Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

WHO Are The Utopians?

by ARGeezer Sat Oct 2nd, 2010 at 12:36:56 AM EST

Right wingers and liberal Democrats both love to say that I advocate for some kind of nebulous utopian dream.
 from The Progressive Dilemma by Nick Egnatz in the Diary What to do now? by tahoebasha3 at Docudharma

Polanyi, the history of economic thought and the economists

The terms Utopia and utopian are often used as terms of disparagement, and not without reason. Massive social experiments based excessively on theory or reason have wreaked social havoc from The Terror during the French Revolution to the Maoist Great Leap Forward in the 1960s and 1970s. Yet one of the most dramatic Utopian experiments was never so labeled. The fact is that both Classical Economics and Neo-Classical Economics were/are utopian systems. In this sense Adam Smith predates Classical Economics. He was more practical and descriptive. Bentham, James Mill and Ricardo were prescriptive and axiomatic. And the economic system they created was, in fact, utopian, but of the dystopian flavor for all but the very wealthy. The 20th Century extension of Classical Economics -- Neo-Classical Economics -- retains all of the original utopian features despite the problems it has been shown to exhibit. Between them, Classical and Neo-Classical Economics as applied in the UK and the USA constitute the longest running Utopian experiment of which I know. We need to understand this history, which has been actively shunned, in order to understand where we are and where we are headed, unless we can change direction. Update [2010-10-2 9:36:11 by ARGeezer]: Spelling, syntax, added link and edits for clarity.


In fairness the Classical Economists created this utopian system at a time when the understanding of markets and economics was rudimentary and when there were not national markets in the sense we understand today. And they were reacting to the remnants of the old hereditary feudal system of social organization and during a period of social crisis involving a highly dysfunctional rural labor system that had been effectively wrecked by the paternalistic Speenhamland System of aid to the poor. Speenhamland had been created by the squire-archy, who had to pay for poor relief, as a better way for them to deal with increasing social dislocation due to rural unemployment  in the 1790s, during a time of war with Revolutionary France, and it effectively succeeded the Elizabethan Poor Laws. But its method of implementation was disastrous to all who fell under its purview and it prevented the emergence of a true labor market just when the English Industrial Revolution needed such a market badly while destroying all incentive for self improvement by the poor.

The founders of Classical Economics saw the problems and advocated the creation of a market based system for land and labor. They succeeded in pushing through a repeal of all assistance to the poor so as to force the creation of a labor market in the early 1830s. In time this led to great wealth, but the immediate cost to a generation of the working class was enormous. Out of their desire to liberate the operations of economic activity from the constraints of feudal traditions they posited a self regulating, autonomous system of economics, analyzed how that system should work, and passed legislation to enable the creation of a set of markets. The whole process was one giant social experiment by wealthy Liberals and their business allies on the working class -- the very model of a Utopian social experiment in a class based society.

In every society that had existed to that time productive effort, or work, was embedded in the structure of the society. People worked for a myriad of reasons, none of which were purely rational or economic. In some societies a the fruits of man's effort went to his sister's families, not his own. All of these different societies had evolved organically. The Egyptians had built the Pyramids without even a concept of money, let alone a labor market.

In order for the self regulating market based system created by the Classical Economists to work there had to be functioning markets for labor, land and capital. The City of London had evolved ways of dealing with capital and there were pressures to remove restrictions on the sale and use of land, but labor was, by brutal abandonment, turned into a market by laws passed in Parliament. Any remaining poor relief was deliberately made as repugnant as possible. If one wished to feed their family, one worked on any terms available. And there was a surplus of labor. "The market will provide!"

The full system of Classical Economics treated all elements of production as commodities and required functioning markets for the commodities of land, labor and capital. But these were fictitious commodities -- not really commodities in the sense that corn, coal and sugar were commodities. Labor was provided by human beings who came, preferably, from families, were required to be minimally socialized and were also subjects of the crown and members of the Church of England or one of the dissenting churches. In addition to their labor they they were seen as possessing souls. Land extended to all aspects of the physical environment, which could not be degraded with complete impunity. Money, or capital, is a relationship between people in the context of a society and not just a commodity. Self regulation of money was thought to come from the magic of the Gold Standard, despite the fact that the money supply, (neglecting the evil magic of fractional reserve banking), was thus dependent on the rate with which new gold mines were discovered and despite the economic havoc that particular fact wreaked on societies which might need different rates of increase in money than that accidentally provided by the mining industry. It is all of these non-economic aspects that cause land, labor and money to be fictitious commodities.

The Classical Economists seem to have fooled themselves into thinking that the sphere of economic activity could be made into an autonomous area operating according to discovered natural laws, like those that Newton had discovered for the physical world. But in the process they did violence to the social system from which that autonomous economy had been ripped. The "laws of economics" which they thought they had discovered did not and were not supposed to take into consideration human and environmental needs. Unchecked, the operations of the autonomous laws of economics on land and labor could destroy the society and the environment -- could and tended to do so. Spontaneous efforts to protect society and the environment arose, but they were de-legitimated by economic theory and that hampered their effectiveness.

For two centuries economists have claimed primacy for their "laws of economics". It is true that the system they described has been associated with the creation of a vast increase in material wealth. But the need for protective measures to limit the scope of economic autonomy has remained and there has existed a continual tension between economists and their business supporters who claim primacy for what they see as "the laws of economics" and those who want to insure the survival of the society and the environment. In the last thirty years the pendulum has swung strongly to the side of the proponents of economic autonomy with the resulting social dysfunction that we see all about. There is a very good argument to be made that such successes as economics had enjoyed has been as much the result of those who would limit it as of those who would make it autonomous. And those who would make it autonomous, and who still maintain that it must be autonomous, remain Utopians.

The view presented above is largely derived from Karl Polanyi's The Great Transformation, 1944, which I am in the process of re-reading, though the formulation is my own. They also draw in part from Capital as Power by Nitzan and Bichler. Despite, or perhaps because of, its incisive and insightful nature Polanyi's The Great Transformation -- a major work of economic and social history and of the history of economic thought -- is largely unknown today to most economists. Economic history can be inconvenient to economic theory. Perhaps that is one of the reasons the teaching of the history of economic thought has fallen into such decline in US academia. I have seen economists complain that economic historians hate economists. I would suspect that what the economic historians hate is that contemporary economists largely ignore economic history and the history of economic thought, of which a large number are largely ignorant.

Display:
As Polanyi notes, the market system of automatic control of economic activity did not automatically create itself.
From Chapter Five: Evolution of the Market Pattern (p.60) The Great Transformation 2001 edition:
    The market pattern, on the other hand, being related to a peculiar motive of its own, the motive of truck and barter, is capable of creating a specific institution, namely, the market. Ultimately, that is why the control of the economic system by the market is of overwhelming consequence to the whole organization of society: it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system. the vital importance of the economic factor to the existence of society [once a society has moved to industrial production and is no longer in any significant sense subsistence based - ARG] precludes any other result. For once the economic system is organized in separate institutions, based on specific motives and conferring a special status, society must be shaped in such a manner as to allow that system to function according to its own laws. This is the meaning of the familiar assertion that a market economy can function only in a market society.

The step which makes isolated markets into a market economy, regulated markets into a self-regulating market, is indeed crucial. The nineteenth century--whether hailing the fact as the apex of civilization or deploring it as a cancerous growth--naively imagined that such a development was the natural outcome of the spreading of markets. It was not realized that the gearing of markets into a self-regulating system of tremendous power was not the result of any inherent tendency of markets towards excrescence, but rather the effect of highly artificial stimulants administered to the body social in order to meet a situation which was created by the no less artificial phenomenon of the machine. (The demands for labor created by the Industrial Revolution.) The limited and unexpanding nature of the market pattern, as such, was not recognized; and yet it is this fact which emerges with convincing clarity from modern research.

....

The reasons are simple. Markets are not institutions functioning within an economy, but without. They are (the) meeting place of long distance trade. Local markets proper are of little consequence. Moreover, neither long distance nor local markets are essentially competitive, and consequentially there is, in either case, but little pressure to create territorial trade, a so-called internal or national market. Every one of these assertions strikes at some axiomatically held assumption of the classical economists, yet they follow closely from the facts as they appear in the light of modern research.

Polanyi then proceeds to illustrate his point with examples for mid 20th century anthropology.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 2nd, 2010 at 12:37:46 PM EST
Geezer,
I haven't been reading all of your recent work, so perhaps should not comment, but --
elaborate on this bit for me, will you?

The limited and unexpanding nature of the market pattern, as such, was not recognized; and yet it is this fact which emerges with convincing clarity from modern research.

By "limited and unexpanding nature" --- is he saying the inflexible, the unadaptable here?
Because in a very direct sense the tendency of the market world to expand to fill all economic space, to absorb and alter social space is clear.
It simply does not adapt to irritating preexisting social components, no matter how desirable, but erases them. Like the commons, for example.

And this bit:

The reasons are simple. Markets are not institutions functioning within an economy, but without. They are (the) meeting place of long distance trade. Local markets proper are of little consequence. Moreover, neither long distance nor local markets are essentially competitive, and consequentially there is, in either case, but little pressure to create territorial trade, a so-called internal or national market.

A paragraph or two would be appreciated--
All of this seems to presuppose that we are in what is now understandable as the late stages of a capitalist- market economy, in which internal predation has concentrated control. In this case, I can see it.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sun Oct 3rd, 2010 at 05:20:09 AM EST
[ Parent ]
By "limited and unexpanding nature" --- is he saying the inflexible, the unadaptable here?

I take him as referring to local markets and their tendencies PRIOR to the transformation of the traditional society into a market society. Local markets were features of traditional societies and long distance trade was of limited impact on traditional societies UNTIL the increased productivity of machine driven production was empowered by the transformation of significance between the economic and social spheres that made the society a function of the economy, not visa versa.

Fordist productionism was the last stage of the socially beneficial aspects of the great transformation. It has now been abandoned and the financial sector is feeding on the productive functions of society.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 3rd, 2010 at 11:23:34 AM EST
[ Parent ]
But there are empirical questions for this human system... so maybe not laws, but things which should be closed to law.

Reading and listening to the author of debunking economics Steve Keen and his analysis of Debt, he claims that who creates the money in a society is an empirical question. In our society is created by debt, finding deposits comes later.

In other words, whether we are in Minsky fly to safe assets world as DeLong says or in a debt-reduction driven economy should be a matter of empirical analysis, isn't it?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Oct 4th, 2010 at 05:11:42 PM EST
The problem with many such empirical questions is that they can often only be answered by looking at historical data after the fact. So while we may say with great certainty that some statements are Not Even Wrong (most of marginalist economics falls in this category), it is usually not possible to say with any great confidence that this statement is right and that one wrong until after the fact. And policy needs to be made as things happen, not (just) after the fact.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 4th, 2010 at 05:32:12 PM EST
[ Parent ]
But, if after the fact, we find that government can nto control the monetary mass unless it controls directly the banks, we must conclude that banks generate debt first, find reserves later (via the lack of need for firms to hold any reserve on debt), we should conclude that all first year macro books, including Krugman, are wrong.

I can not even imagine a first book in Physics being wrong in the appropriate approximation...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Oct 4th, 2010 at 05:38:30 PM EST
[ Parent ]
we find that government can (not) control the monetary mass unless it controls directly the banks

I think that it is more important is to regulate the purpose of the loans and the quality of the loans, but this has not yet been shown to be feasible over a century. Given the money that can be made through destructive lending combined with capture of regulatory enforcement and policy of the government by large banks, strict limits on political contributions may not work -- bankers will just capture that regulatory process, as they have done in the USA.

Given that, I think direct government control of banks might actually be worse than the existing arrangement. It certainly would require an actual functioning representative government that is based on votes and not contributions. In the USA monied interests have always had a disproportionate influence on government, but over much of our history there have been competing financial interests that prevented total domination by one sector. There still are a number of competing interests, but the relative weight of the financial sector is probably at an all time high.

The general population is becoming more and more aware of the disconnect between finance and the rest of the economy and society in the US, but they may well be effectively misdirected by Tea Party astroturfing on behalf of very self serving interests masquerading as libertarians, such as the owners of Koch Industries, Rupert Murdoch, etc. The broadcast media is owned by large financial interests and cannot undercut their interests.

And all of this is occurring within a society that has been transformed into an adjunct of the economy. One result is that, compared to economic claims, all other concerns are made to seem less legitimate. But the fact that the government is run in the interests of a loose alliance of wealth whose most basic interests are self serving has generated what I believe will be uncontrollable instabilities.

I do not see how this can be changed for the better without a larger portion of the population, including some monied interests, coming to see that it is in their interests to create greater stability by looking to sustainability and allowing more of the benefits of the economy to go to the bottom 99% of the population.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 5th, 2010 at 02:20:28 PM EST
[ Parent ]
kcuire
In other words, whether we are in Minsky fly to safe assets world as DeLong says or in a debt-reduction driven economy should be a matter of empirical analysis, isn't it?

The two are hardly exclusive and we are experiencing both a flight to safety and deleveraging just now. Those two phenomena are together largely responsible for the huge drop in the money supply, broadly measured, which is threatening to create a debt-deflation economic death spiral in the US, the UK, Ireland and other EMU peripheral countries.

The problems are largely those of widespread failure of understanding of economic realities combined with a response of repugnance by large numbers of those with means towards doing almost anything that would help. A very large number of those with appreciable wealth are most concerned to keep it rather than to increase it just now. Solvent corporation find the current environment attractive for purchasing valuable assets from insolvent companies on the cheap and are especially interested in buying up competition or potential competition so as to increase the depth of their market penetration. Increasing the width is for times of expansion. And just because they have the vast majority of available wealth does not mean that they do not want the rest.

They analogize endlessly to the family budget without realizing that families cannot print their own money while sovereign nations with their own currency which floats freely against other currencies can and that this difference is crucial for effective policy in these circumstances. But they can conceive of no way that this could be of benefit to them. Mostly they are afraid that printing money will just dilute the value of their existing money.

Many in the USA were happy to see banks in which they have an interest take TARP money to guard against a "liquidity crisis" and remain happy to see those same banks make money by borrowing money from the government at .25% and parking it at the Fed to receive 1.25% or what ever the numbers are this month. Not a big return but still it is free money. And as stakeholders in the financial sector it certainly seems right and proper that the financial sector be saved. That whole process does nothing for the rest of the economy, but they don't see that as their problem.

Many in the financial sector and more that aspire to be in that select company have been nurtured for so long on Randian superhero myths that they feel empowered of feel that those with whom they aspirationally identify are rightly empowered, as will they be some fine some day. As the psychologist David McClelland said in Power, The Inner Experience, Wiley, 1975: "The purpose of power is to feel powerful." So even those who only aspirationally identify with the powerful still can get the feeling -- a feeling that is very fundamental and addictive. With that kind of reward they will be extraordinarily resistant to anything that challenges that feeling -- very much like an addict resisting withdrawal.

I suspect they see money that is in circulation as game and themselves as hunters; money they have previously made is theirs to keep, as they got it by their prowess, and they have every right to go right on hunting. It is the nature of the hunter to kill the last game animal. Not understanding the difference between governments which can print their own currency and individuals who cannot, they instinctively see spending government money to employ people doing socially useful things as taking money they have made and giving it to others who were unable to get a job on their own.

This flows from a society that has been transformed into an adjunct of the economy and where the source of all true values are found in the rationale of the market. That the attitudes sketched above are both ridiculous and monstrous is of no significance until and unless enough people understand what has happened, insist on change and find a way to bring about that change.


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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 4th, 2010 at 11:44:28 PM EST
[ Parent ]
Geezer, you repeat a couple of times that sovereign nations or governments can print their own money. That is not accurate, for what is now a common knowledge. Governments do not print, and Central Banks are not actually government institutions. The best a government can do is to borrow money from "its" Central Bank - and that would be indeed like printing money, except with the interest rate attached. And paying back that money with all interest requires more money to be "printed" through debt issue.

This is indeed a serious game, even more dramatic than privileged hunting. Money creation has stopped, as there is no bubble to justify a massive credit issue. Common folks are desperate for fishing out the money that is left in their circulation. The haves won't be making double digit profits, but they are going to live even better (if they can ignore gloomy surroundings). Real sharks will continue receiving interest payments (almost in full) while doing nothing - that is the best way of living in the new neo-feodalism. And that will continue for a long time. The real face of money now is that of privilege - think of accumulated credit in the other sense of the word. What the TARP really did is that it excused the big banks from their insane financial obligations while keeping their credit claims intact. That is quite a huge item of favoritism, when you think about it.

This is not quite a time to be philosophical about utopias. This is a singular development, that fixed financial game approaching its Endspiel. It won't be pretty, regardless of whether it will go according to the fixed plans. At best, the world is hijacked by a group of top bankers. Slightly worse, the big governments have no good clue what they are doing or what is actually happening.

by das monde on Fri Oct 8th, 2010 at 09:57:26 AM EST
[ Parent ]
Governments do not print, and Central Banks are not actually government institutions. The best a government can do is to borrow money from "its" Central Bank

It is the sovereign that enforces legal tender laws. As such, there is no useful institutional distinction between the sovereign and its central bank.

The useful institutional distinction is between the factions who seek to artificially constrain sovereign outlays (such as by promoting the "independent central bank" game of three-card monte) versus those who are not so blinkered by Mercantilist conventional wisdom. The former group is not exclusively confined to the central bank - if it were, it would be relatively trivial to purge it, since the central bank functions, like all banks in a Chartalist monetary system, purely by the grace of the sovereign.

The problem is not that there is a nominally independent central bank. The problem is that crazy people are in control of the levers of government.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 8th, 2010 at 10:59:19 AM EST
[ Parent ]
The way the sovereign of a democratic government is evolving, the actual sovereign in money. That's where the power lies, under everyone's consent. Governments would do a lot these days, but not something fundamental. Honour of financial ties above all.

Governments are not crazy. They are just mindlessly corrupt.

by das monde on Fri Oct 8th, 2010 at 11:14:53 AM EST
[ Parent ]
In the USA there is nothing to prevent the Treasury from ordering the Comptroller of the Currency from printing more, and even larger, bills. The Greenback dollars from the Civil War period were produced by an agency of the US Government and we could do so again.

But the far more significant power is for the government just to credit checking accounts for purposes it chooses. It currently does this with income tax refunds, Social Security payments, Medicare, etc. The vast majority of "money" is just electronic credits and debits.

Modern Monetary Theory holds that governments can spend on socially necessary functions, especially in times of unemployment, up to the level that will start to produce increases in the cost of labor without having any inflationary effect. What happens is that socially needed tasks get done by labor that otherwise would have been unemployed. The economy and society thus benefit from production that otherwise would have been lost forever. People who are capable of doing useful  things cannot go back and work on a previous day when they were involuntarily unemployed.

Bill Mitchell at BillyBlog and Randal Wray, Michael Hudson and others at New Economic Perspectives have written extensively on this subject. Crediting someone's account actually does not "print money" although the account holder could certainly turn the credit into cash should they so wish. A better term for this would be that by so doing the Government "spends money into creation", while taxes take money out of the economy. I don't pretend to understand all of the details of this but I can see that theories of economics that include monetary models that are not congruent with how the system actually works are not going to give good or useful results. Those who would criticize government spending in times of recession always resort to arguments based on false premises as to how our monetary system works.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 8th, 2010 at 12:54:19 PM EST
[ Parent ]
ARGeezer:
A better term for this would be that by so doing the Government "spends money into creation",

Private banks do just the same when they credit the accounts of suppliers; staff; management; shareholders; or anyone who has sold them a financial or other asset.

When they are doing this they are instantaneously creating the demand deposits for the recipients, in just the same way they instantaneously create demand deposits when they create credit as interest-bearing loans.

If a private bank can do it, why not a public bank?

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

by ChrisCook (cojockathotmaildotcom) on Fri Oct 8th, 2010 at 01:09:44 PM EST
[ Parent ]
Why indeed! California could solve a lot of its problems just now by creating its own Bank of California to handle all California State expenditures and tax receipts. The problem consists in insuring that the bank is run prudently and honestly. Else it could just turn into more insider looting.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 8th, 2010 at 01:47:02 PM EST
[ Parent ]
How much do the governments "spend money into creation"? The way its happening is through greater national debt - which means that the society and the folks (even if receiving "handouts") become increasingly indebted to bond holders - and the governments look ready to enforce that relation strictly.

The other side of sovereignty is the power of the banking investors. As some bankers hold more money than most of sovereign nations combined, they are apparently hold more authority and power as well. Say, the known examples of hyperinflation (and non-inflation, as in Nazi Germany) rather show the free will of international financiers than vanity of press printing. If governments were to exercise radically the sovereignty in legal tender matters, what we can expect from those winning everything now? Wouldn't there be a difference between nominal and real (through astutely hidden) sovereignty.

...while taxes take money out of the economy

This is not clear to me. Government activity has expenses, and it is a part of the economy. In the system that is working now, money is taken out by paying back debt.

by das monde on Fri Oct 8th, 2010 at 11:09:41 PM EST
[ Parent ]
When the private sector has made a mess of things and is justly afraid to invest their own money in the environment that their actions has created there are two options:

  1. Wait until things sort themselves out. If the economy goes into a debt-deflation spiral this might take a long while and result in a collapsed society.

  2. The government can spend directly on projects that will provide a return on the investment. Just now that would be renewable energy and electric rail transport in the USA, but green transport friendly affordable housing would also qualify. Almost anything useful would qualify, but why not concentrate on the most important needs? Capital spending projects do actually stimulate the economy as work is being done on things that do not result in immediate consumption. That increases demand for consumption goods. This is more helpful if your economy actually produces consumer goods -- a bit of a problem in the USA, but it is still helpful.

Numerous studies have shown that such government intervention is less costly in the long run than doing nothing, especially when there are social programs such as unemployment insurance that increases during recessions -- i.e. when the private sector has messed things up.

Just now the private sector has created what is probably a bigger mess than was created after the Crash of '29, so the intervention should be larger. It is not that such deficit spending is a good in and of itself, it is that it is far superior to doing nothing. Even better would be a re-regulation of finance to insure against a repeat of this calamity.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 9th, 2010 at 01:20:18 AM EST
[ Parent ]
This discussion is drifting sideways, but anyways. The problem with Keynesian deficit spending is deficit spending. The governments just do not "spend money into existence". The feel obliged to borrow money from the "existing" capital and then spend it. Nasim Taleb has already have enough of this reciepe.

There is also a third possibility of your list - the crisis is so deep that no Keynesian spending, however gross, would wake the conventional economy up. A paralyzed economy is only a symptom. The problems won't be solved while stiffing (to some, very comfortable to others) amount of debt is out there.

by das monde on Sat Oct 9th, 2010 at 05:56:48 AM EST
[ Parent ]
While the sovereign does not need to issue bonds in order to fund deficit spending (because the sovereign, being able to enforce legal tender laws, does not need to fund deficit spending at all), it can sometimes be a good idea to issue bonds in a volume that happens to coincide with the amount of deficit spending.

Imagine that you are deficit spending because you are in a balance sheet recession. The fact that you are in a balance sheet recession means that a lot of the legal tender you deficit spend is going to end up in somebody's mattress, to offer collateral against potential margin calls.

This is not really a problem - after all, you can just deficit spend more. But what happens when you have lifted the economy out of depression? Why, all the legal tender that was hidden in mattresses to guard against margin calls that never did come (partly because you were deficit spending to get the economy afloat again) is going to come out of those mattresses.

This is why you want to, during the recession, exchange some of the legal tender in the mattresses for T-bonds. For the purpose of guarding against margin calls, T-bonds are very nearly as good as legal tender, so you do not impose any great drain on any actual cash flow. But when the mattress-stuffing people discover that the recession is over and attempt to take their money out of their mattresses, they will find that when it comes to doing anything other than covering your ass from a margin call, T-bonds are considerably less useful than legal tender.

So by issuing T-bonds during your deficit spending, you can obtain greater control of the process of returning the money stuffed in mattresses into the political economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 9th, 2010 at 09:31:43 AM EST
[ Parent ]
There is also a third possibility of your list - the crisis is so deep that no Keynesian spending, however gross, would wake the conventional economy up.

This would have nothing to do with the depth of the crisis, and everything to do with the underlying economic fundamentals of the crisis.

There are four factors of production that are required to make a modern industrial state work: Raw materials, labour, capital and financial assets. "Economic crisis" is normally taken to mean that there is unemployed labour, because unemployed labour creates real hardship for real human beings, something that unemployed raw materials, financial assets or capital typically does not.

Now, if we define an economic crisis as a surplus of labour relative to requirements, then it must mean that one of the other three factors of production forms a bottleneck.

If and only if the bottleneck is a lack of financial assets in the right places at the right times, Keynesian deficit spending can help. But if the shortage is in financial assets, as opposed to real capital or raw materials, then there is no crisis so deep that adequate Keynesian spending will not bridge the shortage of financial assets.

If, on the other hand, the shortage is in real capital or raw materials, then there is no crisis so shallow that it can be bridged by Keynesian spending, because under a shortage of raw materials or real capital, Keynesian spending would not be addressing the problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 9th, 2010 at 09:41:31 AM EST
[ Parent ]
The problem is not just one of on what the money is spent but also one of who gets the money. We need to remember that the "Great Recession" is largely the result of those who have wealth being afraid to invest and unable to practically consume more than a tiny fraction of their existing income. Increasing taxation on this tiny group and then spending those revinues for socially useful purposes would be appropriate in these circumstances.

Giving TBTFs more money, as has been done with TARP, is only useful to prevent their insolvency from becoming undeniable. Since it is their excesses and folly that has let to the GFC, it might be a good idea to let them be "resolved" instead of giving them more money.

On the other hand, money that is credited to those without wealth in return for labor provided performing socially needed tasks pays for the accomplishment of those tasks AND gets spent on consumption, which will boost the economy. It might also be sensible to enact policies that result in the return of some of the manufacturing operations that have been shipped abroad so as to re-create a more balanced economy.

As to your perception that the conversation is going sideways, it seems that what would be forward to you would be towards more "austerity". That path seems very likely to end in a death spiral of debt-deflation. If we want to get out of the liquidity trap, etc. in which we find ourselves we need a combination of fiscal and monetary policies and re-regulation that begins to reverse the massive wealth disparities that current policy has generated and that undoes some of the damage done by globalization.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 9th, 2010 at 11:00:40 AM EST
[ Parent ]
This discussion is drifting sideways...

Of course the one thing that has not been explicitly discussed here is the role of debt and debt to GDP ratios in the existing crisis. In Neo-Classical Economics debt is not a consideration. In the real world it is. The Fed and the ECB are both pursuing policies that are aimed at facilitating the use of bank created debt to extract the last drop of blood from the body economic in their respective areas. This has, in the USA, been accomplished via a giant control fraud where the financial sector first, starting in the '80s, looted and destroyed the Savings and Loan Associations and turned mortgage issuance into a game for commercial banks, the Fed provided increasingly cheap money through low interest rates, anti-regulators were appointed to all significant regulatory bodies and then Congress repealed Glass-Steagall. The result is that money creation came to be a more lucrative for profit exercise by the big banks on Wall Street in conjunction with the shadow banking system.

Finance turned malignant and banks no longer loaned money for productive enterprises. Instead they financed the buy-out of existing productive enterprises and shipped the production to China, etc. Most of the debt they have created through serial bubbles is essentially fraudulent, or counterfeit debt, as Jerome would have it. We are now in the situation that the debt has grown to a point, in 2007, that it could no longer be serviced by borrowing the interests for "interest only" payments and we have entered a deleveraging cycle where the economy is contracting and the overall situation is deflationary.

It is not possible to repay the accumulated debt at this point, nor should most of it be repaid -- except for the unfortunate fact that bogus assets have been sold to all of the pension funds, etc. Given those facts the banks and financial institutions involved should be resolved, the executives prosecuted and what is owed to the banks canceled while what the banks have paid out to officers should be clawed back to pay for the damages.

That is what should be done. Then we could begin to recover from the damage that has been inflicted. We will see what actually happens. Were we to do what needs to be done we could then turn to investing in projects that provide renewable energy and transportation based on that energy. That is truly the vital task, but the ongoing looting is preventing us from getting there. Worse, in the USA and Europe all of the major political parties have bought into the idea that what must be saved is the very financial system that is continuing to suck the life out of the economies.

Two links give a good perspective on these processes:

Steve Keene's AMI Talks at the recent American Monetary Institute in Chicago in FLV format -- the talk by Steve and the talk by Michael Hudson are both worth the effort of watching. Unfortunately transcripts don't seem to be available.

Steve has created stock-flow economic circuit models of economies that actually produce results very similar to the crash we had in 1929 and 2008 and Steve focuses on the role of debt. He talks about "why credit money doesn't have to crash and why it always does." Hint -- it is the motivations of the bankers. He also shows some very elegant dynamic models of the economy based on stock and flow and resolves a dilemma of neo-classical economics, which cannot account for profits! and which is inherently prone to crashes by showing where it goes wrong.

Michael Hudson's talk brings the criminal element into the discussion Steve started. His thesis, well, one of them, is that banking has essentially been turned into a criminal enterprise, but we just are not prosecuting the crime. Hudson provides an insider's view of how all this happened. Very worth while.

The other is Chris Whalen's presentation at an American Enterprise Institute gathering that also included Nouriel Roubini. Several good talks there, but follow the instructions to get to Chris's presentation. He explains why the US TBTFs are going to fail in 2011 and he urges, in effect, new leadership that will repudiate the bogus debt and write it down instead of pretending it is real.

An understanding of these processes and a means of clearly presenting this information to a lay audience has been my goal for a while now.

 

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 10th, 2010 at 01:36:18 AM EST
[ Parent ]
ARGeezer:

An understanding of these processes and a means of clearly presenting this information to a lay audience has been my goal for a while now.

well it's working for me. your explanations are never complicated when they could be simple. the subject of the history of economics was never high on my pleasure-reading list, it's bafflingly immense, like the numbers it's throwing around these days.

you take a heavier-than-lead subject and make it easier to fathom, inch by inch.

your analyses are tireless, and never tiresome. your diaries and comments help fill in many dots, and connect spaces, you're a natural educator.

i deeply appreciate it.

'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 Oct 10th, 2010 at 05:09:41 AM EST
[ Parent ]
seconded

You can't be me, I'm taken
by Sven Triloqvist on Sun Oct 10th, 2010 at 05:43:42 AM EST
[ Parent ]
How much do the governments "spend money into creation"? The way its happening is through greater national debt

This is a political decision, not an unalterable fact about the monetary system. Sovereigns have dated liabilities to their own citizens because it suits their political needs, not because they have to issue bonds, nor even because they have to honour bonds previously issued. That's the whole point of being sovereign.

It can suit their political need because it exchanges liquid legal tender for rather less liquid sovereign bonds. Or it can suit their political needs because they have made the political decision to run the economy as if they were operating under a Gold Standard. The former can be smart or can be dumb. The latter is always insane.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 9th, 2010 at 09:16:00 AM EST
[ Parent ]
the actual sovereign (is?) money. That's where the power lies, under everyone's consent.

Well, I agree that money is the organizing principle behind our societies today, but I hardly believe that more than a very few provide any meaningful consent to this. Consent has to be informed to be meaningful. I strongly suspect that it is not entirely accidental that there is a pervasive misunderstanding about the nature of money in our society. Few people even understand fractional reserve banking and "loaning money into existence", after all, and that is just the beginning.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 8th, 2010 at 12:59:19 PM EST
[ Parent ]
The people do not understand what the money is, but everyone knows that you have to make money to live. And they would do anything (of what they know) for money, even if that does not bring better living. In the 1990s it was quite baffling how eager East Europeans were to emigrate for a "better" job to the West, even if they had (still then) most of what they would normally need.
by das monde on Fri Oct 8th, 2010 at 10:49:47 PM EST
[ Parent ]
The UK's QE is to all intents and purposes an interest-free overdraft at the Bank of England's option  - or rather it would be interest-free if interest were not paid on bank reserves - extended by private banks to the Treasury via the Bank of England as the Treasury's agent.

Retiring QE drains credit/money out of the system, and requires both government income - eg from tax receipts or asset sales - and a policy decision by the Bank of England.

It is true that governments do not print, although they can eg the United States Notes long since subsumed by Federal Reserve Notes.

You and I can 'print' of course.

If I issue an IOU to you in return for value received, and you are able (unlikely though it may be) to have that IOU accepted by someone else, in exchange for value received by you from him, then the result is a monetary system which requires an abstract value standard/ unit of measure for the transactions, but not fiat currency.


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

by ChrisCook (cojockathotmaildotcom) on Fri Oct 8th, 2010 at 12:49:59 PM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries