The economic truth is still hidden
“’One of the shortcomings of American society’, another billionaire financier George Soros, has written, is ‘an excessive admiration of success – measured in monetary terms – to the detriment of more intrinsic values. The buffet cult epitomizes the shortcoming.’”Richard Davenport-Hines quoting Alice Shroeder, The Snowball.
The economic system that is currently very ill (terminal?) and that rules a great deal of the planet is the most vicious economic system that I have encountered as it has an implacable ruler, profit, and only one aim, more.
If one wishes to learn about the system that is at present making life so difficult, there are three basic books to read: Adam Smith’s “The wealth of nations”, Marx’s “Das Kapital”, and Keynes’ “General Theory”. Most other economic works are major or minor commentaries on these three giants.
In the midst of such a major failure of our economic system, it is difficult for those struggling to keep the system afloat, to think about real fundamentals and the possibility of reconstituting our economies on a different basis but as the Talmud says: if not now, when.
It is not possible for someone unschooled in economics to suddenly come up with a new system that works: that is not how social change comes about nor do I have such a goal in mind. What I wish to do is review the three giants and make suggestions while the turmoil is upon us and the suggestions can find fertile ground.
The need to go back to basics is obvious as has been the inability of those “in charge” to grasp the extent of what our unregulated greed has loosed upon so many innocent lambs.
I have watched, more closely than normal, for economics is not a major interest, the continuing failure of the pundits to grasp the seriousness of the situation and the consequent failure to act, producing a present situation of such instability that what we are facing is much larger than a recession and could easily dwarf the 30s, in spite of 60 years of “greater” knowledge and supposed tools (quantitative easing for one which involves the Federal Reserve trading created money for toxic assets, thus allowing a bank to meet its reserve requirement and theoretically to lend money and ease the situation) that have not been available in the past.
Spending (consuming) is the definition of modern life and from a historical perspective very recent in the USA and even more recent in Europe.
The driving force of this change has been Capitalism and its incessant need to turn everything movable or immovable into a consumable object that will turn a profit and produce more capital for the capitalist to invest.
Somewhere in this process of commodities and abstract financial dealing we have lost sight of the reason for all this activity: basic human satisfaction. We have also failed to realize just how destabilizing unfettered economic activity can be on a planet that has limited resources.
Economic theory, suffering as all social sciences do, from physics envy, now writes partial differential equations to talk about house work, but has no sense that there is a limit or a boundary condition that should be integral to all their theory and equation writing.
Economists are also stuck in a 19th century scientific model regarding conservation laws and equilibrium theory, but physics has moved on and quantum mechanics and uncertainty is key.
Risk can be calculated, but as a the recent collapse illustrates, the analysis did not go far enough and what we failed to calculate has destroyed Wall Street and made life miserable for many older people who are literally facing the fact of street time as their houses and savings are gone and they are too old to work. The extent of this horror is unfolding daily before our eyes and can’t be wished away. Yes we need to move on, but not without a very extensive airing of responsibility (a word seemingly alien to the administration that has now vacated), for what has happened to us economically and ethically (torture, gitmo, rendition and other morally reprehensible acts) we are dead in the water, if we don’t. I am not suggesting a witch hunt, but we must look at the past eight years very critically, using the full power of the Congressional subpoena to ascertain as many of the facts as possible and to understand the motivation and culpability of those who are responsible.
So far, almost all the gifts have gone to those who have created the mess, operating upon a seat of pants decision making process that appears to be an ad hoc form of triage.
The problem of restarting an economic space ship as big as the Earth is not going to be easy, even in perfect conditions and the conditions are far from perfect. As we are only 21 months away from a mid-term election for a third of the Senate and the entire House. A constraint along with cloture that will severely limit what Obama and his cohort can do and will constrain him even more once the honeymoon is over and the election approaches.
The second and bigger constraint, particularly in the US, involves the need to deleverage and clear up the immense unsustainable consumer debt. The consumer sustains the American economy. His pocket is locked which of course means less spending and consequent job loss. That creates contraction and a psychological sense of fear that has an enormous knock-on effect.
Few will lend in such a situation and only those with money to burn (a small percentage of Americans) or great courage will spend in the face of such conditions.
Thus putting people back to work and removing the fear is top priority within the limits of the political reality and the problem that past debt and a flood of new American paper on the market will cause. If anyone blinks regarding the dollar, and there is plenty of reason to do so, the USA as presently constituted will be history.
Monetary policy has reached its limit as money ($) is there for the asking, who is going to make products that will not be bought.
Thus Keynsian fiscal policy is the answer, but if one does the math (I will not bore you with it) it does not seem to be enough. The stimulus may just be a wave on the surface without the depths of the problem being touched and then we might enter a tunnel wherein there is no light in sight.
At that point, which I hope we do not reach, many might want to do the re-reading I’ve just begun.
A Nobel Prize winning economist has estimated that the Iraq War – one that never should have been fought – will have an eventual total cost of between two and three trillion dollars. Think of Obama’s proposed $500 billion worth of Keynsian spending with that fact in mind. You will immediately realize just how irresponsible the previous inhabitant of the White House has been.
