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When it was “different this time”: A reflection on the wisdom of Lord Keynes

October 21, 2008 2 comments

The Financial Times has an interesting article on renewed interest in Lord John Maynard Keynes, the gist of which is captured in this excerpt:

The heart of [Keynes book, The General Theory of Employment, Interest and Money] is the idea that economic downturns are not necessarily self-correcting. Classical economics held that business cycles were unavoidable and that peaks and troughs would pass. Keynes contended that in certain circumstances economies could get stuck. If individuals and businesses try to save more, they will cut the incomes of other individuals and businesses, which will in turn cut their spending. The result can be a downward spiral that will not turn up again without outside intervention.

What the Financial Times fails to mention, is that, up until the Great Depression, economic downturns were self-correcting.

The intellectual elite of the nation were alledgedly confused at this empirical refutation of all their grand theories on how the world worked to such an extent the most honest among them began to question the validity of the existing order itself.

According to Nobel Laureate Paul Krugman:

A reasonable man might well have concluded that capitalism had failed, and that only huge institutional changes – perhaps the nationalization of the means of production – could restore economic sanity. Many reasonable people did, in fact, reach that conclusion: large numbers of British and American intellectuals who had no particular antipathy toward markets and private property became socialists during the depression years simply because they saw no other way to remedy capitalism’s colossal failures.

And, by failing to note the “minor” fact that the Great Depression was something different, the FT is not required to ask the crucial question: Why was the Great Depression different? Krugman admits as much when he writes:

Although Keynes speculated about the causes of the business cycle in Chapter 22 of The General Theory, those speculations were peripheral to his argument. Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment. That is, The General Theory for the most part offers a static model, not a dynamic model – a picture of an economy stuck in depression, not a story about how it got there. So Keynes actually chose to answer a more limited question than most people writing about business cycles at the time.

Again, I didn’t understand the importance of that strategic decision on Keynes’s part the first time I read The General Theory. But it’s now obvious to me that most of Book II is a manifesto on behalf of limiting the question. Where pre-Keynesian business cycle theory told complex, confusing stories about disequilibrium, Chapter 5 makes the case for thinking of an underemployed economy as being in a sort of equilibrium in which short-term expectations about sales are, in fact, fulfilled. Chapter 6 and Chapter 7 argue for replacing all the talk of forced savings, excess savings, and so on that was prevalent in pre-Keynesian business cycle theory – talk that stressed, in a confused way, the idea of disequilibrium in the economy – with the simple accounting identity that savings equal investment.

And Keynes’s limitation of the question was powerfully liberating. Rather than getting bogged down in an attempt to explain the dynamics of the business cycle – a subject that remains contentious to this day – Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed – never mind why – how can we create more employment?

Thus, for all the renewed interest in the theories of Lord Keynes, with his insights into the problem of persistent unemployment we are no closer to understanding what actually happened in 1929 which was different from the many depression, panics, and dislocations which occurred from about 1830 onward, for which the standard responses of a balanced budget and patience had become the accepted wisdom.

And, it was precisely this accepted wisdom which so miserably failed in addressing the profound problems of the Thirties. Something had changed, and this alteration in economic circumstance made the conventional wisdom obsolete. Moreover, it threatened the existing order, disorganized that order’s chief defenders, and presented Washington, Wall Street, and their intellectual apologists with such dire implications as a full scale revolt among the class of hungry wage slaves.

Those latter would be our parents and grandparents – that’s right, they suspected your grandparents of harboring the same Bolshevik sympathies which are alleged to be held by Barack Obama today. What fools these Republicans are: Barack Obama wouldn’t have had the balls required to carry the ammo belt for your grandparents if they had actually decided to storm the Congress and the White House in those days.

*****

To add a twist to this imperfect and amateur stab at economic history we should acknowledge that everything stated above about economists being confused about the causes of the Great Depression is pure bunk.

In fact, it was common knowledge, drawn on much empirical study of the details of industrial production, that capitalism was generating such massive surplus output of every kind of good the working day would have to be reduced sooner or later, or capitalism itself would collapse.

And, let us be completely clear on this point: Karl Marx explicitly outlined a path of social development wherein the distribution of the social product of labor would evolve from one based on wages – to each according to his work – to one no longer bound by the requirements of scarcity – “To each according to his needs.” He knew the progressive improvement in the productivity of society was bringing the age of scarcity to a close, and spent the better part of his life writing about it.

Lord Keynes, unlike worthless modern day hacks, such as Nobel Laureate Paul Krugman, was completely familiar with the works of Karl Marx, and even directly references him in the opening pages of the above mentioned book.

*****

Bertrand Russell

Beyond Marx’s explicit outline of the transition to a post-economic society, a society no longer bound by the laws of scarcity, Lord Keynes had the advantage of conventional wisdom which also explicitly stated the length of the working day would have to be shortened. Among them was his colleague and friend, Bertrand Russell, who wrote these words fully four years before the publication of The General Theory of Employment, Interest and Money:

I want to say, in all seriousness, that a great deal of harm is being done in the modern world by belief in the virtuousness of work, and that the road to happiness and prosperity lies in an organized diminution of work.

First of all: what is work? Work is of two kinds: first, altering the position of matter at or near the earth’s surface relatively to other such matter; second, telling other people to do so. The first kind is unpleasant and ill paid; the second is pleasant and highly paid. The second kind is capable of indefinite extension: there are not only those who give orders, but those who give advice as to what orders should be given. Usually two opposite kinds of advice are given simultaneously by two organized bodies of men; this is called politics. The skill required for this kind of work is not knowledge of the subjects as to which advice is given, but knowledge of the art of persuasive speaking and writing, i.e. of advertising.

Throughout Europe, though not in America, there is a third class of men, more respected than either of the classes of workers. There are men who, through ownership of land, are able to make others pay for the privilege of being allowed to exist and to work. These landowners are idle, and I might therefore be expected to praise them. Unfortunately, their idleness is only rendered possible by the industry of others; indeed their desire for comfortable idleness is historically the source of the whole gospel of work. The last thing they have ever wished is that others should follow their example.

Not to be confusing on this point, Bertrand Russell adds this lesson of history:

The morality of work is the morality of slaves, and the modern world has no need of slavery.

*****

Sir Sidney Chapman

One may ignore the opinions of one’s friends in this matter, and certainly it is acceptable to ignore the Father of Communism in every matter, yet, Keynes needed not only to ignore the above commonly known views, but also the views of some of his most honored contemporary economists, including Sir Sidney Chapman, author of Hours of labour, in The Economic Journal (vol. 19, pp. 353-373) who was, according to his biography in the Wiki, President of the Economics and Statistics Section of the British Association for the Advancement of Science; Joint Permanent Secretary of the Board of Trade; Commander of the Order of the British Empire; Companion of the Order of the Bath; and, Knight Commander of the Order of the Bath.

And, further, notes the Wiki:

In 1915, he was asked by the Board of Trade to head inquiries into wartime industrial organisation, initially on a part-time basis, but later full-time… [and] In 1927 he was appointed Chief Economic Adviser to HM Government and held the post until 1932, when he became a member of the Import Duties Advisory Committee until his retirement shortly before the outbreak of the Second World War in 1939. During the war he served on the Central Price Regulation Committee and was Controller of Matches.

As Tom Walker points out:

Chapman’s analysis arrived at several remarkable and far-reaching conclusions. First, the length of working day that would be best for workers’ welfare is shorter than the length that would produce the largest output. Second, the play of competition would tend to make the working day too long, even from the standpoint of production. Third, improved methods of production would lead to a progressive reduction of the optimal length for the working day. As a consequence, renewed conflict over the length of the working day would break out from time to time.

Lord Keynes was not only familiar with the works of Sir Chapman, he directly critiques the work of A.C. Pigou, who, according to Walker, “based his own discussion of working time in The Economics of
Welfare
on Chapman’s theory.”

Lord Keynes, therefore, did not simply neglect to discuss the causes of the Great Depression – how mass unemployment is possible in the first place” in the words of the Nobel Laureate, and useless political hack wannabe, Paul Krugman – he chose to ignore nearly a century of acquired wisdom in social criticism, economics and a throrough going examination of the capitalist production process – both theoretical and empirical – by such disparate figures as the highly honored men of the British Empire and its most hated avowed enemies.

*****

Supply and Demand Curve

Supply and Demand Curve

In place of this accumulated wisdom, Lord Keynes substituted a proposal for a mechanism of government intervention which has now resulted in a massive sixty year old bubble economy – a bubble which now threatens to implode, and which may result in the single most catastrophic economic event in mankind’s long history if it is not reversed in an orderly fashion.

The outline of this substitution, as set forth by Krugman:

Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully

Government policies to increase demand, by contrast, can reduce unemployment quickly

Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

By concentrating on an economic abstraction, demand, Lord Keynes was able to sidestep the very question thrown up by the massive and unprecedented persistent unemployment of the Great Depression. As World War II proved, there was no shortage of productive capacity to create enormous amounts of goods of every description, and employ miilions who had suffered relentless poverty and stood in soup lines or drifted westward in search of jobs.

That is, there was no shortage as long as the goods were armaments of unprecedented ferocity, and those millions engaged either in producing them, or using them on the bloodiest battlefields in human history. The actual shortage was the opportunity to make massive profits producing anything other than horrendous engines of annihilation.

As one would expect, a social organization based on the assumption of fundamental scarcity in all the goods society consumed – the market – failed to allocate these same goods once they became abundant. As consumer products became abundant – which is to say, as society gained the capacity to produce more of everything than was immediately needed – the prices of the goods dropped below their costs of production; profits fell to zero; and, the owners of the productive stock of society – factories, farms, etc. – took this as a signal to stop producing – in the process laying off millions of employees – and, to stop investing further in the companies they owned.

And, with millions now suddenly thrown into the streets, the demand for the goods they had consumed fell even further – the key word, demand, here meaning, simply, unemployed working families did not have the wages to purchase what they themselves had produced.

It is important that you understand this: it wasn’t that people weren’t hungry, homeless, and in need of what they had produced with their own hands, THEY DID NOT HAVE THE WAGES WITH WHICH TO PURCHASE WHAT THEY NEEDED.

Demand, is a term used by that most crippled of human beings, the economist, to denote another less fortunate human being – typically, not an economist – having both the need for a loaf of bread AND the means to purchase it.

In other words, Lord Keynes was saying capitalism had placed an insurmountable barrier between the needs of millions of unemployed and the satisfaction of these need – cash.

Since, wages slaves like us have nothing to exchange for the goods we need to live, save our own bodies, which we hire out to the highest bidder like a twenty dollar hooker in an alley along Wall Street, not being able to prostitute ourselves, one Donald or Warren at a time, is quite the same thing as being left to starve – a starving wage slave is NOT an economic category you can plot on a curve.

What Keynes showed is that governments could step in and provide this lost demand with the printing presses of the treasuries of every country – substituting its own demand for that of the unemployed wage slaves like us, and then pay us to slaughter the wage slaves of other countries, or produce the means to slaughter them.

Happy with this solution, every major nation in Europe, Asia, and America immediately began printing their currencies as quickly as possible, building incredible engines of mass murder, and, when they felt themselves strong enough to despoil their neighbors’ homes, industries and civilian populations, launching the most amazing acts of racial suicide ever to be witnessed by God or man.

An event for which we will always be able to thank Lord Keynes, who proved we are truly as unworthy of divine breath as we have always been taught by priests, rabbis, imams and assorted other instigators of communal guilt and insecurity.

*****

It is for this reason, we hold there is no danger of another Great Depression.

And the reason for this assertion is simple: the first Great Depression is still alive and in good health beneath the illusory prosperity of our own time – an iceberg hidden just beneath the murky waters of our economy as the grand ship of state plows forward with the cast of Gilligan’s Island firmly in command.

Which is just another way of saying this:

For all the economic dislocation rendered thus far in the present crisis, with the disappearance of the five big global investment banks, the collapse of AIG, the nationalization of Freddie and Fannie, the partial or complete nationalization of the banking industry of virtually every major nation, the momentary cessation of interbank lending, the serious interruption of international trade, and, the collapse of the stock markets of every major financial center on the planet, things are poised to get much, much worse.

Worse, as in the Great Depression was sixty years ago, and in that time the productive capacity of society has likely at least quadrupled, implying as much as 90 percent unemployment, if there is any employment at all for anyone not wearing a uniform, when the bubble erected according to the wisdom of Lord Keynes finally gives way.

Avoiding this disaster – if it can be avoided – is the historical necessity of the moment, and starts with the immediate reduction of the work week.

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Mother of all Bubbles…”The Era of Big Government…”

October 6, 2008 Leave a comment

What has been little noted in all this discussion about the financial crisis is effect it will have on the size of the United States government – apart from the doubling of the national debt.

According to data I can find, for the year 2007, Fannie Mae had revenue of 45 billion dollars. Freddie Mac had revenue of 43 billion.

According to USA Today;

The two companies hold some of the loans they buy and securities they bundle in their investment portfolios. Fannie Mae said its portfolio was $736.9 billion in May, highest since August 2005, while Freddie Mac said its portfolio was a record $770.4 billion in May.

Including investments and guarantees, Fannie Mae’s total book of business topped $3 trillion for the first time in May, twice its size at the beginning of 2002.

With Freddie Mac’s $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market.

It would seem, as of May, 2008, the United States government is the single largest holder of home mortgage debt on the planet; with a portfolio of $1.5 trillion, and combined investments and guarantees of $5.2 trillion.

Taken by itself, this would likely make Washington the largest business concern on the planet Earth, the monopoly player in the U.S. mortgage debt industry, and, the market maker for all home mortgage loans.

But, there is more:

AIG, of which Washington is now proud owner of 80 percent equity, had revenue of 110 billion. According to one site:

American International Group, Inc.  provides insurance and financial services in both the United States and abroad. One of the largest companies in the world by assets and employee size, AIG was a component of the Dow Jones Industrial Average from April 1, 2004 to September 22, 2008. Through its subsidiaries, its holdings can be divided into four sections: General Insurance, Life Insurance and Retirement Services, Financial Services, and Asset Management.

AIG is the world’s largest aircraft leasing company. It has responsibility for over $60 billion in credit default swaps. AIG is already the largest individual operator inlife insurance world wide, and has a large presence in “writing all lines of commercial property and casualty insurance, as well as various personal lines domestically and abroad.”

All totaled, according to Forbes.com:

AIG, with 103,000 employees and more than $1 trillion of assets, is more than an insurance company. It is arguably the biggest player in the financial services industry; a collapse, many fear, could be catastrophic.

The total revenues of these three companies are, therefore, approximately $200 billion, with total assets of more than $6.2 trillion.

On January 27, 1996, President William Clinton delivered his address to the nation declaring in part:

But we also face stiff challenges. Challenges we must meet and meet together if we are to preserve the American dream for all Americans, maintain America’s leadership for peace and freedom, and continue to come together around our basic values.

These are the seven challenges I set forth Tuesday night — to strengthen our families, to renew our schools and expand educational opportunity, to help every American who’s willing to work for it achieve economic security, to take our streets back from crime, to protect our environment, to reinvent our government so that it serves better and costs less, and to keep America the leading force for peace and freedom throughout the world.

We will meet these challenges, not through big government. The era of big government is over, but we can’t go back to a time when our citizens were just left to fend for themselves.

“The era of big government is over,” said Mr. Clinton, still stinging from the battle with the Republican majority in Congress, and desperate to reposition his administration ahead of the November elections.

Twelve years later, how completely wrong he turned out to be still hasn’t dawned on this nation.

Get set for the Mother of all Bubbles…

October 6, 2008 Leave a comment

The collapse of the Congressional opposition on Friday signaled the likely dissolution of the Party of Wall Street, and the victory of the Party of Washington. (27 Republicans and 32 Democrats were cajoled or bribed to switch sides.)

With the passage of the Wall Street bailout, the Street has been effectively annexed by Washington – a conclusion seemingly confirmed by the German government’s decision to guarantee the deposits in its own banks to stem the financial collapse unfolding in the world market, and similar moves by the governments of Ireland, Iceland, Belgium, The Netherlands, Britain, Denmark, and Luxembourg.

Wall Street imagined itself an independent force on the American landscape – pressing for greater and greater autonomy and deregulation, and growing in influence within the machinery of state to such extent even the Party of Washington began bending to its will.

Wall Street fatuously promised the magic elixir of non-state economic growth and rising living standards, even as it reduced the great mass of American families to debtor status not unlike that of sharecroppers of the post-Civil War to mid-20th Century – encouraging debt to extend the abysmally long working day far beyond that which was necessary to satisfy the requirements of modern production.

As one writer, Tom Walker of the Shorter Working Time listserv stated to us:

What is debt? In banking terms, debt is a withdrawal from an account in anticipation of future deposits. Debt is allowing me to take money out before I put it in. The banking system allows its customers, as a whole, to take more money out than they collectively have on deposit. This is called monetary creation. The core idea of economic growth has been to stimulate growth through a controlled expansion of debt (fiscal policy) and the money supply (monetarism).

Well, Benjamin Franklin said, “Time is money.” That is to say, disposable time is something valuable in itself, which potentially can be converted into cold, hard cash if so desired. If one can stimulate economic growth by withdrawing funds before you deposit them, then who is to say that you can’t do it by systematically withdrawing hours of work? “Oh, but it sounds rather preposterous.” Perhaps, except that the debt model of economic growth sounds no less preposterous and yet it is accepted uncomprehendingly by people who would be horrified by the notion that working less might actually be a better option than owing more.

That is the paradox. The same people (economists and those who believe them) who refuse to even entertain the notion that shorter working time could create jobs, accept that expanding debt will create jobs without caring whether they understand why. But I repeat myself. And to tell the truth, it is necessary to repeat this paradox many, many times until it becomes plain what kind of an absurdity we are dealing with here.

With Wall Street effectively annexed by Washington, the Party of Wall Street now finds the interests of it most important constituency virtually identical with the former. Goldman Sachs’s Masters of the Universe, have become highly paid government bureaucrats simply managing Washington’s growing portfolio of dependent entities.

We will continue this theme.

German real estate lender failure threatens euro with collapse

October 4, 2008 Leave a comment

From Naked Capitalism:

Hypo Real Estate, Germany’s second largest real estate lender, teeters on the verge of collapse. The bank has a €400 billion balance sheet, which would make for a failure of a similar scale to Lehman’s (Hypo’s footings are roughly $550 billion, while Lehman’s were $660 billion as of its last balance sheet date).

Even though Hypo is technically a bank, it is not a depositary institution, so rescuing it poses similar difficulties (procedural and political) to the authorities as Bear and Lehman did in the US. The financial system cannot take another body blow of this magnitude. The authorities had better patch this one up over the weekend, or we face even more credit market panic on Monday.