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The rise and fall of industrial civilisation

by JakeS Mon Jul 19th, 2010 at 07:51:21 AM EST

One of the things the conventional wisdom on ET frequently lambastes orthodox economic theory for is an inattention to the question of land and (other) raw materials. These are usually rolled into the capital apparatus, despite the important difference that one can be replenished by human labour and ingenuity while the other cannot.

front-paged by afew


There was a good reason that land and raw materials fell out of economic analysis in the late 19th century - with advances in transportation, land and raw materials had become readily available to any power that had the ability to kill the people living on top of them. With the industrial powers being a comparatively small fraction of the world, and with the AK-47 still three quarters of a century from mass production, all industrial powers possessed, to a greater or lesser extent, this capacity.

Raw materials being abundantly available, the power to extract rent shifted to capital (labour, at the time, was still for the most part fairly crude, easily replaced and very abundant).

It is noteworthy that in those countries not yet industrialised, land reform (rather than tax reform or other means to redistribute capital) was and is the primary rallying cry of those who want to cut rentiers out of the economic loop. To take one example, Che Guevara's book on guerrilla strategy identifies a disenfranchised and economically desperate rural population as a cornerstone of any successful guerrilla war (as opposed to Marx who calls for mobilising the disenfranchised and economically desperate urban proletariat).

Then came the Fordist political economy in which capital became plentiful. Capital being readily available, and land and other raw materials still being available at will to any serious industrial power, control of the business enterprise shifted again. Not to labour per se, because blue-collar workers remained abundant relative to demand (partly because increasing capital commitments meant increasingly automating blue-collar functions). But to white-collar workers.

This is what Robert Reich calls "the not quite golden age," largely because the interests of the white-collar workers then in charge of the business enterprise were oriented more towards stability and security than towards rent-seeking: They were sufficiently well remunerated to become highly risk-averse, and rent-seeking increases the risk of systemic collapse (and systemic collapse would cost them not simply money but prestige and power as well, which further reduced the incentive for risk-taking). So in the Fordist political economy, the dominant factor of production was in the business of eliminating other people's rent-seeking largely without substituting their own. (Of course this was only golden for The WestTM - some of the rent seeking the white-collar technostructure eliminated with extreme brutality was the rent-seeking of developing countries seeking to regain control of the raw materials on or under their territory...)

Then you had the Raygun/Volker counter-revolution, which was basically about reasserting the primacy of capital, by creating an artificial scarcity of money to replace the scarcity of capital that had fallen by the wayside in the 1940s and by concentrating capital in fewer hands (through the establishment of pension trusts, reduction in top tax rates, etc.) so that it could create its own scarcity.

The effort to concentrate capital in fewer hands was particularly successful, and probably goes a large part of the way towards explaining the rise of modern managerial/financial capitalism (a.k.a. the Anglo Disease): When capital is made artificially scarce by restricting its large-scale, organised deployment to the members of an oligarchy, connections become more important than competence, and the power in the business enterprise switches to the members of the oligarchy (the financial sector, as opposed to the industrial sector) and the people who have regular business and social interaction with them (the executives and accountants, as opposed to the engineers and technicians). The oligarchs, as has been frequently noted on ET, did not inherit the technostructure's inhibition towards blatant and destructive rent-seeking...

The Raygun/Volker counter-reformation masks, to some extent, the increasing scarcity of a number of important raw materials - if capital is made artificially scarce compared to scarce white-collar workers, there is no reason that it cannot be made artificially scarce compared to raw materials instead, in the same way that a successful labour union can make labour artificially scarce for landlord and capitalist alike. But of course this only works up to a point - as the Americans are currently learning to their considerable discomfort, you cannot extract rents from economic activity that does not exist...

This diary started its life as a comment here.

- Jake

Display:
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 Migeru (migeru at eurotrib dot com) on Fri Jul 16th, 2010 at 03:49:11 PM EST
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 ]
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 Migeru (migeru at eurotrib dot com) on Fri Jul 16th, 2010 at 04:29:55 PM EST
[ Parent ]
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 ]
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 ]
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 Migeru (migeru at eurotrib dot com) on Sat Jul 17th, 2010 at 03:55:23 AM EST
[ Parent ]
"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 ]
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 ]
[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 Migeru (migeru at eurotrib dot com) on Sat Jul 17th, 2010 at 03:57:01 AM EST
[ Parent ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
"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 ]
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 ]
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 ]
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: "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 ]
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 ]
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 ]
"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 ]
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 ]
"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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
"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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
That was a comment really worth making into a diary!
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jul 16th, 2010 at 04:22:58 PM EST
I can see why industrialists would oppose rent-seeking when it comes to raw materials. But i doubt they have ever had any problems gaining the housing market. During The Great Depression there was a housing bubble that burst 1926. Some georgists say that the original reason for the great depression was in fact The Car, that created huge speculation on urban land.
Anyway, this shows that the economics as a "science" is a hoax. "The theory" says whatever the political power wants it to say. Land is the largest property of any economy. So making it worthless, "protects" the property owners' incomes and pushes the public costs to the landless workers. Whose work and taxes create the land values in the first place.
by kjr63 on Sat Jul 17th, 2010 at 04:20:38 AM EST
Some georgists say that the original reason for the great depression was in fact The Car, that created huge speculation on urban land.

Those Georgists are poorly informed. The primary mode of overland personal transportation during the Florida land bubble was rail. Further, the Florida land bubble had already burst years prior to the crash of 1929, with no appreciable effect on the American macroeconomy outside the principally affected states. The crash of 1929 is a story of the stock market - land speculation has no appreciable claim to credit for the 1926-29 business cycle. (Incidentally, we may here have another metric for when we're seeing the light at the end of the tunnel rather than an oncoming train: When the next panic comes within less than a handful of years from the prior panic, the powers that be are losing their ability to prop up the Masters of the Universe - the 2007 panic came six years after the 2001 panic, so there's some way to go yet before we reach 1920's frequency...)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jul 17th, 2010 at 06:13:52 AM EST
[ Parent ]
George died before the panics and depressions that informed Wall St. panics around WWI. George may be said to be intimate with macro-factors culminating in the "Long Depression" of '74 which didn't end in '79, really, but paused until, like, '93 according to the NBER retrospective. The peak of his political career, shortly before his DEATH, coincided therefore with the first wave of R&R IPOs, ore mining and processing (Rockefellers totally bogarted oil spec: QED), and federal west'ho homestead financing pf the '80s ostensibly to relieve abject poverty of the NE corridor industrial economy and which had, like, nothing to do with much post-WWI, post-1921 Panic Florida resort RE speculation.

Other very important fin de siècle commodities bubbles (besides R&R right of way) were electricity and telecom utilites corps --unbelievable boom in true and fraudulent bond and equity sales. Total break out in marketing "investment=savings" to widows and orphans -- implicating the business acumen of such giants of innovation as Edison, Tesla, Ponzi, and Insull.

Tell you what: If I gave a damn, I'd investigate the preposterous wiki article List of recessions in the United Kingdom instead of picking US gristle. Keynes after all is a revered personnage of socialist philosophy and economic theory and I would bet a wooden US nickle there are lurkers who'd like to know, How the hell did Keynes and his antecedents prevent industrial catastrophe in the UK until 1933, when he had to move to the U.S.

Diversity is the key to economic and political evolution.

by Cat on Sat Jul 17th, 2010 at 04:22:50 PM EST
[ Parent ]
... began before the Great Crash ... the Great Crash was when the onset of economic decline burst into the national consciousness, not when it began.

The importance of the car is not so much land speculation but rather the Good Roads movement. Paving roads on general obligation bonds is a stimulus when it occurs, but has contractionary impacts when the paving has been completed and the bonds are being paid back. With total government spending on goods and services dropping from at least 1927 on, part of the 1920's growth engine was reversed.

And residential construction was another part, but it too was playing out by the late 1920's.


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 Mon Jul 19th, 2010 at 04:18:15 PM EST
[ Parent ]
The importance of the car is not so much land speculation..

Perhaps you are right, but new means of transportation have usually created land speculation. The canals in britain 17th century, railroads in the USA 19th century. And wasn't the Missisippi Bubble of 18th century something to do with river transport? It would be quite strange if car would not have similar conseqences.

by kjr63 on Tue Jul 20th, 2010 at 12:01:52 PM EST
[ Parent ]
The primary mode of overland personal transportation during the Florida land bubble was rail.

But still, the T-Ford production ended 1927, one year after housing bubble burst, after 15 million produced cars. The population of USA was then, i believe, 150 million. There was a lot of cars in the US already then. And a huge increase since only 1908 when the T-Ford production started.

by kjr63 on Tue Jul 20th, 2010 at 12:15:56 PM EST
[ Parent ]
One critical shift in US political economy was domestic Peak Oil ... prior to the late 1960's, production quotas from the Texas oil fields were used to stabilize prices. That gave a strong incentive to capital-intensive, labor-extensive oil producers to support full employment policies.

After the quotas were lifted, the special incentive of Texas oil producers to focus on maintaining sustained high employment was lifted, as they sold their full production irrespective of the state of economic activity.


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 Mon Jul 19th, 2010 at 04:21:41 PM EST


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