissez faire or no rules and regulations. The “free market” means the freedom of prices to change as conditions change.