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The Greatest Generation--economics division

by techno Thu Mar 13th, 2008 at 04:09:28 AM EST

I have fulfilled a New Year resolution.  Last Fall I was given a book to read called "Don't Make Me Think" about designing effective navigation schemes for websites.  By the time I got to the end, I was convinced my website needed a serious redesign.

I have 39 video clips and 24 .pdf files on my site. And like Institutional Economics, it sprawls over a lot of subjects.  Much of my traffic appears through other than the splash page. And there are many links from the outside I do not want broken.  So the redesign took over 60 days.  And occasionally I took time to edit an old favorite paper.  So please visit my new-look site and enjoy my re-edited essay below.
http://elegant-technology.com/


The Greatest Generation--Economics Division

Jonathan Larson 2008
http://elegant-technology.com/GG_econ.html

On September 11th 1973, while Americans were deeply distracted by the Vietnam War, various clandestine operatives of their government organized the overthrow of the government of Chile. Her mild-mannered president had been deemed too leftish for our sensibilities so he had to be killed. In the chaos following that coup d'état, a team of economists who were mostly students of a far-right crank at the University of Chicago named Milton Friedman, rushed in to introduce economic "reforms." Citizens of USA did not know it at the time, but the first shot in a global war of economic ideas had been fired.

The new economic agenda was not new at all. It was a rehash of the ideas that had been discredited by the Great Depression and the New Deal. It was the economics of the robber barons so it benefited only a tiny minority--it was not an economic agenda that the vast majority of people on the planet would choose (if they had a choice). So the vast apparatus of New Deal economics would have to be destroyed.

Because economic arguments tend to be obscure anyway, the roll back of New Deal economics would happen in think tanks, government offices, bank boardrooms and deadly-dull conferences of academics. Most of the necessary legislation happened without meaningful public debate. Even the academic debates were surprisingly muted.

The biggest problem with the "new" economics is that it doesn't work very well. It destroys the lives of millions of people so there is chronic social chaos. But even when the middle and working classes have been successfully repressed so the plundering can proceed, the bigger problem emerges. Poor poor people eventually make for poor rich people so that by 2008, the defaults of sub-prime borrowers are threatening the richest financial institutions of the planet. It turns out those "old" New Deal-era regulations and economics ideas may have been destroyed, but the reason they existed in the first place was quite valid indeed.

My economic education was at an institution that took great pride in their role as inventors and teachers of New Deal economics. In 1970, I had the privilege of hearing Walter Heller teach economics in his famous Intro class. He was the "chief Keynesian" at the VERY Keynesian University of Minnesota who had come from a job with the Kennedy administration. I thought it was cool that the former chairman of the Council of Economic Advisors to CAMELOT would explain the large ideas of economics to kids at a Minnesota public university. Heller was outrageous and told lame jokes (example: An economist is someone who would marry Elizabeth Taylor for her money.) He was an energetic, brilliant, passionate man who cared for his subject.

Learning economics was probably never more enjoyable. But behind the showmanship and the claims he taught JFK the principles of Keynes, the man was serious. Economics IS a serious business--it is the study of how people survive and the root cause of most of the wars and social upheavals of history. And Heller wanted everyone to know why understanding the ideas of Keynes was key to their lives--it was why he taught an Intro class.

Keynesianism was a collection of ideas that grew up as a response to the fundamental dilemma of the industrial age. Simply put, if you want to build something very difficult (like the automobile) you can only justify the expense of the tools if you have a LOT of customers. Industrialization could produce virtually unlimited and very sophisticated goods if the economists could arrange for unlimited customers. So the Keynesians spent most of their time working on ways to increase the purchasing power of the greatest possible number of consumers. (There were other variations of these principles in other parts of the world but in the English-speaking countries, they came to be associated with John Maynard Keynes largely because he wrote about them so clearly and effectively. Ironically, of all the industrialized nations, Keynesianism was probably least successful in England for a host of interesting reasons.)

Keynes staked out a centrist economic position. The laissez faire economists taught that all economic activity should be private and unregulated and that all useful information came from the markets. The Marxists taught that everything should be regulated, centrally planned, and collectively owned. There was an amazing amount of intellectual space between these two extreme positions. And so Keynesianism became this sprawling doctrine the believed that markets were important but had to be regulated to keep them from destroying themselves, that there was plenty of room for private initiative AND central planning, and there must be public AND private investment and ownership.

Being reasonable is not easy. Folks with a simple one-size-fits-all philosophy substitute tenacity for reason and thoroughly mistrust anyone who begins an answer to a question with "that depends on a host of circumstances." But that was exactly what the Keynesians were trying to do--answer questions with "that depends." It was an attempt to match the subject of political economy with the complexity of industrialization. As a result, the economic fundamentalists mistrusted the complexity embraced by the Keynesians. And even after more than 40 years of Keynesian influence, the laissez faire fundamentalists had not disappeared from the economic debate--and certainly not at the academic level.

Facing packed lecture halls, Heller invited debate and controversy as a teaching style. One day, a crew-cut young prairie banker's son baited Heller with the idea that regulation of the financial business was an example of "creeping Socialism." Heller stood very still. He was visibly annoyed as if he were a world-class astrophysicist confronting a member of the flat-earth society. Since this was over 34 years ago, my quote may not be exact but as I remember it Heller said, "Young man, what I am teaching is not creeping, walking, or any other ambulatory form of Socialism. We saved Capitalism from itself. There are regulations because Capitalism without regulations does not work."

Heller's annoyance at the partisan of deregulated Capitalism that day was probably due to his frustration that even though he and his kind had found the political center, fundamentalism in economics had not been slain. Keynesian ideas were complex and had to be taught--and obviously, the banker's son had not been doing his homework. Fundamentalist ideas, like Arthur Laffer's famous curve, could be explained on a bar napkin. The Keynesians were at the political center in 1970 only because of their unequalled record for successful economic guidance.

The Keynesians had a right to be a little arrogant. When their school of thought came to prominence in the early 1930s, the global economy was a total and complete disaster. After they took over, they organized the economic recovery from the Great Depression, fought World War II without triggering inflation, organized an industrial conversion to a peacetime economy in Japan and Europe after the War, while raising living standards in USA to heights never seen before in human history.

Yet by 1973, things had started going seriously wrong for the Keynesians. They had figured out how to balance consumption with industrial potential, but they never got around to dealing with the problems of how to value energy, waste, or other contributions of the natural order. For the first time in history, energy costs were set beyond the reach of their regulation. Cheap energy was at the very foundation of the prosperity the Keynesians liked to take credit for. The monetary prescriptions of Keynesians in response to the massive run-up in energy prices triggered a global outbreak of inflation.

The fundamentalists had long been suspicious that the Keynesians were soft on inflation. With the investor classes howling in pain worldwide, anyone with a solution to inflation suddenly gained credibility. One of the foundation principles of the Keynesians was that banking and monetary policy was too important to be left simply to the bankers--there ARE other players in the economic game with valid interests. The fundamentalist response was, "See! We let others into our business and just LOOK what they have done." So to prove one's intellectual credentials in the new economic world order, it was not sufficient to be against inflation--Keynesians also hated inflation, after all--one had to believe that all other economic interests would be subordinate to interests of investors.

The Nobel committee awarded the economics prize in 1973 to a cranky guy from the University of Chicago who had long preached the evils of regulation named Milton Friedman. The rout of the Keynesians was virtually complete. Grads of the University of Chicago became hot properties; Keynesians were unemployable. The fall from influence had been swift indeed.

Adam Smith neckties on Wall Street heralded the new order. Regulation was bad. High interest rates would be the tool to fight inflation. Public planning had never worked. And the market was always the final word on any matter, and not just any market, mind you--the market was only "perfect" if it most resembled a bankruptcy auction.

The fundamentalists often liked to call themselves "Post-Industrial" as they merrily destroyed the institutions created by the Keynesians to nurture industrialization, but in fact they were quite pre-industrial. They would quote David Ricardo, a 19th-century Englishman whose main contribution to economics was a more scientific way on how to calculate the absolute minimum you could pay the help. They quoted Adam Smith whose industrial expertise was exhausted at a pin factory.

But as any Keynesian could tell you, if you choose to fight inflation by drying up consumer demand, you WILL cause a global depression. It is mathematically certain, not to mention the reason the Keynesians ever got the chance to run things in the first place. So Ricardo can teach the fundamentalists how to drive down living standards, the Keynesian response is to ask...why would you ever want to do THAT?

Like teenagers in a high-powered car, the theorists behind the anti-Keynesian counter-revolution were virtually certain to wreck things because they did not understand the complexity of the task they were attempting to undertake. And crash the industrial economy is exactly what they did. Because if inflation was the flaw that brought down the Keynesians: deflation is the Achilles heel of the laissez faire fundamentalists.

Deregulation was synonymous with freedom itself in the eyes of the fundamentalists and was accorded priority status. Air transport, trucking, and the phone system were deregulated with some success in fighting inflation but at a high cost for the affected employees who saw dramatic declines in living standards. It also gave us old trucks driven by exhausted drivers plus thousands of bankruptcies and wild financial instability in the transportation business. Agricultural deregulation did not lower the price of food but did drive hundreds of thousands of farmers from the land. Telecommunications deregulation had small economic effects but did drive down programming standards in broadcast networks. And the deregulation of energy markets gave us the disaster of Enron.

Yet in fact, all these forms of deregulation were insignificant by comparison to that ultimate test of economic fundamentalism-financial deregulation.

Usury--charging interest on borrowed money--is the heart of possibly the oldest recorded economic argument. Scathing denunciations of the practice occur over 50 times in the Bible and the Koran flatly prohibits it. For almost 15 centuries, the Catholic Church considered it a crime worse than murder. Not until John Calvin, a 16th century French theologian living in Geneva, were Christians allowed to practice usury without religious condemnation. Because the Puritans were Calvinists, USA would be founded by folks who thought usury was a perfectly acceptable practice.

In typical fashion, the Keynesians had attempted to split the difference between outright prohibition of usury and its unfettered practice. Industrialization required huge amounts of capital that could only be provided with borrowing. On the other hand, over three thousand years of experimentation with usury had demonstrated that the practice could be very harmful. So the usury laws passed in the 1930s allowed usury but set strict limits on how much interest could be charged. In many states, interest rate ceilings were written in their constitutions.

By the late 1970s, the financial deregulators had managed to dismantle virtually all meaningful usury laws nationwide. The prime rate hit an astonishing 21% in 1981. Not surprisingly, 1981 saw the most damaging recession since the Great Depression. But this would only be the beginning of the economic disasters to afflict the giant industrialized middle classes the Keynesians had labored so long to help create. There are at least four reasons why decriminalizing usury would cause such destruction.

  1. Usury is a drag on productive people and their work. The higher the interest rates, the greater the proportion of effort must be diverted to something other than the project itself. If the economy is thought of as a car, interest rates are the accelerator. If interest rates are at 1/8% per year simple, projects with long horizons like re-growing forests can make economic sense. If the rates are 100% per day compounded, even a drug deal is nearly impossible. Sound economic policy demands that rates be both fixed and low. The high-interest-rate environment that has existed since the late 1970s has spawned an epidemic of corporate raiding, asset stripping, and a tulip-mania-style Internet bubble. It is an economics based on plundering the work of the previous generations. Economic fundamentalism is ultimately doomed to create depressions because without regulation, the institutions responsible for setting interest rates will push the accelerator so hard, a crash is inevitable. Worse, because compound interest rates demand compound growth in the rest of the economy, environmental destruction is certain. Compound growth in a finite biosphere is mathematically absurd--demanding such growth is destructive and futile.

  2. Usury confers too much power on the lenders. One of the reasons that military coups fail is that the military is too specialized to run a whole economy. The same holds true for bankers, and with the high-interest rate regime in place since the late 1970s, they have had the powers of martial law and then some. And like a military government that hangs on too long, this coup of the bankers must ultimately fail because there are other important and competing interests that are not being heard because the high-interest-rate policy silences them.

  3. Usury is the ultimate trade barrier. The reason a bright teenager in Argentina will not be getting a new computer this year is because some government in the 1970s borrowed a few billion dollars for the usual purposes of weapons and some Swiss bank accounts. Through the magic of refinancing and other wonders of high interest, this debt now exceeds $140 billion, and the government is forced to make cuts in pensions and other public services, and most of all, CUT THEIR IMPORTS!!! What difference can it make if Argentina has no formal import barriers to trade, if they are prohibited by the Lord of International Finance from importing that Dell Computer the folks in Texas would be so happy to sell them. So instead of learning a fascinating new skill, the Argentine teenager will be happy if he has enough to eat while his government decides whom to pitch overboard in order to pay interest rates of 14% or more in foreign currency.

  4. Usury is ultimately plunder. And if it is gross enough, it cannot be anything except a form of slavery. Note that ancient texts like the Bible actually rank usury as worse than slavery because while there are many condemnations of usury, the Bible never really condemns slavery. There is a reason for this--usury enslaves whole groups of people who are clearly better off acting as free people--merchants, small businessmen, builders and trades-people, large corporations, and ultimately governments. This is just TOO much slavery to run a successful industrialized nation.

It took a long list of disasters, but the fundamentalists in economics have finally provoked wide-ranging countermeasures. The great economic gatherings that cities used to fight over for hosting rights are now scenes of massive demonstrations with expensive and legally controversial security measures. This phenomenon is only new for places like Seattle and Quebec City and Genoa-anti-fundamentalist demonstrations against their economic prescriptions have been common in the less developed world for over a decade. The few remaining old Keynesians must be taking some comfort from the fact that THEY never had to meet behind police barricades.

It is a sign of the panic among responsible people concerned with the problems of national economic performance that after nearly 30 years in the wilderness, Keynes is now even mentioned on CNNfn by carefully prepped economists from places like Goldman Sachs. And in a reversal of pattern that lasted 25 years, the Nobel committee on economics has begun to award their prize to an economist specializing in development problems. And just to make certain everyone gets the point, the 2001 Nobel went to (with two others) Joseph Stiglitz who is best known these days as fundamentalism's most outspoken critic. The works cited in the prize were Stiglitz's writings on the flaws in the market--especially that "perfect" one.

Of course, I won't believe that Keynes is really back until I hear regular guests on CNNfn describing the economic benefits of industrial regulation, the value of trade unions, and the need for the investment community to recognize that they and their precious market are not qualified to make all the necessary economic decisions of a complex industrialized society. The CNNfn economists who are discussing Keynes these days most certainly do NOT have such a wide-ranging economic agenda--they are simply discussing government borrowing as fiscal pump priming. Of course, Keynes DID teach the value of such borrowing. However, Keynesian fiscal stimulus only works when interest rates are something like 1%---government borrowing at usurious rates is merely a way to sell the children into slavery.

The old Keynesians were not without their flaws. They have a LOT to answer for in their single-minded quest to stimulate consumption. From nuclear power plants to PCBs in polar bears, the Keynesian unwillingness to make value judgments about what forms industrialization took means they winked at some pretty serious environmental errors. And their willingness to take economic credit that rightly belonged to cheap petroleum was their undoing.

Keynes was famous for pointing out that you could stimulate economic activity by hiring a crew to bury money one day and then pay them to mine it the next. If the Keynesians make a return, I hope they have a slightly more enlightened plan for economic stimulation than make-work this time around.

They will have no shortage of macro-economic targets. A serious effort to cut carbon emissions by 1/2 would probably get the economy of the world going again all by itself--it is THAT big a problem that will require huge investments of time and money. The old Keynesians organized prosperity in the age of petroleum by encouraging novel ways to start fires (and how many internal combustion engines do YOU own?). The new Keynesians will have to organize prosperity while putting out most of those fires AND cleaning up the mess left behind by their careless industrial forebears.

The old Keynesians organized economies that could blast off to the moon for the public relations value. The race in space taught us how to make these primitive little devices for collecting solar power. The new Keynesians will have to transform that primitive experiment so that the whole planet with 6 billion people with raised aspirations can be solar-powered. BIG difference.

No wonder responsible people want to give Keynesian ideas another turn at bat. Inflation IS under control. Deflation is the problem. The problems are huge. "If you think you Keynesians can solve the problem of human society will be powered, you are most welcome to try," the folks who are abandoning their fundamentalist fascinations seem to be saying. We will be happy to let you share the blame for our economic "mistakes" of the past generation and we will certainly let you try to fix them. Besides, we liked it when we went to IMF meetings that didn't smell like tear gas.

This economics called Keynesianism worked--spectacularly at times. The summer I graduated from high school in 1967, I worked on a small construction team that built homes. One home was for a guy who worked in a shoe factory sewing tongues or something. You could tell he worked very hard because he would almost fall asleep when he came over to see how we were doing after his work. But the home had three bedrooms, a modern kitchen and bath, a dining area and large living room, and a garage. Remember this guy the next time you read how folks making shoes in Indonesia live these days. We built him a nice house--it is still there and would probably sell these days for well over $100,000. For those too young to remember the prosperity of the Keynesian heyday, just remember this--we went to the moon for FUN!

Rolling back the forces of economic fundamentalism will be a monumental task. I once asked M.I.T. economist Lester Thurow who was speaking at the Veblen-Clark lecture series at Carleton College in Northfield if there were any schools in USA these days where someone who thought and wrote like Thorstein Veblen (the political economist who was an intellectual hero of the original American Keynesians) could get a Ph.D. in economics. Thurow furrowed his magnificent brow and said, "None that I can think of."

Thurow was probably correct. Academic economics in USA is now the home to such extreme economic fundamentalism; the religious fundamentalists of the earth seem utterly tolerant and reasonable by contrast. The complexity the old Keynesians embraced seems to frighten and baffle the new crop of economists. To demonstrate the performance difference between the greatest generation of economists and the current bunch it is useful to compare the outcome of the advice given to Russia after the fall of Communism in 1992 and that given to the destroyed economies of Japan and Germany in the 1940s. The greatest generation produced such prosperity that the Germans called it Wirtschaftwünder (economic miracle) while today's fundamentalists recommended a plan for Russia that resulted in massive poverty and unemployment, a 20 year drop in life expectancy in less than a decade, and the return of diseases humanity had conquered a generation ago like tuberculosis.

From this devastated base, a new and improved Keynesianism must emerge. Socialism did not work and as the Russians discovered, unregulated Capitalism can actually be worse. These were failures of extreme thinking. The Keynesian era demonstrated the economic superiority of centrist thinking. With appropriate modifications, a new Keynesianism could bring back prosperity by putting people to work solving the great environmental problems of our age.

Display:
Wonderful essay, techno: I can't do it justice right now,  but I'll have  a go later...

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 13th, 2008 at 05:06:34 AM EST
Great writing, absolutely.
by das monde on Thu Mar 13th, 2008 at 05:45:40 AM EST
[ Parent ]
... poor rich people.

Worth the price of admission in its own ... everything else is gravy (and a tasty gravy it is, too).


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Mar 13th, 2008 at 07:19:26 AM EST
Nice writing, I'm about half through it and MUST stop and go to work now, thanks.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson
by NearlyNormal on Thu Mar 13th, 2008 at 09:41:30 AM EST
Well, that was superb - concise and lucid.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 13th, 2008 at 10:01:41 AM EST
Great analysis, but I'm not sure I entirely buy it.  To explain the demise of Keynesianism  and the rise of monetarism through the rise in energy prices in the 1970's doesn't say much for Keynesianism - even though you do highlight its other flaws - a blindness to the cost of the externalities which fueled its growth.

Its most fundamental flaw, surely, was that it taught the rich that it was in their own interest to look after the poor.  When things got tighter the rich simply decided they could take it all for themselves - and let the devil take the hindmost.  Any ideology which depends on the enlightened self-interest of the rich ignores the begger-my-neighbour attitudes of the majority.

The failure of Keynesianism was not that it wasn't relatively enlightened compared to the monetarist fundamentalists, but that it depended on the continued enlightenment of society and polity to survive. The problem with being a middle-of the road centrist is that you get hit from all sides.

A more fundamentalist political analysis would conclude that only when the political systems empowers the less well off to ensure that social democrat or new deal policies are pursued which are in everybody's interests and when those policies and institutions cannot be hijacked by the rich for their own benefit.

The problem isn't simply, as Heller said, that Capitalism when left to its own devices doesn't work, but that it can't work so long as all political power is concentrated in the hands of the rich.  The crises of capitalism in the meantime - as Naomi Klein - has demonstrated, have not delegitimised such rule, but rather reinforced it - by progressively disempowering the middle classes.

Keynesian liberals are still dependent on the enlightenment of the rich to be allowed yto do their work, and will only ever be tolerated for so long as their non-zero-sum game also enriches the rich even further.  Anything less than that will result in a retrenchment into blatant class war, as fought by the monetarists.

The only solution is the building of democratic political movements strong enough to withstand the power of the "markets" i.e. the rich - in the media, academe, and in the political system itself.  That the new deal never achieved.  The US will need a much more fundamental political revolution this time around if it is to recover its leadership role - and middle-of -the-road Keynesians cannot make that happen.  They are ultimately beholden to the rich and their sense of enlightened self interest - a very barren field to plough in indeed.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 13th, 2008 at 10:28:15 AM EST
Frank Schnittger:
The failure of <insert utopian ideology here> was not that it wasn't relatively enlightened compared to the <insert dystopian idologue here> fundamentalists, but that it depended on the continued enlightenment of society and polity to survive.
Which political system is able to survive an unenlightened society and polity? That is the problem: enlightened self-interest.

The Federalist #51

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.


It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Migeru (migeru at eurotrib dot com) on Thu Mar 13th, 2008 at 11:06:48 AM EST
[ Parent ]
I think you ignore the class analysis - it is not so much a case moral probity or intellectual foresight - of people being angels - as of their objective interests being at variance.  Keynesians got away with bridging that divide so long as everybody could be a winner.  They could describe themselves as centrists then - whereas now, in the US, they are so far out liberals - you can't get a PhD in any University based on Keynesian ideas.

The political centre has moved so far to the right, that only the out and out class warriors are at the centre of it.  Basically the rich have been able to reverse the New Deal and re-assign the political system to themselves.  The problem is not with the economics, but with the realities of the political order, and only a political revolution can change that.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 13th, 2008 at 11:42:08 AM EST
[ Parent ]
We've already had a political revolution. That's what the Right did when they dug up Friedman and waved him around like a decomposing scarecrow, and funded any number of think tanks to do the evangelial work needed to sell his reform message.

It was a very quiet revolution, but effective because - as Techno says - the Keynesians had weaknesses. In the middle of an energy crisis it was easy to throw out the Keynesian message and replace it with monetarist crankiness.

Now we've had twenty years of crank economics flopping around incontinently in the mainstream, with the inevitable hilarious results.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 13th, 2008 at 10:56:41 PM EST
[ Parent ]
Its most fundamental flaw, surely, was that it taught the rich that it was in their own interest to look after the poor. When things got tighter the rich simply decided they could take it all for themselves - and let the devil take the hindmost. Any ideology which depends on the enlightened self-interest of the rich ignores the begger-my-neighbour attitudes of the majority.

I do not see Keynesianism emphatically teaching the rich to take care of the pour as own interest. If there was a progressive influence on the rich, it was more of neo-Darwinian flavor - the rich made the extra conscious conclusion that if you powerful, you have to use the power for yourself. Progressive politicians seem to believe in "invisible hand of self-interest" sincerely - just look at election campaigns, where the progressives expect the common quest to succeed while each taking care of yourself only; the conservatives (and the rich!) are much more cooperative among themselves (though it would be nice, of course, if they would believe in wider cooperations as well).

Any political system could be taken over by the rising power misbalance - running totalitarian within a democracy requires only an additional layer of monetary and media control; it is not much more fancy than running Windows on a Mac. Getting more power to divested classes is a good idea; but that cannot be settled on an automatic pilot; holding up the gentle power should be kept almost relentlessly. The idea that you can possibly do very little (if nothing) self-enforcing with power, and be happy with that, is very radical for these times. Keynesianism did not really play with that idea.

Not using education in modern times is akin to asking ancient humanoids not to use tools. Sadly, under the marketist revolution education degenerated to just another item of competitive advantage to be gained, or to be denied to others. Now, depressingly much of world's decisions (from political commitments to building yet another hotel or brothel over a gym or a library) are in the hands of elite power players and richer businessmen; they are not stupid, but increasingly rarely the brightest. The education systems of the rich, or of anyone else, could be more aware of the primate instincts of territoriality and pecking order. But teaching to subdue your ego, or to appreciate less greedy choices, is not a sin.

by das monde on Fri Mar 14th, 2008 at 02:12:37 AM EST
[ Parent ]
you left out the most salient ingredient of high inflation in the U.S. in the '70s. This was the rise in military spending, spiked in particular by the war in Viet Nam. The elder Keynesians (World War II vintage) might have promoted a war-oriented economic mobilization, but their acolytes acquiesced to the politicians' desire to have both 'guns and butter'.

Beyond the effect on the money supply available for normal consumption, the Keynesians in government lost support among their liberal cohorts, simply because they did not oppose the war per se to any meaningful degree. A non-economic effect to be sure, but Heller, et al, became persona non grata to most opponents of the war. Simply put, their economic theories/activities also lost moral standing.

One other matter - the current situation does not include control of inflation. If you want to say that 'asset deflation' is the main issue, OK. But the monetary inflation rate - at the level of actual mass consumption - is high, the rate is increasing. The recent $200 billion dump announced by Paulson in favor of the usurers will redound in further inflation rate increases.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Mar 13th, 2008 at 02:22:30 PM EST
paul spencer:
The recent $200 billion dump announced by Paulson in favor of the usurers will redound in further inflation rate increases.

We've had a lot of recent discussion on ET about this.

This "dump" is aimed at keeping existing money in circulation, and does nothing whatever to repair bank balance sheets. IMHO it cannot therefore lead to inflation, as new bank lending (based on repaired balance sheets) maybe - and only maybe - would.

But of course there will be little or no new bank lending as their balance sheets are bad and getting worse. I really cannot see any serious new US bank lending for a generation.

The situation is similar to what happened in Japan, only it will be much worse in the US due to the low US underlying/ underpinning land rental values - land being in short supply in Japan but not in many of the worst hit parts of the US.

In truth, I think US credit institutions aka banks are terminally fucked, and that the only conventional solution is the Swedish one (or come to that the current UK one!) of nationalising the lot.

Which. Will. Not. Politically. Happen. (unless someone pops something hallucinogenic into Obama's coffee if he gets in)

Unconventionally, on the other hand, it is possible to refinance all the mortgage-backed crap in a "Debt/Equity swap" on a cosmic scale. This is achievable by "unitising" land/property rentals using LLC's or similar to create "Land/Property Rental Pools" - ie residential quasi REIT's.

Investors would just have to get used to a 1 or 2% index-linked return - which might be a welcome relief from the current negative real returns from holding "risk free" T-bills right now.

Btw Paul, a key reason for the use of a "Custodian"  is that the LLC solution you are applying - where the LLC owns the property - cannot easily "scale" and network, for just the same logistical and administrative reasons why stock markets globally are all underpinned by Custodians such as Northern Trust.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 13th, 2008 at 03:41:02 PM EST
[ Parent ]
- mostly. And you may be correct about the "custodian" vs. direct-LLC-ownership question. But - in the marketplace of ideas, I lean toward the Free Market. In other words we will try both approaches in practice and review/compare/contrast/analyze the data as it emerges.

As to inflation - yes, there has been a lot of discussion on ET (which is another reason that this site is so much more useful than so many other sites). The "dump" is aimed at circulating money, but it is another transfer from taxpayers - present and future, assuming non-repudiation - to the financial corporations. And, yes, it will not enhance lending, because the banks, investors, and related financial institutions will just be handing these dollars around among themselves. And, yes, it will take nationalization of the banks to create the possibility (not the certainty) of correction.

Meantime, the proof of the inflationary aspect of the "dump" has emerged almost immediately: the price of oil futures in US$, which then becomes a component increase in the cost of every other aspect of economic life - in the U.S. at least. Why do these markets - and the currency exchanges - downgrade US$? Because they know that the printing presses are running 24/7 with no increase in real value to warrant the money increase. That is inflation.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Mar 13th, 2008 at 05:14:56 PM EST
[ Parent ]
paul spencer:
Why do these markets - and the currency exchanges - downgrade US$? Because they know that the printing presses are running 24/7 with no increase in real value to warrant the money increase. That is inflation

That's the $64 billion issue in relation to inflation: the relationship with the world outside the US.

Sure, an increase in the price of oil or other raw materials imported raises "costs" and to a greater or lesser degree gets passed on, thereby causing "Inflation" to the extent that these costs are a component of the end product.

But since the money will increasingly no longer around in the US to buy anything but essentials, I think that many businesses are simply going to be unable to pass on these increased costs, and we'll see profits taking a hit and/or businesses going bust.

ie what we may well see is value = "money's worth" (not dollars, because no-one will take them) draining out of the US (and exports booming, if the US is capable of producing stuff the rest of the world wants, beyond arms and ammo).

But I don't see inflation beyond that because there will not be "too much money chasing too few goods": the problem will be the on going "black hole" of "deleveraging" which was identified (Migeru, I think) in a really interesting thread a while ago which got on to Japanese deflation.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 13th, 2008 at 06:46:45 PM EST
[ Parent ]
create their own counter-force. Inflation is the current reality, though, as you would certainly be aware if you were a consumer here.

As to where it's headed - gasoline consumption is already contracting in the U.S., as are jobs and, now, retail sales. Yes, there are still 'market forces' that operate to some degree. The company from which I will soon retire exports a substantial portion of our product (actual, manufactured-right-here product) to Japan. The recent changes in the ratio of the yen to the dollar has resulted in a heavy volume of quotations - with a lot of associated pressure on being prepared for a quick ramp-up. And, yes, we may be the exception, more than the rule, because so much manufacturing capacity in this country is either dilapidated or gone.

As far as reduced profits and business bankruptcies, no doubt whatsoever. USians are headed for big and bigger problems. "Deleveraging" is at hand.

Meantime, there is inflation here. If you want to blame it on the fact that oligarchical capitalists control costs, government, prices, 'markets', media, etc., I agree completely.

If you want to talk in terms of theories of economics, then: 1) military spending cycles money while reducing the production of goods that actually enter the real, recycling economy; 2) printing money in excess of simple replacement causes "more money to chase the same amount of goods"; 3) raising component costs increases price in non-competitive markets (majority of the consolidated U.S. markets nowadays). All of these are inflationary.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Fri Mar 14th, 2008 at 12:01:13 AM EST
[ Parent ]
paul spencer:

1) military spending cycles money while reducing the production of goods that actually enter the real, recycling economy;

True. But the US will be obliged to withdraw from Empire because it is simply no longer sustainable either in material (particularly energy) and increasingly exhausted human resouces.

I think we all agree that the redeployment of the military industrial complex into US infrastructure and particularly renewables is the solution here. A War on Carbon if you like.

ie an entire new generation of manufacturing, which I believe the US may still be capable of (but maybe only if they call the baby boomers out of retirement to mentor the generation brought up to serve in Macdonalds.....)


2) printing money in excess of simple replacement causes "more money to chase the same amount of goods";

Firstly, this is not happening. The "replacement" requirement will actually run into the trillions of dollars, such is the extent of the US asset land value bubble. The Fed isn't even scratching the surface.

Secondly, merely providing "liquidity" in this way merely circulates existing money and avoids deflation. New money is needed for any new development, and the mechanism for providing it is fucked, because what the Fed is not doing is rebuilding Banks' balance sheets in terms of their Capital.

The Nordic (and Northern Rock) solution to this is nationalisation - which simply is not going to happen in the US. So, a "Capital rebuild" can only happen from future Bank profits, and if they ain't lending much then that reduces the scope for future profits as well.

This will be a sloooow process, as in Japan, and definitely not in itself an inflationary one.


3) raising component costs increases price in non-competitive markets (majority of the consolidated U.S. markets nowadays). All of these are inflationary

Here you presume pricing power that increasingly no longer exists because - thanks to the Anglo Disease - the poor bloody consumer is only able to keep buying by borrowing, and that option is now over.

So, either they absorb component price increases (and profits dive) or they go out of business. Quite possibly both.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Mar 14th, 2008 at 06:07:28 AM EST
[ Parent ]
paul spencer:
Meantime, the proof of the inflationary aspect of the "dump" has emerged almost immediately: the price of oil futures in US$, which then becomes a component increase in the cost of every other aspect of economic life - in the U.S. at least. Why do these markets - and the currency exchanges - downgrade US$? Because they know that the printing presses are running 24/7 with no increase in real value to warrant the money increase. That is inflation.
By how much did the oil futures price jump in response to these $200M from Poulson?

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Migeru (migeru at eurotrib dot com) on Fri Mar 14th, 2008 at 06:21:12 AM EST
[ Parent ]
Is the $200 billion dump attributed to Paulson or Fed? I see quite a difference on taxpayers' balance.

As I understand, Fed is lending $200 billion to big banks, allowing the "worthless" collateral of mortgage-backed securities. In other words, Fed is taking worthless CDOs and such toxic stuff to relieve the banks; but that does not dramatically hurt the Fed, does it? The operation looks like a limited debt forgiveness act to me, and it may have workable effects. What else can be done when the core problem is debt disbalance?

As for the Vietnam and other wars: 'coups of bankers' were loving wars since long times. In the US, they are running much of the show since 1913. I even wonder, how on Earth they allowed so much Keynesianism...

by das monde on Fri Mar 14th, 2008 at 02:37:29 AM EST
[ Parent ]
ChrisCook:
Unconventionally, on the other hand, it is possible to refinance all the mortgage-backed crap in a "Debt/Equity swap" on a cosmic scale. This is achievable by "unitising" land/property rentals using LLC's or similar to create "Land/Property Rental Pools" - ie residential quasi REIT's.
I'm beginning to think this "debt/equity swap" is the only way to preserve the (maybe reduced) cash flows in case of a default of the debt.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris
by Migeru (migeru at eurotrib dot com) on Fri Mar 14th, 2008 at 06:20:02 AM EST
[ Parent ]
You know, I have heard the "guns and butter" argument for years and have not even been a LITTLE convinced.  There was no problems with the economy until we ran short of a real product--namely oil.  There was no shortage of food, or steel, or labor, or industrial capacity, or housing, or anything else.  But when it became clear that we didn't have enough oil to control the price, then everything else unraveled.

Of course, because MOST economists have NEVER understood the value or importance of energy, they addressed the shortage of oil with usury.  And 35 years later, the same fools are prescribing the same stupid "cures".  And they call economics a science.  Like hell it is!

I cannot treat economists seriously until they comes up with a believable scheme to organize substitutes for oil. And if that means every hedge fund on planet earth goes bust in the process, well that will just be a plus.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Thu Mar 13th, 2008 at 09:37:14 PM EST
[ Parent ]
techno:
Of course, because MOST economists have NEVER understood the value or importance of energy

...unlike the Technocrats...

Energy Accounting

Has there been a Diary on Technocracy? I know there's been some references along the way.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 13th, 2008 at 09:45:25 PM EST
[ Parent ]
techno:
I cannot treat economists seriously until they comes up with a believable scheme to organize substitutes for oil.

Not just oil, but non-sustainable resources of every sort.

Today's crank economics - which as someone said recently is about as sane, empirical, coherent and effective as Galen's medical texts - assumes that money is the primary resource, and money can buy anything it wants to.

The money has to be good money, but as long as there's enough of it in at least some peoples' hands, shortages are impossible.

This is crackpot nonsense, for obvious reasons.

There are only two core commodities - scientific, engineering and cultural inventiveness, and raw resources, including energy sources.

Any useful system has to take these as the basis of its accounting system, and make 'money' contingent on them.

Chris's land credits and oil credits are all specific cases of this more general principle.

And if you turn the view around to consider sustainables as a valuable potentially everlasting resource, you get the interesting result of having an element of 'natural prosperity' - a constant source of 'income' which potentially underpins the rest of the economy, and is available for free.

Non-renewables become very much more expensive in this frame - how can you price something which literally can never be replaced?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 13th, 2008 at 11:12:25 PM EST
[ Parent ]
ThatBritGuy:
Non-renewables become very much more expensive in this frame - how can you price something which literally can never be replaced?

But as we saw only last night, it is quite possible to apply energy to carbon dioxide and water and come up with the products (eg gasoline & petrochemicals) of "non-renewables".

Doing so will become "economic" when the energy cost of that process is less than the energy cost of other sources. ie the "price" of crude oil becomes the energy content.

IMHO the unmatched US human/intellectual resources currently wasted on the military are capable of doing just this, if only the "enterprise model" existed for them to do so.

At the moment the choices are between:

(a) State provision (a new, and Keynesian, New Deal) which is politically unacceptable in the US; and

(b) conventional Capital - "Equity" and "Debt" - which is fucked, probably terminally.

But I believe that unconventional "unitisation" of future land and energy value streams not only squares the investment and monetary circle, but will do so in a networked way from the ground up.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Mar 14th, 2008 at 06:33:42 AM EST
[ Parent ]
Yes, but it's the framing and it's connection to reality that needs to be clarified.

If you frame the environment as half the source of all prosperity - which ultimately it is, being the source of all raw materials and energy inputs - you can cost the value of resources of every type more realistically than if you count products of raw resources in terms of their nominal economic utility.

This is why biofuels are such a fiasco. In terms of natural prosperity economics they're not just barely cheaper, if at all, than oil, they're shuffling deck chairs around by taking energy from one place - food production - and moving it to another.

Natural prosperity accounting would make shifts like these explicit and central, not peripheral and easy to disguise.

Of course you still have to account for more conventional utility. But the equation becomes:

value = resource taxes (including energy inputs) x innovation multiplier x human conscription ('work') x desirability x profit

In a natural prosperity economy, the only true source of profit is the innovation multiplier, so traditional corporate profit - which is 'rent' paid on 'capital' - will have to be eliminated.

Infinitely renewable resources, or intellectual and creative products which use no physical resources at all, will pay no resource taxes. Extremely scarce items will pay very high taxes. If - and only if - ways are found to make them less scarce, the taxes can be lowered.

Desirability engineering can be used to create demand, but it should be valued less than original innovation.

And I don't agree with the use of land as a key resource. It's certainly one key resource, but it's also a return to a feudalism of sorts.

If I happen to find a gold-mine under my house the value of my land increases dramatically, and accounted for - and probably taxed - accordingly.

Value of land is a very contingent concept, which is why it can't be counted as a primary resource.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Mar 14th, 2008 at 07:31:09 AM EST
[ Parent ]
Indeed.

That's why Energy Accounting could only have come from people who discount all other forms of "value".

ThatBritGuy:

And I don't agree with the use of land as a key resource. It's certainly one key resource, but it's also a return to a feudalism of sorts.

Exactly: but I advocate a form of feudalism where tribute is given to Society generally, and not an individual with a bigger axe than you have...

Like it or not, most of the value in circulation (more than two thirds in the developed world) is in fact land-based.

I advocate getting rid of the current overlay of financial claims on land, and essentially reinventing the "property" relationship.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Mar 14th, 2008 at 08:58:33 AM EST
[ Parent ]
great diary, techno. makes a lot of sense.

i went to your site to check it out, and read your bio. what a rich life, lived so deliberately!

as a massage therapist, i would like to know more about your patented device to do with ergonomics and the human back.

can you share a bit about it with us here?

the pic of you is a bit daunting...do you have any where you don't look so pissed off?

good luck!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Mar 13th, 2008 at 09:20:51 PM EST
Daunting, huh?

Well, that's what I look like.  I'll try to do better in my next life ;-)

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Thu Mar 13th, 2008 at 09:54:29 PM EST
[ Parent ]
oops i forgot to mention that i found the homepage text of your site a bit blurry, something to do with the font shadowing?  (maybe it looks better on another browser)

once i clicked through to other links, things got much easier on the eye, nice, clean, streamlined visuals, cool, efficient, (but not too utilitarian) feel.

nice job, it frames the writing without distracting from it.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Mar 13th, 2008 at 09:25:35 PM EST
Thanks for the kind words.

I don't have any font shadowing except on the gifs.  And the font choice for text is plain old Verdana which come with every OS out there.  I only checked things out Safari and Firefox during the design and it looked fine.  Of course, the love of my life gave me a 24" iMac for Christmas and it has a fabulous monitor, so I am in a poor position to judge.  So I DO appreciate the feedback.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Thu Mar 13th, 2008 at 09:50:59 PM EST
[ Parent ]
i read it in safari, too, and on a second look, i realise it's the beigey background that makes the text seem a bit scumbled, something in the contrast perhaps, between the background colour and the colour of the text. it's easier to read the linked pages than the homepage.

as for your pic, i was referring to your expression, not your physiognomy!

silly quibbles, really. magnificent content is what counts.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Mar 14th, 2008 at 05:55:30 AM EST
[ Parent ]
You are probable right about the background making the text hard to read.  I guess that is what happens when anything but a plain background is used.  I may change it.

As for my picture, I assume you are referring to the picture on my bio page.  That one was taken by a professional photographer in Helsinki.  I happen to like it a lot...but then, I LIKE pictures of me that make me look deadly serious.  Oh well, that's us Nordics for you ;-)

Thanks for the feedback.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Fri Mar 14th, 2008 at 02:37:38 PM EST
[ Parent ]
Great writing: a great grasp of the big concepts and how they conflict, and a remarkable way of drawing the contrast - I especially liked the contrast of the results of the advice of the Keynesians given to Germany and Japan in the late 1940s, with the results of the advice given to Russia by the market fundamentalists in the early 1990s.
by NBBooks on Fri Mar 14th, 2008 at 01:33:21 PM EST
Thank you!

Isn't it amazing how different the economic advice was between 1947 and 1992?

But hey, Sachs the mega-fool has a nice job at Columbia--proving that if you carry water for the banksters, you can never be so wrong as to actually do damage to your career and reputation.  sheesh

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Fri Mar 14th, 2008 at 01:55:29 PM EST
[ Parent ]


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