Economists Tackle the Economic Crisis: II

A good, old-fashioned crisis of capitalism – a disruption that rocks the whole system – produces one salutary result: wiser heads, serious students begin to re-examine widely held assumptions and popular theories of political economy. For those few, this may mean dusting off old copies of the works of Keynes, Schumpeter, or Minsky, and – only too rarely – Marx. For the honest observer, the crisis is an opportunity for a deeper understanding of the capitalist mechanism and its direction.

But others cling to the comforting views of infallible markets and perfect rationality that prevailed until recently, while amending their theories with warning labels touting the current crisis is a special case falling outside of the economic canon. Most economists, pundits, and policy makers fall into this latter category. They got it wrong and they continue to get it wrong. They have too great of an investment in the ideologies, careers, and honors of the past.

There is now a long list of books and papers offering explanations, in part or wholly, of what went wrong with the global economy. The worst of these offer simple and immediate answers: evil bankers, irrational borrowers, lax regulators, etc. The best offer longer and deeper views that locate problems in the evolution of capitalism and its inner mechanisms. They contest the too human urge for simple answers and easy solutions. This is the second in a series of commentaries on the views of various economic writers on the economic downturn. Zoltan Zigedy

A recent article in the New York Review of Books gives an opportunity to examine the views on the economic crisis of three different writers (“Two Roads to Our Financial Catastrophe”, 4-29-10). Benjamin M. Friedman, William Joseph Maier Professor of Political Economy at Harvard, offers many of his views while discussing current books by John Cassidy, a staff writer at The New Yorker (How Markets Fail: The Logic of Economic Calamities, 2010) and John Lanchester, a UK novelist and journalist (I.O.U: Why Everyone Owes Everyone and No One Can Pay, 2010).

Friedman emphatically dispenses with some of the closely held myths of modern capitalism: the responsible governance of corporate management and self-regulation. He thoughtfully sketches the evolution of banking from high liability partnerships - personally funded and personally liable to risk - to complex, multi-functional, risk-happy behemoths playing with “other people’s money”. His useful account emphasizes the departure from the textbook explanation of banking as funding economic activity, the “basic economic function of providing capital to either individuals or businesses”, in his own words. What he does not emphasize is the actual, less seemly, goal of banking, namely, making a profit. Thus, he is left with an arresting story of the transformation of banking from the early eighteenth century until today, but with no cause for that development. The changes from low, to limited, to virtually non-existent liability; the movement from self-financing, to joint stock financing, to massive assumption of debt (“other people’s money”); the development from risk-aversion, to calculated risk, to risk abandon; seem, on his account, to be mere historic accidents flowing from the peculiarities of the minds of bankers. In fact, we know, and undoubtedly Friedman knows, that the force producing these changes is an unbridled drive for greater and greater profits and – if Marx is right – a desperate attempt to combat the tendency for the rate of profit to decline.

Speaking the unspoken – the critical role of profits in banking -challenges the textbook explanation of banking and suggests the dangerous questions: Doesn’t funding vital economic functions conflict with profiteering? Do we really need profits in “providing capital to either individuals or businesses”? And most dangerously, shouldn’t the banks be publicly owned? Friedman does not wish to address these questions; instead he prefers to regulate the banks – save capitalism from the capitalists.


John Cassidy

“To John Cassidy, a fine journalist with a long standing interest in economic and financial matters, the explanation [of the crisis] is intellectual; the increasingly dogmatic and unquestioning belief, on a priori grounds, in the efficiency – indeed, the rightness – of free markets and the outcomes they produce.”, recounts Friedman. Cassidy castigates what he calls “utopian economics”, blaming such iconic writers of the right as von Hayek, Milton Friedman, Ayn Rand, and the hand maiden of these devilish ideas, Alan Greenspan. The problem with this explanation – like all explanations that pin blame for an historic event on individual figures – is that it purchases easy agreement and a comfortable scapegoat at the expense of deeper understanding, context, and the play of social forces. One could as easily attribute the repression of the nineteen fifties to Joe McCarthy, while ignoring the growth and influence of a massive anti-Communist, anti-working class offensive after World War II. A proper explanation would go deeper and explain the causes and conditions that gave rise to this offensive. Similarly, the causes of the financial crisis no doubt owe some debt to the influence of these neo-liberal figures blamed by Cassidy, but their ideas have been around for some time. Why did they gain near dominance at this time? What were the social and political circumstances that allowed their ideology to plant deep roots in the thinking of the governing class, the media, the academy, and much of the public?

Equally, the notion that the behavior – or misbehavior - of the corporate world runs on a track determined by “intellectual strands” overestimates the influence of the views of public figures, even a Federal Reserve chief, and underestimates historic changes in the trajectory of US capitalism, a trajectory determined by previous crises, historical changes (see Lanchester below), shifting balances in social and political forces, and, in the final analysis, capitalism’s thirst for profits.

Friedman takes up what he calls the “centerpiece of Cassidy’s analysis”, the popular susceptibility to “rational irrationality”. Friedman describes this as “a situation in which each influential actor does only what makes perfect sense from an individual perspective, but the combined effect of everyone’s acting in this way leads to outcomes that make sense to no one”. This sounds tantalizingly close to a point I made in the first installment of this series, citing a common error by academic economists that I dubbed the “fallacy of aggregation”. But it is not the same point.

Instead, Friedman and Cassidy are referring to the influence of incomplete or unshared knowledge in individual decision making, a problem that, according to economists of one school of thought, thwarts markets from achieving completely rational or efficient results. In Friedman’s words, “Cassidy is pointing to problems of collective action. Individuals, acting purely on their own, can’t arrive at outcomes that they would all prefer if they had ways of sharing information, making joint decisions, and coordinating their actions. The problem is a classic staple of economic analysis…”

But if they had complete knowledge, made joint decisions, and coordinated their actions, their behavior would be collective rather than individual! In other words, one cannot rescue the individual, self-serving behavior of capitalist enterprises from the charge of irrationality, by simply acknowledging that their behavior would be rational if they would work together. This merely begs the question. If lions would not devour their prey, they would not be lions; and if capitalists would share information, make joint decisions, and cooperate, they would not be capitalists. And we would be warranted in asking the question: who needs them?

For both Friedman and Cassidy, the default position is to assign the role of referee to the government. Government regulation is the magic coordination that will convert rational, self-interested behavior into equally rational, other-directed behavior, breaking the grip of the fallacy of aggregation. Through the mechanism of government intervention, individual pursuit of self-interest will generate the collective interest.

But both writers assiduously sidestep the issue of who owns the government. If, as the details of the crisis strongly suggest, the influence of the most powerful corporations, a desperate fear of their failure, widespread corruption, and a money-driven two-party system determines the referees, then government regulation will fail as surely as it has over the last, many decades. Without addressing this problem, regulation is a mere chimera.


John Lanchester

In spite of not being a professional economist – no, because he is not a professional economist – Lanchester provides a fresh, unique, and deeply insightful perspective on the economic crisis. His transcends the often wooden, conventional approach writers acquire from drinking from the same academic well. His views are – quoting Friedman – “more deeply rooted in the political evolution of our contemporary Western society.” Further, Friedman elaborates, “Lanchester believes that the ‘essential precursor’ to what happened [the crisis] was the collapse of international communism, including in particular the demise of the Soviet Union.” From Lanchester’s book, quoted in the NYRB article:

The way in which the financial sector was allowed to run out of control… took place not in a vacuum but in a climate. That climate was one of unchallenged victory for the capitalist system, a clear ideological hegemony of a type which had never existed before… The good guys won, the beauty contest came to an end… The Wall came down, and, to various extents, the governments of the West began to abandon the social justice aspect of the general postwar project… Under these circumstances, it could have been predicted that the financial sector, which presides over the operation of capitalism, was in a position to begin rewarding itself with a disproportionate piece of the economic pie.

Though these would not be my words, I have not seen anything like this thesis in print anywhere outside of my own writings. Blinded by deeply ingrained anti-Communism and anti-Sovietism, economic historians pass over the disappearance of the world’s second biggest economy without seeing any profound effect upon the course of economic history. Shuttered by the dogmas of academic economics, they do not notice how awkwardly the Soviet socialist economy fit into the global capitalist market. Mired in triumphalism, they overlook how the Soviet Union influenced economies, not only in the socialist community, but in many developing countries. In a world of IMF and World Bank loans, they forget that socialist economies offered credits, often resembling barters, which were vastly different from the exchange relations defining market transactions. Well over a third of all economies participated to some degree in these relations. Yet for the typical economic writer, these awkward facts bear no impact on the post-Soviet period.

Lanchester deserves high praise for intruding his perspective into the smug world of Nobel laureates, policy makers, and pundits, but he only touches upon the broad implications of the Soviet Union’s demise for the direction taken by the world economy over the last two decades. It is not just the victory of one rival opening the floodgates to rapacious behavior, but also the opening of vast new markets to capitalist penetration. It is also the removal of impediments to trade and the creation of new instruments lubricating the flow of goods and capital. It is new relations between labor and capital and a shift in the balance of power between them. New divisions of labor between nation-states have emerged as a consequence of the demise of a unique social system offering alternative economic relations. All of these factors help shape the current economic moment; all of these factors are largely ignored by those studying that moment, explained, instead, by the slippery and vacuous notion of “globalization”.

We need much more research into the economic upheavals in the wake of the Soviet collapse and their consequences for the world economy, but I am skeptical that conventional economists will make the effort.

Lanchester is a skillful wordsmith, penning memorable metaphors: “Assume that capital is like a virus and its motivation is to replicate; it wants to grow.” I think Marx would like that…

Giving Friedman and Lanchester the next to last word: “But if Lanchester is right – if the underlying force at work is the mindset resulting from the triumphant emergence of Western-style finance capitalism as the credible way to organize economic activity – then prospects for meaningful reforms anytime soon are surely limited. As Lanchester puts it, ‘The rich are always listened to more than the poor, but that’s now especially true since, with the end of the Cold War, there is so much less political capital in the idea of equality and fairness.’”

Then it is surely time to opt for a different “mindset” that embraces “equality and fairness” – the mindset of socialism.

April 27, 2010
Zoltan Zigedy
zoltanzigedy@gmail.com

Economists Tackle the Economic Crisis

A good, old-fashioned crisis of capitalism – a disruption that rocks the whole system – produces one salutary result: wiser heads, serious students begin to re-examine widely held assumptions and popular theories of political economy. For those few, this may mean dusting off old copies of the works of Keynes, Schumpeter, or Minsky, and – only too rarely – Marx. For the honest observer, the crisis is an opportunity for a deeper understanding of the capitalist mechanism and its direction.

But others cling to the comforting views of infallible markets and perfect rationality that prevailed until recently, while amending their theories with warning labels touting the current crisis is a special case falling outside of the economic canon. Most economists, pundits, and policy makers fall into this latter category. They got it wrong and they continue to get it wrong. They have too great of an investment in the ideologies, careers, and honors of the past.

There is now a long list of books and papers offering explanations, in part or wholly, of what went wrong with the global economy. The worst of these offer simple and immediate answers: evil bankers, irrational borrowers, lax regulators, etc. The best offer longer and deeper views that locate problems in the evolution of capitalism and its inner mechanisms. They contest the too human urge for simple answers and easy solutions. Zoltan Zigedy

Joseph Stiglitz is one of the few courageous enough to peek beyond the curtain of official dogma and smugness. Though a prominent and celebrated economist, he has dared to challenge many of the assumptions of the neo-classical model dominating his profession, thus, earning our measured respect. He is deservedly an “outsider”.

In a recent article in the London Review of Books (“The Non-Existent Hand”), Stiglitz has much to say about the causes of the crisis and those who failed to see it coming. He reminds of his own work in debunking the infallibility of markets. He and others (such as Akerlof and Shiller) have demonstrated what should not have needed demonstration: markets are often not efficient, not self-correcting, nor rational. Despite its euphoric embrace over the last thirty years, the perfection of markets never earned the theoretical or empirical right to be elevated to a timeless truth rather than a fervent faith. Nevertheless, it was.

For Marx, commodity exchange – the human relationship that stands behind what we call “markets” – may well be to some extent efficient and rational on the level of individual interactions, far from determinant of social efficiency and justice and collective rationality. There is no reason to expect that the profit-optimizing behavior of individual capitalist enterprises in the market will in any way optimize social or collective interests (including the health of the capitalist system). I think Keynes would agree.

If only Stiglitz were right: “The present crisis should lay to rest any belief in ‘rational’ markets.”

Stiglitz quickly dismisses those who hope to account for the crisis by distinguishing between “risk” and “uncertainty”. He correctly points out that the difference is really a slippery slope, the actors indeed believed they were possessed of statistical models that promised low risk, and they were drawn by high expected outcomes. Yet he misses the larger point – the fallacy of aggregation – that allows that what might be of reasonable risk for one actor, may not be a reasonable risk for the system if all the actors take on that risk. Aggregating all the risk-taking that individual enterprises take may well multiply the risk to the system beyond that of the seemingly sensible risks undertaken by each and every of the enterprises comprising that system. Stiglitz cannot escape the limits of neo-classical economics that rigidly assumes that all system-wide behavior is simply and coherently reducible to the behavior of the individual units.

Stiglitz perceptively focuses on one of the anomalies of the current crisis and its supposed recovery: the intractability of high unemployment (“why the usual laws of supply and demand, which should result in full employment, have failed to work.”). He elaborates: “Standard economic theory - the theory of demand and supply that is taught in classrooms around the world – says that if prices… are fully flexible and markets function as they should, then… there should be full employment.” This challenge to standard theory grows more apparent with the expansion of production and GDP, beginning in 2009. With the standard view, the crisis would reduce the costs of labor (which it did), resulting in a strong incentive, with recovery, to utilize labor over other factors of production. But no such expansion of employment has occurred.

This is only an anomaly if one fails to assign a central role to profit and exploitation in one’s economic theory. Capitalists are only pragmatically interested in the theory of supply and demand; their real interest is in maximizing profit and their behavior reflects this fixation. Consequently, they follow the path that produces gain regardless of the intuitions of academic economists. As I have written, perhaps ad nauseam, the explosion of exploitation measured by unprecedented increases in labor productivity since early last year has resulted in strong, persistent, and almost unprecedented profit growth. Why would a capitalist hire more workers with profit expanding?

Moreover, those countries that have protected employment as a matter of policy – enforcing labor market rigidity – have often weathered the crisis as well or better than those with “flexible” labor markets, a point that Stiglitz concedes. And there has been little employment growth since the bottom of the crisis in any country, regardless of whether it had a relatively rigid labor market – like Germany – or a flexible labor market – like the US. Unemployment remains high independently of private sector regulation or stimulus. The hard lesson of the Great Depression that the public sector must take up the slack in employment during a severe crisis has apparently been spurned today.

Of course conventional neo-classical economics permits of productivity increases as a source for growth, but it finds no reason to distinguish between productivity gains that are exploitative and those that are not. But the capitalist certainly does.

The neo-classical economist has a problem beyond the current intractability of unemployment in the US – the entire decade since the “dot-com” crisis has been one of a “jobless recovery” with employment recovery drastically trailing production and GDP growth. In short, profit growth has decoupled from employment growth in this last period, replaced by super-exploitation and the concentration and rationalization of production.

Stiglitz does offer an explanation for the anomaly of persistent unemployment, an explanation that has been conventional since the era of Keynes. At the end of the day, he argues, unemployment persists because of an insufficiency of aggregate demand; there is simply too much productive potential to be absorbed by those able and willing to buy. A corollary of this lack of demand is the decline of investment opportunities; the capitalist finds fewer and fewer avenues for pursuing profits.

Stiglitz locates the lack of aggregate demand in two factors: savings on the part of developing countries (to protect them from the onerous policies of the IMF and the banks of developed countries!) as well as reserves accumulated by oil producing countries (for insurance against price fluctuations) and, secondly, the “huge increase in inequality, which in effect redistributed money from those who would spend it to those who didn’t…” The last point hints at the systemic problem facing capitalism.

Stiglitz is right, but only partially right. The problem of “savings” was, in reality, a problem of declining profitability throughout the capitalist system. I wrote in November of 2005 (“Capital Surplus, Marx, and Crisis”) of “the world economy awash in accumulated money, an enormous pool desperate to accumulate even more capital… the ability to make further money is now impeded. Capitalists are finding fewer and fewer investment opportunities. And when they find them, they offer at best modest returns.” I cited the Wall Street Journal, quoting Gerd Hausler of the IMF: “The search for yield has been the defining factor in financial markets for roughly the last two years.” In my view, this was a harbinger of a possible crisis of capitalism, an instantiation of the tendency of the rate of profit to decline, the touchstone of Marx’s theory of crisis.

For Stiglitz, the lack of investment opportunity demonstrated by the “Great Recession” was circumstantial, an extraordinary event brought on by contingent events in the world economy; in my view, and I believe from an understanding of Marx, the glut of capital in search for investment returns was inherent in the capitalist system and one that would lead unerringly to a crisis. One can thus understand the frenzy that led to sub-prime mortgages, exotic investment instruments, insider trading, and market manipulation as desperate and risky attempts to restore a higher rate of profit.

The word “profit”, and even its euphemisms “yield” and “return”, is curiously missing in Stiglitz’s account. In only one instance does he employ the word “profit”: “The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to society.” Surely he understands that this is the objective of all capitalist enterprises! From Goldman Sachs to Nike, from AIG under government guidance to bailed-out GM, the goal is to generate profits “regardless of the costs to society.” Otherwise, how does one explain the millions of laid-off workers and the enormous bail-outs directed to executive bonuses and mergers and acquisition? I’ve yet to see a “cost to society” in the balance sheet of a monopoly-capitalist corporation.

In passing, Stiglitz offers the following interesting comment about the state of matters today: “The Hooverites – the advocates of the pre-Keynesian policies according to which downturns were met with austerity – are having their revenge. In many quarters, the Keynesians, having enjoyed their moment of glory just a year ago, seem to be in retreat,” While there was little difference between the late Hoover policies (NCC and RFC) and the early New Deal (just as there is a continuity between late-Bush and Obama’s first year), he is sadly correct. The progressive and left movement has lost the initiative to the oracles of neo-liberalism who scream “Deficits!” at every opportunity. Lethargy and unwarranted faith in the Obama administration has robbed the left and progressive forces of a rare opportunity to move decisively beyond the neo-liberal model. We are, in too many ways, back where we started.

Stiglitz closes with the following – no doubt sincere - reflection: “Keynes great contribution was to save capitalism from the capitalists… Keynes insights are needed now if we’re to save capitalism once again from the capitalists.”

But facing another wave of capitalist excess, why do we want to save capitalism at all? May I suggest that saving humanity from capitalism is a far more urgent and proper demand?

This is the first of a series of articles discussing the important contributions of liberal, progressive, and left commentators on the economic crisis.

Zoltan Zigedy
zoltanzigedy@gmail.com

When Does an “Accident” Become a Crime?

“…waiting at the gate, we are waiting at the gate…while the miners’ kids and wives wait at the gate…” Woody Guthrie

From 1900 until 1950, over 95,000 US workers were killed in coal mines, nearly as many as died in World War I and exceeded only by military deaths in the Civil War and World War II. Millions more were injured in this period. While records were not required, a conservative claim by the Bureau of Mines estimates that 140,000 miners were injured in 1914 alone, roughly 18% of all miners employed. Millions more went undiagnosed with black lung disease and severe arthritis. As recently as the 1990’s, over 21,000 injuries occurred annually in coal mining, despite far fewer employed at that time in the industry.

Outside of the war-time military, no occupation has suffered nearly the rate of fatalities and injuries as has coal mining, including law enforcement. Yet there are no national memorials to mourn those losses.

Throughout this period, annual coal mining deaths averaged between two and eight a day. Yet there are no national days of remembrance.

During the early decades of the twentieth century, coal mine employment drew thousands of newly arrived immigrants speaking little or no English – mainly from Eastern Europe and Italy – who were drawn to rural coal mining towns throughout the US. They account for more than their share of those killed and maimed in the mines. Often the native-born were promoted to working above ground, replaced underground by newly arrived immigrants. This brutal story is lost in the current debates over immigration, a debate smothered by the same crude bigotry suffered by the immigrant miners of the twentieth century. Sadly, too many of the descendents of these immigrant miners have joined the chorus of vulgar nationalism that pollutes the discussion.

US coal operators were notorious for their callous disregard for safety and abuse of workers. Despite employing 40% more miners, the British coal industry experienced half as many fatalities in 1914 – a fairly typical year for fatalities in the first three decades of the twentieth century. The rate of deaths per thousand workers in the US was higher that year than that in the Union of South Africa, where workers were virtual slaves.

While the industry has changed dramatically, underground mining remains the most dangerous occupation, made especially dangerous by the relentless drive for production and profits by the coal operators and their corporate masters. The recent death of 29 miners at Upper Big Branch mine in southern West Virginia reminds us again of how little regard owners and managers have for the lives of coal miners. The Upper Big Branch mine is a non-union facility owned by Massey Energy whose CEO is an out-spoken supporter of right-wing causes, an opponent of environmental protection, and notorious for “buying” the Supreme Court of West Virginia. He ranks with the most profit-crazed and corrupted coal baron of the past century.

The mine was cited 458 times last year for safety violations, 50 of them severe. The US Mine Safety and Health Administration closed the mine 61 times since the beginning of 2009. Workers were required to work in four feet of water and suffer other “aggravated conduct” on the part of the operator. Clearly, the Massey Energy subsidiary had no regard for safety, only production and profits.

The media speaks of an accident, a tragedy where they should be condemning a crime. But the crime rests not only with the operator, but with politicians, regulatory agencies, and opinion-makers who take little interest in the conditions and safety of working people. When the curtain of neglect is occasionally pulled back by some dramatic loss of life, our leaders wring their hands in remorse. At all other times, they are blind to the tens of thousands of injuries suffered by those working everywhere from Wal-Mart to auto production.

While discussing the deaths at Upper Big Branch, my sister reminded me of the fear for her father’s safety that entered her mind every night at bed time, dreading the mine whistle or a phone call; he worked twenty-seven years in the mines and left with black lung and crippling arthritis. She reminded me of our grandfather’s death in the mine and his daughter’s hearing from a passerby: “Your dad was killed today in the mine.” He had to work until he was 67 - past retirement age - because of his activism.

For most of the twentieth century the most militant, class-conscious miners called for nationalization of the mining industry. Without the brutal, life-crushing drive for profits, tens of thousands of miners might have lived to enjoy their grandchildren.

Zoltan Zigedy
zoltanzigedy@gmail.com