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The rise and fall of industrial civilisation | 59 comments (59 topical, editorial, 0 hidden)
Re: The rise and fall of industrial civilisation (4.00 / 9)
I was going to make a comment in the original diary on the fact that back when Adam Smith was writing the economy had a strongly agrarian base and so it was clear that land was one of three factors of production (and rent its price). A few decades later Ricardo was still using the export of wine from Portugal to England as part of his toy example illustrating comparative advantage. This is why modern textbooks still pay lip service to the three-factor model of production before dropping land to develop the marginalist theory.

But, by the end of the 19th century, at least in the advanced economies, the industrial sector and its supporting banking system had become the lion's share of the national product (if there had been any econometrists there to measure it by sector). So, it was a safe approximation to drop land and rent from the model. Also, because of the rise of the money economy, land was now more important not because of the rent it could command but because of the mortgage that could be put on it (backed by the rent - but the capitalization became more important than the income).

However, it doesn't appear to me that capital is as scarce since the 1980's as you make it sound. Maybe the oligarchs have been able to capture and redirect the money flows so that capital is scarce for the "real economy".

Anyway, currently we have a paradoxical situation where money is plentiful (trillions in cash have been injected into the banking system in the last 3 years) and interest rates are at historical lows, and yet credit is scarce and nobody's lending (and the solvent are not borrowing). So a simple supply-demand theory of money and interest is simply not applicable today if it ever was.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Fri Jul 16th, 2010 at 03:49:11 PM EST
Re: The rise and fall of industrial civilisation (4.00 / 5)
Migeru:
Maybe the oligarchs have been able to capture and redirect the money flows so that capital is scarce for the "real economy".

That may well be the most deadly of the ill effects of the Anglo Disease. Wealth captured by using financial instruments to realize future revenue flows from the real economy goes globally in search of ever-higher returns, and is not ploughed back into real activity.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jul 16th, 2010 at 04:20:36 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 9)
There is an easy way to break the loop and that's for the fiscal and monetary authorities to sidestep it by having the Central Bank create the money to fund direct productive investment by the government.

However, in order for this to be politically feasible, let alone thinkable for the authorities, the financial system and the real economy must remain in a seizure for a few more years.

The problem with this is that, like any complex system, prolonged starvation actually damages the productive economy, eventually beyond repair. As money to spin the wheels of the real economy remains scarce, it will slowly be stripped/scavenged/liquidated and the longer the crisis lasts the lower the attainable level of activity will be when it resumes.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Fri Jul 16th, 2010 at 04:29:55 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
Migeru:
As money to spin the wheels of the real economy remains scarce, it will slowly be stripped/scavenged/liquidated and the longer the crisis lasts the lower the attainable level of activity will be when it resumes.

considering how much of the 'real economy' consists of humiliating, underpaid makework creating stuff people don't need and persuading them they want it, perhaps there's a silver lining to this.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Jul 16th, 2010 at 05:28:51 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
There is definitely a debate there around the sense and content of real activity.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Jul 17th, 2010 at 01:39:40 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
Repeat after me: finance is the brain of the economy...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Sat Jul 17th, 2010 at 03:55:23 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 4)
"Those whom the Gods would destroy they first make mad."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 17th, 2010 at 10:51:27 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 5)
Little is likely to change so long as political power remains concentrated in the hands of today's economic elites. This is because the basic order of a society is created by the ruling elite to suit their needs. They will adapt the system as best they can to prolong its usefulness, but the present system has built to such a crisis that collapse is the most likely.

The only way out is for a new elite to create a superior system. Such a system should be sustainable and provide social justice. This is eminently possible, but there is no reason I can see to that it is more likely that such a system will in fact emerge than that we will see a far more dystopian outcome.   Given the rampant lack of concern for others characteristic of so many of the leading political and financial sector figures and given the habits of mind and heart for billions of people that tend towards submission to arbitrary authority, we could just as likely, if not more likely, go down the path of a decades long collapse of what currently passes for civilization while the climate tips into a super interglacial period and population collapses to a small fraction of what we have today.

Significant resources are required to change the political agenda in any way. Until and unless individuals with such resources embrace such a plan because they do not want their descendants living in the more likely dystopia the outlook is grim. And if one or more such individual does emerge it will be difficult to be certain they are genuine.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 17th, 2010 at 01:59:33 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
[ARGeezer's Crystal Ball of Doom™ Technology]

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Sat Jul 17th, 2010 at 03:57:01 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
Thank you for correcting my omission.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 17th, 2010 at 10:51:56 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
One should separate desirability from sustainability. North Korea is undesirable but clearly sustainable. Feeding, clothing, housing and treating the whole human population is desirable but might not be sustainable (a discussion about the ability of Earth to maintain 7 billion humans would ensue, but that is not my point here).

My point is very simple: sometimes people confuse what they like with what is possible.

Do I like the current direction of things? Certainly not, but it has been a sustainable model for my whole life. Do I think it is sustainable in the future? No, but if it collapses only in 40 years, they it would cover virtually my whole life.

This all being said, I think it will collapse sooner, and we might see a strong down-step before 2020.

So, what to do to avoid it? My thesis: nothing can be done. Collapse is a natural.

Lets see potential alternatives:

  1. A top-down alternative: trust the government, trust the EU, trust the elites. Well, clearly it is where the cancer is most installed. Getting there (ie, changing the top brass) is impossible: there is almost absolute control of the propaganda machine.

  2. A bottom-up alternative: A bottom-up alternative is completely dead for a century or so. Political alternatives (Marxism, old-fashioned social-democracy) are top-down by approach - their proposal is to have control of the state (top-down thus): Which they will not get. Other things like suggesting that people should form a local cooperative to pay to a common pot for communal support (e.g., housing costs) is something in terminal decline. In fact, the current system is precisely defined by the destruction of local community bonds (atomization, self-centeredness and greed).

A grim picture...

This leaves space for individual/family solutions. If collapse happens, be prepared. If you have some degree of preparation then you will have a possibility of influencing your neighbours (who will take note of your relative success). That will be a sound base for community building.

Seems too pessimistic? Just think roaring 20s and then the 30s and early 40s.

Of course you might believe that the human species learns with its past mistakes and a repetition (with the added issues of resource constraints, by the way) is impossible because "we have learned". If you believe in such non-sense then there is not much I can say. Only to suggest that humans are not omnipotent and omniscient gods, in fact they are closer to Baboons than to gods. As a species we do not learn from our past mistakes (or we will forget what we have learned in a couple of generations)

by t-------------- on Mon Jul 19th, 2010 at 04:24:18 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 7)
However, it doesn't appear to me that capital is as scarce since the 1980's as you make it sound. Maybe the oligarchs have been able to capture and redirect the money flows so that capital is scarce for the "real economy".

That's what I mean by "create its own scarcity." It's not so much that capital is scarce as it is that capital is being controlled by a sufficiently small number of people and institutions that it becomes a serious threat when an owner of capital makes noises about picking up his toys and leaving. (Though a case could be made that the entry of China into the global economy made capital scarce enough that the rest of the stunt could be pulled off - you can't unionise if there's ten unemployed for each vacant job, but you can if there's only two.)

In the days of the industrial state, ownership of capital was sufficiently diluted that owners had a harder time organising in any effective way to impose their claims on the users of capital. With the great pension privatisation of the 1980s, the corporate raider movement that shifted balance sheets from internal to external financing and the reduction of taxes on liquidation (top-bracket tax rates are essentially taxes on liquidation falsely booked as profit - nobody can sustainably earn millions of € a year...), capital ownership became sufficiently concentrated and sufficiently organised that capital could resume the rent-seeking that had been so rudely interrupted by the great crash of 1929. (For more in-depth discussion of these mechanisms, see here and here.

The problem with this (issues of fairness and democratic accountability aside) is that modern industrial production is extremely vulnerable to excessive rents: Industrial production is much more complicated today than it was just a hundred years ago, and when a complicated system fails, it will usually fail catastrophically (as opposed to simple systems which tend to fail gradually).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jul 16th, 2010 at 04:20:58 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
There was also artificial abundance of labor created in the industrial countries by central banks tasked with keeping inflation down, interpreted as keeping unemployment up.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sat Jul 17th, 2010 at 08:23:58 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 4)
To illustrate, an item presented in the Salon two years ago.

Riksbanken var oenig om räntebeslutet - Ekot | Sveriges Radio
Förklaringen finns bland annat i högre priser på livsmedel och energi, och i Riksbankens egna räntehöjningar. The explanation [to higher inflation] is partly found in increased prices on food and energy and also in the increased interest rates of the Central Bank.
Men till det kommer ett problem med att effektiviseringen av produktionen sjunkit, att produktiviteten blivit sämre än väntat. Något som i sin tur delvis bottnar i att det är goda tider på arbetsmarknaden med fler jobb och högre löner.But adding to that is the problem that the efficiency increase in production has declined, the productivity is worse then expected. That in turn is related to the good times on the labor market with more jobs and higher salaries.
Det är de problemen som vice riksbankschefen Svante Öberg i redan i december ville stävja med höjd styrränta.These are the problems deputy chairman Svante Öberg already in december wanted to stop by increased interest rate.

More jobs and higher salaries demands a solution in increased interest rates, because it can not be tolerated. That higher interest rates was a driving force in creating inflation is irrelevant.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Jul 17th, 2010 at 08:37:32 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 5)
What is capital scarcity or abundance? If we produce ever more, how it can be that capital suddenly runs out?

Although theoretically capital is any means of production (for rent), the overwhelming form of capital is money or financial instruments. The way money is "created" or financial instruments are structured, numerical abundance of capital basically means abundance of promises, ditto with scarcity. But a promise contract has two sides: the promised are credited with quite some power to expend, while the promisers find their freedom stressed, especially in hard times. A promise bubble produces a situation where promise entitlements are collected by increasingly smaller elite group, while promise dues start to weight (directly or indirectly) on the rest, with compounded growth. This is basically a neo-feudal order with a highly privileged minority and forever "indebted" masses.

I read somewhere (perhaps here) that the Anglo-Saxon economy dominates the planet precisely because of the power of promise economy. Other systems, without a mass of mortgage and other promises, are just very lethargic in comparison. An African anthropology study shows that tribes with culture of strong promise compulsions tend to displace looser tribes.

But of course, the risk of promise economies is that the volume of promises start to exceed natural resources and capacities. Unsurprisingly, that leads to enormous social stresses. We get indeed abundance of capital (aka promises) - and that is the stifling problem.

by das monde on Sun Jul 18th, 2010 at 12:36:27 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 6)
I'm beginning to think the entirety of Economics, as such, needs to be ripped-up root and branch.  Since the 1500s the discipline has been warped by self-seeking, self-justifications, supporting rentiers and trans-national mercantile companies. To 'Talk Economics' is to enter a twilight zone where False-to-Fact assumptions and premises seem to be necessary even if the speaker knows they are nonsense.

Looking at das monde's question to even attempt to answer means I accept that capital is a thing.  That it is a term, a noun, something that can the Subject or Predicate of a statement.  

But what if it is a Verb?  What if capital is Action or Being?  If so, saying "capital is scarce" is exactly the same as saying "walking is scarce."  If I went around saying, "Can't go down to the Post Office, WALKING IS SCARCE!!!!!"  They'd lock me up for a nutter.  

When you ... alright, when I ... look at capital I see Action and Being, not Person, Place, or Thing.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Jul 18th, 2010 at 01:18:04 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
Read or view the most recent diaries on Steve Keen's blog. Among other accomplishments Steve has come up with models that generate patterns amazingly like the performance of the US economy over the last twenty or so years. He could turn out to be the Keynes for our age, but he did not start with the advantages of position that Keynes had.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 01:41:43 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 5)
Nitzan and Bichler title their recent book Capital as Power  A study of Order and Creorder. One of their major themes is the inability of Marxist and Neo-Classical Economics to account for capital formation. Part of their foundation is Mumford's analysis of the social machine created in the first hydraulic civilizations, which had means of accounting but not money. The power of the rulers was the power to organize and direct labor and resources to their ends. That is the origin of capital and it is political in nature.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 01:58:48 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
By Creorder they mean "the creation of order" by political power.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 02:03:12 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
ATinNM:

I accept that capital is a thing.  That it is a term, a noun, something that can the Subject or Predicate of a statement.  

But what if it is a Verb?  What if capital is Action or Being?

whoa, now you're talking! this is ringing all kinds of mental bells, well done.

next words (after capital) to really parse? Commodify and Monetisation.

top comment, wonderful sunday morning brainfood, profound and excellent!

capital effort!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Jul 18th, 2010 at 05:20:58 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
thank you

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jul 18th, 2010 at 10:43:22 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 4)
"Capital" can be both a thing (a machine, an idea) or a relationship (an organisation).

"Financial assets," on the other hand, are promises. And financial assets are not capital.

One interesting little exercise to wrap your head around is to put ordinary double-entry bookkeeping in a slightly different form: The balance sheet for economic agent i can be written as

Ci + Fji + Bi - Ei - Fij - Rji = 0

summed over j, where Ci is the value upon liquidation of the capital of agent i, Fji is the long financial position of agent i in agent j (cash is a long position in the sovereign, while, e.g., student loans are a short position in the sovereign), Ei is the equity of agent i, Rji is the value of the risk of default by j on its obligation to i and Bi is the bezzle of agent i. The bezzle is composed of all the things that make a going concern more valuable than a liquidated concern - organisation, public confidence (whether misplaced or justified) in future earnings, brand value, political connections, as yet undiscovered embezzlement, etc.

Now sum the balance sheet equation over the whole of the private sector: All the financial obligations net out, and you're left with the identity

C + B + F0 - R = E

Where F0 is the net long position of the private sector in the sovereign (plus, in an open economy, the net long position in foreign countries).

The total equity in the private sector of your economy is, in other words, equal to the capital plant plus the net sovereign debt minus the net foreign debt minus the total cost of default risk, plus the bezzle.

What happens during a speculative episode is that the bezzle grows due to unjustified expectations of future revenue. This causes the total equity to go up, which allows (a) more of it to find its way into the hands of the wealthy and (b) total lending volume to go up, which makes aggregate lending risk go up too. Collective insolvency happens when the bubble bursts, leaving the bezzle unable to cover the increased aggregate lending risk.

(This analysis can, of course, be replicated for any relatively isolated sub-sector of the economy by replacing "sovereign" with "rest of the economy" in the above derivation.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 09:26:25 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
And the much loathed "National Debt", F, is a positive item until overwhelmed by the bezel, the perceived risk of which is represented by R. In effect, the thing that most on the right wing hate is the possibility that, collectively, the bezels will overwhelm and kill that which some are embezzling. This COULD be a positive and shows that much of the problem is the result of a total lack of understanding of national accounting by most people, including some accountants. (The local teabagers are led by an accountant!)

What most do not understand is that it is their largest allies that are doing the most embezzling and that the hated national debt actually stands for the monetary value of the society in which they live. How patriotic would it have been to loathe War Bonds during WW II? Not only did they help finance victory, they helped underwrite the postwar economy.

What should be loathed and prosecuted is the fraud that has been allowed to pollute the national debt and the whole society, but, because government has been identified as the problem in the minds of so much of the public, there has been insufficient outrage at the actions of the fraudsters.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 10:13:27 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
And the much loathed "National Debt", F, is a positive item

Well, the sovereign debt also carries a counterparty risk (though legal tender laws complicate the analysis somewhat on this point...), which is properly accounted for as a part of R. It is perfectly possible for the sovereign to engage in a debt binge to the point where F0 contributes a significant fraction of R. If the risk of sovereign default is underestimated, this is effectively equivalent to an unjustified increase in the bezzle and can lead to precisely the same situation of systemic insolvency.

until overwhelmed by the bezel, the perceived risk of which is represented by R.

No, R is the aggregate cost of default risk. The bezzle is different, and the bezzle isn't always bad (if it were that simple, you could have a computer run the central bank, like Friedman said he wanted...).

The bezzle can be perfectly justified - take the balance sheet of a major medical company, for instance. They have physical assets, financial assets, intellectual property, etc., but their biggest asset does not show up at all: Their organisation - their trained cadres of specialists working together in a coherent institutional framework. Why does this not show up in their book value? Well, because it has no liquidation value. Never the less, such intangible assets are very much real. In fact, the bezzle is the entire reason for keeping the going concern a going concern rather than liquidating it.

But it's impossible to device an objective way to compute the proper size of the bezzle from first principles, because (among other things) the bezzle includes expected future earnings, and there is no way to definitively state that any given expectation is justified. So while it is possible to say whether any given bezzle is clearly far too big or small, providing a precise number for its value involves a component of subjectivity. Part of the mechanism in a speculative boom is that this subjective valuation is exploited to substitute mysticism and glamour for reasoning and substance.

It's this ambiguity that makes economics interesting. And, incidentally, what makes precision in economics "a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of our quantitative analysis."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 11:28:33 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative. Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 12:13:48 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
re: "You are equating what is normally called 'intangible assets' with the 'bezel'."

That's OK and should not be the least controversial.

An intangible thing ("object") is foremost an idea. It is a mental or intellectual representation of some fact ("event") that is imperceptible to human senses which is merely the interface of the environment in which one acts. It is the thing that has yet to occur to objective measure. The unuttered idea is a fact and an intangible object.

The attribute common to yet that differentiates tangible and intangible things is time; that which is present and that which is not present.

Any demand for or claim to a future state of something, intangible or tangible object referent, is an intangible object.

The ideology of GAAP attempts to describe the essential subjectivity of business practices by enforcing applications of recognition to transaction events and objects.


Diversity is the key to economic and political evolution.

by Cat on Sun Jul 18th, 2010 at 03:11:30 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
You are equating what is normally called "intangible assets" with the "bezel". I presume this is deliberately provocative.

Deliberate, yes. Provocative, perhaps. Deliberately provocative, no.

The reason that I lump together justified and unjustified expectations of future gains is that, in the snapshot that the balance sheet represents, there is no way to tell the two apart in any manner that is both objective and precise at the same time. Nor is it relevant to the phenomena that I designed the model to analyse.

Take a company that is leveraged 4:1 and capitalised at 150 % times its liquidation value on the expectation of future earnings - that is, it has a bezzle of +50 % of its liquidation value and an equity of +37.5 % of its liquidation value. So if its bezzle shrinks below +37.5 % of its liquidation value for whatever reason, its creditors will start liquidating it in order to avoid being left as the last creditor holding claims on an insolvent institution.

The original bezzle could have been perfectly justified, based on what everybody knew or could reasonably know at the time. The new bezzle could also be completely justified, due to changes in market conditions. Or one or both could be entirely due to the overactive imagination of stock market speculators. That doesn't matter, because all that the creditors see is that the company's stock just went to zero, which is a signal for them to start sending out margin calls.

Or take a company that, due to the prevalent discount rate on the money markets, has a negative bezzle - that is, the liquidation of its plant and the sale of its patents would give more money than the money markets are prepared to pay for the future cash flow that they believe the company will generate. In that case, the company will be targeted for liquidation by corporate raiders. And it really doesn't matter whether the negative bezzle is justified on the basis of the company having an unsound business model, or the negative bezzle is due to unjustified required rates of return on money or even due exclusively to overactive pessimism on part of the stockholders.

(Of course the story about corporate raiding is a little more complicated, because it's also a story of corporate raiders exploiting loopholes in the law to liquidate companies without paying out their deferred expenses, like pensions, in full. Obviously, the ability to shaft creditors during the liquidation of an otherwise solvent company creates an incentive to liquidate perfectly sound going concerns.)

So separating the bezzle into a justified part based on brand recognition, organisation, business models and so on versus an unjustified one based on hype, glamour and mysticism does not, I think, add sufficient analytical power to the model to compensate for the demarcation problem it introduces.

Nitzan and Bichler include a term for "hype", a coefficient that accounts for differences between "actual" value and the value that the market assigns to assets when they are capitalized and discounted to present value. The hype can be above or below unity.

How do they determine the "actual" value? The actual value of an asset depends on the expectations, plans and strategies for the future, as well as the applied discount rate. Now, the future can be guessed at, studied or planned for, but the discount rate is (in part) an explicitly political parameter that has no objectively true value.

And there is another advantage of separating the intangible assets from the physical assets: If you want to model the cascading collapse during a financial panic, explicit bezzles are more illustrative and mathematically convenient (or at least I think so) than dealing with multipliers on asset values.

Additionally, it is possible to be an economic actor with no tangible assets - a company that deals entirely in financial assets and rents its buildings and equipment would have no physical portfolio to apply the multiplier to. Yet presumably it has a positive bezzle - if it did not, we could not expect it to remain a going concern, per the discussion of corporate raiding above.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 04:13:11 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
How do they determine the "actual" value?

If I recall correctly, they don't try. They do note the various factors that can affect that value, not least the political, economic and social power to favorably manipulate popular perception.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:31:39 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
"unobserved inputs"
(intangible objects)

Diversity is the key to economic and political evolution.
by Cat on Sun Jul 18th, 2010 at 07:52:10 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
That is why such a store is placed on the value that the most recent fool has placed on an asset, the "market" price.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:33:27 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
"observable inputs"
are tangible objects,
a transaction price
paid
with cash

Diversity is the key to economic and political evolution.
by Cat on Sun Jul 18th, 2010 at 07:53:36 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
Thought provoking, thank you.

I would like to quickly note, while I ponder:

  1.  You left out Information in your definition of Capital

  2.  I have grave reservations about ideas being a thing.  

  3.  The equation you gave is zero sum, which is accurate for the normative analysis and use of Double Entry Bookkeeping.  I dispute it.

But not until my brain engages.  :-D


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jul 18th, 2010 at 10:54:37 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
1&2) Because it is either commodified, in which case it can be broken down into a liquidation value and a bezzle value, or it is a common, in which case it does not appear in the world of double-entry bookkeeping. One of those diaries that remains unwritten in the back of my head is on how privatisation (and intellectual property laws) fictitiously creates wealth by enclosing commons, thus making them appear on somebody's books where they weren't before (properly accounting for them would put the commons on the asset side of the sovereign balance sheet, but the asset side of the sovereign balance sheet is not often properly accounted for).

3) The equation is zero-sum because the bezzle is a residual - unlike the other entities, it is impossible to compute from first principles, so it is taken to be whatever is needed to balance the books. Additionally, this is a static equation - the dynamic equations are in the cash flow and production/consumption functions. But I'll have to work a bit more on those to re-cast them in an analytically productive form.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 11:05:21 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
In Capital as Power the difference between the capitalization of Microsoft and GM was used to illustrate the role of "hype" or "bezel" in capitalization. GM had massively greater physical plant and total physical assets, but because of expected cash flow and return on capital, had vastly smaller capitalization.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 12:20:37 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
But this is not necessarily unjustified - Micro$oft may not have much physical plant, but they have an organisation that certainly rivals that of General Motors, and they are in a business that actually has a long-term future.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 03:29:37 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
and they are in a business that actually has had a long-term future.

Fixed. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jul 18th, 2010 at 04:08:38 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 0)
The comparison was made a few years ago so MS had some future value at that time. Still does, but I expect it to be depreciating.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:15:31 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
Well, the business of making operating systems does, I believe, have a future.

Whether Micro$oft's business model has a future is another question entirely. And it should be evident from the history of stock markets that considerable discomfort awaits those who believe that the future of a company's market value has been revealed to them :-P

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 04:17:22 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 2)
I'd put the OS business somewhere between 'mature' and 'declining' on the corporate life graph.

If I was throwing investment money around I'd be spending it on robotics, private space access, interface design and biotech.

The core OS part is pretty much an irrelevance on PCs now, and doesn't have the feudal power that it had now that many people use the OS as a gateway to the web.

MS tried and failed to control that gateway, but Bill G was too slow to understand why it mattered, and without its monopoly MS is failing at almost everything it touches.

MS will carry on, zombie-like, for at least another decade, but it's closer to GM than it might think it is.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jul 18th, 2010 at 04:33:15 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
Decline, perhaps, but it will not go to zero. As long as we have computers, we will have operating systems of some sort or another (most people don't speak machine code...). Cars, on the other hand, could easily go all the way to zero when the oil runs out, or at least near enough as makes no matter.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 04:52:17 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
Microsoft is not in the business of crafting operating systems, Microsoft is in the business of leveraging the power law distribution of operating system market share into an effective monopoly.

When I can keep a class spreadsheet in the cloud and get at it from anywhere using a browser without really caring which operating system is running underneath, and we see programmers programming to various browsers and browser plug-ins, the termites have got to the load bearing beams.

Meanwhile, GM can build pluggable battery electric share cars and pluggable battery electric short haul container haulers and continue in their same basic business model for decades. I'd rather hold Ford stock long-term than GM stock, but I'd rather hold GM stock than Chrysler ... as the industry downsizes, the number of transnational firms with substantial US manufacturing will decline.


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 Tue Jul 20th, 2010 at 12:57:30 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
I never thought it was unjustified. If there is no, or insufficient market for the existing GM capital plant, it is only worth its salvage value, or it becomes an expense to "mothball".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 04:14:09 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
My difficulty is not with your exposition of Double Entry Bookkeeping but with the concept of DEB itself as taught, as I understand, by Economists based, as it is, on out of date mathematical philosophy -- if you will.  

[Lyapunov] showed that a sufficient condition for local stability was that the real parts of the eigenvalues for [a Jacobean] matrix be negative.  It was a small step from this theorem to understanding that such an eigengvalue possessing a zero real part indicated a point where a system could shift from stability to instability, in short a bifurcation point.

Mathematics of Discontinuity

Thus the quantification of a firm using DEB is nothing more than a snapshot of the firm at a particular moment in time having unreliable predictive value over time.  

And the unpredictability stems directly from "the cash flow and production/consumption" since they are the dynamic mathematical parts of the DEB equation.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Jul 19th, 2010 at 01:25:54 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
Bingo. Which is why the above comment is a comment, rather than a Probably Incredibly Unreadable Modelling Thread. You need both the state functions and the dynamic equations to have a full model, and the state functions are the easy bit :-P

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jul 19th, 2010 at 01:56:35 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 0)
"Oh," he said, disappointed.  "You're no fun a'tall."

:-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Jul 19th, 2010 at 02:35:46 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
When was the last time you sat in an accounting class?

Diversity is the key to economic and political evolution.
by Cat on Mon Jul 19th, 2010 at 04:52:49 PM EST
[ Parent ]
Review (none / 0)
April 2010, Principles of Accounting, illustrated
Dec 2007

Diversity is the key to economic and political evolution.
by Cat on Mon Jul 19th, 2010 at 07:03:53 PM EST
[ Parent ]
Re: Review (none / 0)
I see I have to get off my ass and write that Modeling diary.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jul 21st, 2010 at 01:16:33 PM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
I think money is a poor substitute for capital in this analysis as money is needed as cultural chip to access either land, labor or capital.

Think instead of the tools, the machines, the workbenches and the assembly line of industrial production. As we produce ever more, we need ever more of resources to feed in (land), workers to man the machines (labor) and and machines (capital). Any one of these can hinder the growth of the production. Of course, production can be directed to build capital, but if capital is controlled in a few hands, that will not happen.

When speaking of non-industrial sectors, there are also ways to control capital, today intellectual property legislation in different forms seems to popular method, a couple of centuries ago guilds were the rage.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Jul 18th, 2010 at 08:25:05 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (4.00 / 3)
Mumford showed that even the most rudimentary means of accounting for grain, timber, livestock, etc. is adequate to underpin the capital that inheres in the social machine of the early state. Coins did not come along until 800-700 B.C. and, naturally, had the image of the sovereign embossed upon them when they did. Double entry bookkeeping is, in effect, just fancier coins. What matters is how honest it is.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 10:20:42 AM EST
[ Parent ]
Re: The rise and fall of industrial civilisation (none / 1)
I have said "Although theoretically capital is any means of production...

The problem with machines (and such) as capital nowadays is that the machines are expendable soon because of fast technology progress and obsolesce turnover. The whole industry business model is based largely on planned obsolesce. Material resources get little respect as capital. Like in the "Monopoly" game, the purpose is to score that funny paper. The real capital with power is the capital of implicit promises and privileges represented by money.

The whole purpose of economy seems to be not to serve some needs of aggregate production or producers. Rather reversely, production exists to serve needs of financiers and rentiers. They have such a huge volume of implied promises and privileges, that they can hardly do anything with it but nominally grow or convert it to commanding social power. And the whole political-economic system is geared to satisfying that.

by das monde on Sun Jul 18th, 2010 at 08:54:06 PM EST
[ Parent ]

The rise and fall of industrial civilisation | 59 comments (59 topical, 0 editorial, 0 hidden)
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