It’s getting real in the Eurozone: self-inflicted recession threatens World Economy
from Mark Weisbrot
The economic news out of the eurozone is getting worse every day, and so is the contagion to the rest of the world. The OECD (Organization for Economic Co-operation and Development), the club of 34 mostly high-income countries, has now lowered its projection for eurozone growth for 2012 from 2 percent (in May) to just 0.2 percent. According to their report, the 17-member eurozone economy already “appears to be in a mild recession.” For the U.S., the forecast for next year was lowered from 3 percent to 2.1 percent.
Forecasts for China, India, and Brazil have also been lowered significantly since May. From Asia to Latin America, the problems of the eurozone are reverberating as international banks contract credit, big investment projects are canceled or postponed, stock markets and real estate prices fall, and investor and consumer confidence drops.
And the OECD projections assume that Europe “muddles through” its current financial crisis without any significant financial disaster. But as the eurozone economy worsens, this assumption gets increasingly less tenable.
The simplest solution to the crisis is for the European Central Bank (ECB) to buy enough of the Italian and Spanish debt – and possibly other eurozone countries’ debt – to push down interest rates to a safe level. On Tuesday, Italy paid a record 7.89 percent yield for three-year bonds that it auctioned, well above the 7 percent level that was seen as a threshold for Greece, Ireland and Portugal to move from market financing to the International Monetary Fund (IMF) and European authorities. With lower borrowing costs, Italy and Spain would not be facing a “debt crisis.”
In fact, this whole crisis and recession could have been prevented very easily if the European authorities had simply intervened to maintain low interest rates on the Greek debt a year and a half ago. It is possible that some restructuring might still have been necessary, but the cost would still have been very small relative to the available resources of the European authorities. Because they refused to do this, and instead shrank the Greek economy, increased its debt burden, and allowed its borrowing costs to skyrocket – the crisis spread to the weaker countries of the eurozone, including Italy.
And now capital – including American money market funds – is fleeing Europe’s banking system, threatening a systemic financial crisis of unknowable proportions.
This failure to act – then and now – shows clearly that this is not a “debt crisis” at all but rather a crisis of failed policies. Eurozone finance ministers met Tuesday but failed again to come up with any credible solution that would stabilize the situation.
ECB intervention to stabilize eurozone bond markets is the most obvious, and possibly the only practical solution for several reasons. First, it is the only institution that can move quickly to bring the situation under control at a moment in which we really don’t know how far we are from a meltdown. Nobody anticipated that Germany, for example, would have trouble selling its bonds last week – there will be other unanticipated events that could possibly set off a panic at any time. Second, the ECB can buy the sovereign bonds of Italy or Spain at no cost to the European taxpayer. This is a serious issue, since the amounts of money involved could be large enough to present a political problem in Germany and other better-off eurozone countries. Just as the U.S. Federal Reserve has created $2.3 trillion since 2008 and used it to buy securities in the United States, the ECB could do the same in Europe where such buying is much more desperately needed. And just as there was no measurable effect on inflation in the United States, we would not expect any problem with inflation in Europe. Inflation in the eurozone is currently projected to fall to just 1.6 percent for next year.
The problem is that the ECB, and other European authorities led by the German government, are still playing the same game of brinkmanship that they have been playing for the past two years. They are more worried about forcing austerity policies on the weaker eurozone countries than they are about tanking the European and global economy. They continue to see the crisis as an opportunity to force through unpopular “reforms” – such as cutting jobs and pensions, raising the retirement age, privatizations, and reducing the size and scope of the welfare state. They have already caused a recession in the eurozone and seem more than willing to let it deepen in order to get what they want. The big question now is whether their recklessness will bring on a financial crisis that triggers a world recession.
Some of us have called for the Federal Reserve to intervene before this happens and do the ECB’s job for them. It has the capacity to do so, and like its prior quantitative easing in the U.S., would be costless to the taxpayers. It might cause a bit of a political storm, but that would be a small price to pay to avoid a recession that would throw millions more people out of work – in the United States, Europe, and much of the world
See article on original website
I believe the Eurozone “crisis” has been engineered to twist the arms of German politicians in order to make that nation buckle down as Europe’s workhorse. It’s all about creating fear in the minds of decision makers in Germany in order to give the ECB a carte-blanche to do what its management wants: To create the European Soviet.
Who do you imagine is doing that?
Well, Marga Peeters, for one, tries to do this. You shoud read this one (but it’s in Dutch…):
http://www.mejudice.nl/artikel/730/eurocommissarissen-als-wapen-tegen-wanbeleid-van-lidstaten
it’s a (amateurish and quite inconsistent) proposal, by one of the people from Brussels (between 2006 and 2010 she was one of the senior economists of the European commission), to take power away from national parliaments and transfer this power to Brussels bureaucrats, without an accompanying increase of the power of the European Parliament. Even the people from the European Commission should not be able to control these bureaucrats, according to her proposal.
And it’s not just about transfering existing powers. It’s also about giving entirely new powers to these bureaucrats, like interfering with national sectoral wage negotiations (which, at least in my country, is not one of the powers of the parliament).
I think Sarkozy and Merkel are working hand-in-hand with the financial oligarchy to force reluctant German politicians into submission. Those two are part of the “club”.
There is no real financial crisis. Remember, money creation and destruction is just an accounting exercise and central bankers can do whatever they like in this regard in a nation/state. The people behind the ECB wants that bank to have the same powers in order to give them total control of Europe.
There is a real financial crisis if you believe there is one: and if you think that preservation of the private financial power, and an increase in that power through deregulation, is a good or an essential thing (whether for private gain or on faith based grounds) then it is likely that you cannot see much past that. So far as I can tell the people who are looking for solutions and have the power to find them are in that position: they appear to be so blinded as to imagine they can make a new settlement to reinstate the status quo ante, and that the people will vote for it, or maybe accept it without a vote. I cannot say if they believe the story they tell, but it hardly matters: it is the only story on offer in the mainstream, for now at least.
In the UK they have managed to persuade what seems to be a majority that there is a real debt problem and we must pay it back. There is a dishonourable streak in the British population which bears other people’s misfortunes with marvellous stoicism: it is not very edifying how we have allowed the poor to pay for the boom for 30 years. But that streak of “puritan” masochism does not extend to the “middle classes”, and it is a curious sight to see them suddenly realise that it is their turn to endure what was visited on their poor neighbours: amazingly they appear to be rediscovering the concept of fairness. They may even be beginning to realise they were conned when they thought themselves middle class in the first place: they are no such thing, mostly.
Having said that there is still some masochism in play: and it is fostered by the lack of any realistic alternative to austerity. All politicians with a chance of power sing the same song: and most of the mainstream media do as well. People do not really appreciate what is being done, nor do they understand the consequences yet. There is little appetite for a real change in direction and there is a weary acceptance that they are to blame for the situation and must pay the price. There is some anger that bankers etc are not having to pay, but people have little hope that can be altered and people are not sure it was not all just some terrible mistake/ predictable outcome of irresponsible government policy. It is amazing how far the narrative of government venality/incompetence has been imported to this country in a few decades: but there it is.
If the people of Europe see this the same way then there is no way forward but to make the ECB in to a central bank. At least not that I can see.
We could of course dismantle the EU and eurozone: I am told the consequences of that would be worse, but that is just shroud waving since nobody explains what they actually are to those of us who are not economists. They are just monsters in the shadows to make our flesh creep, so it is impossible to judge them. But unspecified monsters are worse than the devil you know for most people: so we won’t necessarily choose that
We could perhaps follow Iceland and foreclose on the banks, demanding back all the money we have given them across the continent. Since I think that banks and financial institutions are the problem that seems like a good solution to me: and since they brought us to this pass through fraud I would have no hesitation in confiscating much of the wealth extracted by those individuals as the proceeds of crime, as well. I think that would pretty much enable us to guarantee ordinary deposits and pension schemes. But the aim is to preserve them not to punish them: so that is not going to happen
The eurozone countries could expel the weaker members and follow the prescriptions for austerity demanded by the stronger ones and the IMF etc: that would make sure ordinary people never share in the good times but pay for the party they did not attend in any case: seems to suit those in power if we would just get on with that
They could also expel germany: convergence would be a sight easier if that was done and German currency and goods would rise massively in price: that might help others’[ exports and growth and seems at least as good a solution to me: but it is not going to happen unless Germany chooses to exit: I don’t see much sign of that.
So what do you think should happen that CAN happen in the current political situation?
Like the people of Iceland, the people of European nations have to rediscover their nationality and statehood and take charge of their economic affairs. That’s exactly what the financial oligarchy don’t want them to do and will use all kinds of scare tactics to keep it from happening. We are in the same boat here in Canada: The European and North American financial oligarchies are closely connected.
So, it’s all about courage and conviction.
Courage and conviction sound very much like confidence, to me. I don’t believe such abstract nouns are helpful. What we need is a practical proposal and since we have abandoned democracy without much protest it seems that people are not prepared to stand up for even the limited mechanisms we have. How will “courage and conviction” translate into practical action?
My question here is have the number of bank mmultiplied exponentially since the start of the boom before the GFC crash?
Does anyone have any stats on that. If they are overbred and over prolific (and lets gface it we have been giving them legalised income streams by way of super – yours and mine)
…why are we propping these over prolific banks up up with austerity measures? It wont solve a thing.
Only a rationalistaion of the sector will …but bar one or two banks – its not really happening – the piper isnt playing the right tune.
Courage and conviction will translate into practical action by replacing puppet politicians with action politicians that derive their power from a motivated populace.
Possibly: but that can lead to totalitarianism as easily as to anything else. Umberto Eco has a list of what he sees as the defining features of eternal fascism: it includes the cult of action for action’s sake (I paraphrase). Without a specific programme I can assess I am certainly not about to vote for the man of action or the strong leader: Policy is what matters, and without that you open the way for the totalitarian of left or of right. How does your proposal guard agains what i see as a very real danger now? Or do you perhaps see no such danger? If not, why not?
Ultimately we get the kind of government we deserve. The price of freedom is eternal vigilance. The choices made by individual citizens translates into the kind of society we all live in. If people are prepared to let the desire for material wealth overrule all other choices,
then we end up the victims of those that control material wealth by way of the financial system. Like sheep in the dollar-pasture.
I do not agree that we get the kind of government we deserve. Most of the “governments” in Europe and America have transferred effective power to the plutocrats, who are neither elected, nor in any way accountable. By now the “governments” are largely there as whipping boys to take the blame for the inevitable adverse consequences of the neocon project. This is treason, on one view: there has never been a mandate for the dismantling of democracy in this way.
Having said that it is clear that the self chosen powerlessness of government has undermined any faith in democratic institutions the people may have had.This is shown in falling rates of participation in elections, for example. A counter productive response, since it allows the twin tales of “apathy” and “most are content with what is being done” to be presented as accounts of why that happens: in reality the whole mainstream political class has acceded to the plutocrat analysis and there is no real choice on offer. Why would you bother to vote in that case? Sadly that disenchantment seems to have gone further than I realised and the people are not even prepared to oppose the imposition of direct rule by neoncons: that is dangerous indeed, if you happen to be a democrat
Once again you offer no programme: there are slogans and not much more in your post. The danger of slogans of this sort is that they offer nothing but appeals to emotion: and that is characteristic of totalitarianism.
I have the impression that we are broadly agreed on some aspects: at least to the extent that we need to reinstate democratic rule and claim back the power from the very wealthy. But I disagree with some of what you appear to imply. In particular I do not see the venality implicit in “if people are prepared to let the desire for material wealth overrule all other choices”, if by that you mean that the majority of people have acceded to that. Other values are present: but can find no political expression because power no longer depends on public support and because institutions which served as checks on the interests of the few have been largely dismantled. Till very recently the presence of those other values was evident in the stories told: the hypocrisy that is the “tribute vice pays to virtue” was still necessary: only now has it been effectively abandoned to a much greater extent: that is because the transfer of power is almost complete.
In these circumstances the sense of helplessness and frustration readily leads to totalitarianism: and it is fostered by the increasingly “presidential” approach to elections. If the politician has no real power what can an election be but a beauty contest? The focus on “character” which we see in the USA is a manifestation of that writ large because that country is further down the plutcratic road. It is laughable given the power of the media to control our perceptions of people’s “character”. We know nothing about them and we cannot know. Different parties will smear the other candidate but it is all in terms of character. It is of no help and serves as a distraction. But when the fundamentals of policy are identical there is a reason for that
What is required is a genuine debate about the premises to be adopted and the logical consequences of those for the action we need to take. There are no mainstream parties who do not accept the right of markets, and the very wealth, to determine vast areas of our lives and experience: increasingly vast areas. While that is the premise there can be few policy options: but there is nothing inevitable about it.
So I ask again: what do you actually propose as a programme which we can discuss and ultimately vote on? This needs to identify the unexamined assumptions which lead to the current prescriptions: to argue whether those assumptions are true: if they are not it needs to show why not and what the adoption of other assumptions would mean in practical programmes and in terms of effects on people’s lives in the short and the long term. I do not find an appeal to “action” without thought appealing in any way.
Fiona, that is such a fantastic last comment, I want to share it. Further, you are right that the alternative to failing capitalism has not yet been defined. Most of the good stuff out there, from people like Steve Keen and Michael Hudson is analysis. There is very little on offer as to what precisely to aim for nor how to get from here to there.
Fiona, you are hard to please.
I don’t have a prescription for solving the world’s problems, but I do know how “real-politik” works and always has worked, ever since Roman times, and before:
Relatively small groups of people establish themselves in political power in geographic regions. They are very aggressive and proactive, causing other people to congregate around them and support them in return for a share of the spoils. These groups then invariably clash in their competition for resources and territory and the strongest one(s) prevail. The last big conflict, WWII, resulted in the loss of more than 50 million lives, mostly innocent people.
Many “isms” have been proposed to set up an ideal society: “Capitalism, Communism, Socialism, (including National Socialism), but they have all failed because the underlying patterns of human behavior have not changed.
In fact, the “isms”, with all their prescriptive plans, have just been flags under which people of similar intellectual predispositions can gather and feel a sense of unity.
“Isms” are blueprints for the Titanic.
Not looking for an “ism”: it is anathema to me: but that is what you will get if you do not specify what you actually propose to do, and why. There is no better recipe for totalitarianism than appeal to emotion coupled with slogans and a lack of specific policies
How about starting with a living wage for everyone, a financial floor without any cracks?
Also, an automatic write-down of exorbitant debts caused by asset bubble psychology?
(as suggested by Steve Keen)
Good ideas. How will they be implemented?
How about just letting some banks fail and start giving people their own super first to save as they like (and who cares if they dont? Most do. The cost of paying a miserly pension to those who dont save would be much smaller than the losses and bailouts of the GFC LOTS smaller).
If those who had the power to act wanted to get real about cleaning up this mess – its really npt hard. Less money under bank control, fewer banks = less insane gambling on “blow whole nations up derivatives”.
Its just so ludicrous to keep feeding and protecting the the banks now……
By people deciding that the banksters need to go and taking control of the financial system.
The banksters wont go until we cut their life support.
One of the things which would help me to think about how to tackle this would be an outline of the consequences of the varous proposed solutions.
The OP seems to take a fairly conventional Keynsian line: on that thinking, as I understand it,. in times of recession a central bank shoud create money with the specific goal of creating employment. The spending will foster economic growth, and demand: and the debt will then look after itself.
I had thought that Keynes recommended direct spending on infrastructure projects to achieve this: but the OP appears to think the same outcome will occur by buying up government debt with the money. That is not quite the same thing, though it is possible it will give the same result. I do not know. To me the aim of “stabilising the bond market” is insufficient. I see no reason why the same thing would not happen again some way down the line. With the ECB acting as a true central bank they could apply the same measures at each downturn: but that does not actually solve a systemic problem. And this is where I do not agree with the OP, though it may be that this is a very short term proposal to give breathing space: in which case we need to discuss what to do next.
The problem, as I see it, is the debt itself. It seems to me that what we are actually seeing is usury. That has been deplored and legislated against in many places and at many times. When a phenomenon has that bad a press you can be pretty sure there is something really wrong with it,. It is a crime, and it follows that the proceeds of that crime should be confiscated , For me wiping out the debt has to be part of the solution. To do that you need to show that this really is crime ( of usury or of some other character) and you have to make retrospective legislation. That can be done: we have done it to deal with the proceeds of drugs and they are far less serious than this.
But no current government is likely to analyse the problem in that way, nor spontaneously adopt any such solution. They do not consider that is the nature of the problem and the do not locate the source where I do. That is a genuine debate which could be conducted in terms that people understand: for they have understood usury before and they have dealt with it . Far from being a new problem arising from technology it is an age old problem in disguise. The steps to deal with it differ depending on how you characterise what is happening,. But if we at least put that analysis on tthe table we can have a discussion. At present the people and the politician are thinking within the terms of reference set by those who caused the problem. Some sincerely believe the narrative and some are venal or self interested. There is no need to attrubute malice to the majority of those in power: they are no smarter than the rest of us and they swim in the same water we do.. To make a big change in policy direction there needs to be an alternative story for people to consider. Preferably several with attached courses of action arising from them. While it may be true that nationalising the banks etc are part of the solution it has to be justified because most people do not accept wholesale expropriation of property unless criminality can be demonstrated: and most have come to believe that socialism is at best inefficient and at worse evil. They see nationalisation as part of socialism because that is how the debate is framed
As a democrat I think it is vitally important to gain a mandate for whatever we choose to do: and that means accepting tne values of the people as they actually are now: not as we would like them to be.
While I therefore agree that the banks and financial institutions need to be controlled or abolished, that cannot be done in the context of a narrative of theft: of their property: for two wrongs do not make a right. The debate needs to be reframed and then discussed: and it may be my view is wrong. and that some other analysis is better for explaining the facts. But it is that kind of consideration of underlying premises that I am looking for: one which explains what is happening and provides a route to a solutions which is both legal and ethical: and can command the support of the polity.
I do not think a demand that people just take over the banks etc will work:, because they need a story which justifies such action which is greater than “what works”. Much of the treason of the left is precisely the abandonment of such narratives in favour of what works: we have seen the results which arise because they carefully avoid the question “works for whom?”
Banks and bankers ‘Central’ or ‘Big’ have the same problem. How is it that putting citizens to work on infrastructure, which keeps people employed is such anathema to the financial community? Why is it that the negative spiral higher interest in a downturn of the private sector is such a hard idea to sell?
I tend to believe it is because they are not free marketeers: they are mercantilists of a sort. For them high unemployment is not unemployment: it is reduced costs because it drives down the price of labour.
But the narrative which supports this is complex and you have to have watertight boxes in your head to make it work: the interrelations are not talked up: each element is looked at in isolation.
For banks and financial institutions to have an interest in full employment they would have to have an interest in producing stuff: Since they make more profit through manipulating money it follows that capital invested in production is capital not available for speculation. That is not something they can support because it diminishes the source of their wealth, I think.
Full employment and high wages reduces the need for debt as well: but they have a vested interest in debt because the interest is a big part of their wealth and it is achieved by transfer of from the poor to the usurer. It is interest on consumption. In the end that will lead to recession etc: but since they have captured the narrative they have managed to get us to agree to socialise the consequential losses they incur. Meantime they have taken their enormous rewards and what happens afterwards does not matter to them unless what happens is we take if off them. But that will not happen so long as the narrative is accepted
There is a very strong interest in persuading us that we are all on the same side and that the interests of the wealthy are identical with the interests of the rest: Achieved by making it partially true, and inviting us to focus on those elements: for example we are shown that low interest rates are essential but not encouraged to realise that that is true because we are indebted in the first place. Similarly they have persuaded us that inflation is a bad thing: since it is, at least from one perspective, a tax on wealth, that was a good trick. The spectre of hyperinflation is waved as a shroud; but inflation is actually beneficial for the lower income element,. It is also obvious that inflation is decried only for some things: they call it a positive benefit when it applies to asset price.
All of this has taken a long time to become the unchallangeable narrative, but that is where we are now. We need to construct an alternative tale which is true and also understandable. For now the people believe that we all went to the party together and we all overspent and we must be punished. That is a big fat lie. Nonetheless people must believe that what they propose to do is ethical as well as effective. It is in one sense comforting that this is the case: because it demonstrates comprehensively that the account of human nature the current wisdom adopts is partial at best. We still have values which include “thou shalt not steal”. If we refuse to pay debt; or take “earned” wealth in the form of tax; or expropriate property without compensation then that is characterised as theft and will not be accepted so long as that is true. If we steal a great deal of other people’s wealth by inflating the price of the roof over their head and then making them pay interest on that very high debt; or by taking away their job in the interests of “efficiency”; or by repudiating contractual obligations to pay their pensions on the terms agreed, that is not currently seen as theft: it is seen as economic law and so impartial and without agency. That is the reframing we need to address, IMO
Fiona, you said:
“While I therefore agree that the banks and financial institutions need to be controlled or abolished, that cannot be done in the context of a narrative of theft: of their property: for two wrongs do not make a right.”
What if it could be demonstrated that the large, so called “investment banks” have engaged in fraud (like selling overrated derivative financial products) to boost their balance sheets?
Surely it would be legitimate to confiscate this money?
Most banks are legitimate businesses operating in a risky environment with the same challenges as any other business. We are talking about a handful of nasty operators that manipulate the system for their own benefit. They need to be dealt with by the heavy hand of the law. In many cases they have changed the law to legitimize what they have been doing.
So the law needs to be changed back again (Glass-Steagall).
Looking at history, we have troubled path in front of us: Increasing unrest in a population will invariably be exploited by special interest groups for their own benefit; look at North Africa and the Middle East at the moment. The various power players are jockeying for position on the geopolitical chess board. There are now indications that a lot of people are turning to Islam in those regions, in order to find some sort of anchor in an uncertain world.
I’m inclined to think that the pendulum will swing away from the rampant materialism of the present to a more contemplative way of life here in the west as well.
I think it is perfectly evident that there has been fraud and also usury on the part of not just a few banks and financial institutions; and also of “academic” economists who do not seem to see a “conflict of interest” in making enormous sums from their relationship with those same institutions and with government. As you say, the law has been framed to keep this legal: but there is no reason why we should respect that. Retrospective confiscation has been done in the context of drug law and can be in the case of financial law, too
Banks are legitimate when they are tightly controlled or are mutuals or are nationalised. Deregulation always has the same result:: bad banks drive out good just as bad money drives out good. By now I think you are over reasonable in suggesting it is a “few bad apples”.
Glass-Steagal is a minimum. There is both a legislative/regulatory function which must be reinstated, and a cultural reframing of what constitutes acceptable behaviour in wider sense. We are currently in thrall to the idea that we are purely selfish/competitive and that the sum of individual self interest magically leads to desirable outcomes when taken in aggregate. That is a a very curious conclusion and some evidence would be nice: history seems to show that usury is always the outcome of any such “freedom” from ethical or legal constraint.
I don’t see rampant materialism in practice: I hear that as propaganda. It is not rampant materialism to want to put a roof over your head. If you have to pay an exorbitant price for that because of asset inflation engineered by those who benefit from the price and interest you pay, it is not unnatural to worry more about money because of your debt and the consequences of default. But most people would prefer an affordable home to the bird in the bush of future profit from the bubble. At least that is what I see
I would go further than your concern about civil unrest and the exploitation of that. Without a change of course I fear that there will be a very big war because that is the only form of keynesian spending which the current narrative admits. It is not universally accepted but that is what I think this kind of economic and social policy leads to, pretty much inevitably. Along the way the process is facilitated by the promises of “strong men” and the temptations of the easy analyses of totalitarian prescriptions. The perception that democracy is functioning but failing to meet people’s apirations inevitably brings people to the position where they will not defend it: we seem to be far down that road already
Where I really part company is with the idea of a move to a more “contemplative” way of life. Until the poor have a decent standard of living it is a bit rich to ask them not to care and to go smell the coffee: that is fine for the rich world and the rich people in it. But in my country people are really struggling to heat their homes: staring at your navel is not going to fix that and it isn’t going to take your mind off it either
In order to get a handle on the economic situation we are in, I think it is important to place it into its geopolitical context: A relatively small group of people based out of New York and London (the City), mostly, are proactively seeking to maintain control over the world’s financial system, as they have been for the last 100 years or more.
The latest move, in the news today, involves Sarkozy and Merkel coming up with a new “blueprint” for Europe to give the ECB the full fledged power of a national central bank. The EU financial “crisis” is being used as a pretext for this move which real purpose is to reign in reluctant German politicians and other establishment figures in that nation. Merkel and Sarkozy are working, hand in hand, for the financial oligarchy.
From a geopolitical perspective the idea is to strengthen the hold on the western flank of Eurasia, i.e. Europe. At the same time one of the main players on the chessboard, China, is being progressively contained by sponsored disturbances in Africa, where China has been working hard to gain a foothold. Similarly, Iran is being destabilized, along with Syria. The idea is to Balkanize the region in order to make it more easy to control.
The big Joker in the deck is Islam which used to be a major force in the world and could easily re-emerge as such again. Mammon might have let the genie out of the bottle and find himself facing something much bigger than he ever imagined.
@ #12: “there are slogans and not much more in your post. … So I ask again: what do you actually propose as a programme which we can discuss and ultimately vote on? This needs to identify the unexamined assumptions which lead to the current prescriptions: to argue whether those assumptions are true: if they are not it needs to show why not and what the adoption of other assumptions would mean in practical programmes and in terms of effects on people’s lives in the short and the long term. I do not find an appeal to “action” without thought appealing in any way.”
@ #13: “Fiona, that is such a fantastic last comment, I want to share it”.
Likewise, Carol, but when you add “There is very little on offer as to what precisely to aim for nor how to get from here to there”,it seems to me you are missing an ambiguity. We now have, built in to the economy, a precise aim – to make money – which is dictating to us increasingly precisely what we can and cannot do. I believe we should be aiming not at a point but a space within which we are free to do in our own way what we see is worth doing.
As the economic system is structured by communication paths between different people specialising in different phases of whatever it is we are doing, our programme should be analogous to the definition of a spatial coordinate system in which distinctions between North, South, East and West enable us to make journeys between any positions, or to the computer architecture in which I/0, object-oriented, indexing and error-correction logic have allowed us to develop the freedom of the internet. This slight additional complexity in the method will enable us to do, simply, much that we simply couldn’t do before.
Helge @ #14: “In fact, the “isms”, with all their prescriptive plans, have just been flags under which people of similar intellectual predispositions can gather and feel a sense of unity”.
Thw exception which proves the rule is “Catholicism”, which seeks to hold together the human family with four gospels addressing the differing concerns of the different intellectual predispositions about “the truth which sets you free”.
@ #15: “Not looking for an “ism”: it is anathema to me: but that is what you will get if you do not specify what you actually propose to do, and why.
Unless, that is, you propose to DO nothing, but to allow and indeed help others to make the best of what we’ve got. The exception which proves the rule. The baby which has been thrown out with the bathwater.
@ #21: “To make a big change in policy direction there needs to be an alternative story for people to consider. Preferably several with attached courses of action arising from them”.
Fiona, over that last several months that is precisely what I’ve been offering on this blog: pointing to a 21st century alternative to the 1870′s “competing atoms” story which is based on the circulation of money and the different possible uses of complex (i.e two-dimensional) flow circuits.
Just as we can be treated as inert objects, living things, animals or humans, it is for us to decide whether monetary economics is best interpreted as (and so made into) a power distribution system, a power control system, a communication system, a [hardware] logic system, an independent automaton, a cybernetic [information feedback based] control system or an information system with error-control (moral) logic prohibiting and/or making good the effects of operations which don’t work (like dividing by 0 or ambiguity in computer logic or usury and fraud in economies).
Take the proposition that economics is a [cybernetic] control system with up to three types of information feedback circuit representing the present, past and future. Once you understand what that is, it is easy to see that Adam Smith’s “invisible hand” anticipated the corrective feedbacks; that marginalists reduced them to the “present” (short term monetary) feedbacks, Keynes added correction for past accumulation of drift and entrepreneurs anticipate declining markets by moving on to pastures new. I don’t know what you mean by OP, but it seems to me they are relying on anticipation of future entrepreneurial profits rather than Keynesian compensation for a generalised loss of profitability.
That model leaves economies as systems with centralised control; there are localised alternatives akin to using pc’s in a network.
Crucial to the whole approach are how we interpret money and law: as carriers of value and power or mere carriers of information which (insofar as it is true) will help us direct our own power. The facts support the latter interpretation. You want (@ #12) a concrete programme, Fiona? The feasibility of Helge’s universal “living wage” at #16 and your democracy (as against totalitarianism) at #12 hinge on this, and there is nothing emotional about it. Either bankers create money and politicians property entitlements “out of thin air”, or they do not. All that glitters is not gold, and the Emperor has no clothes.
I am fairly new to this site, Dave Taylor, and so you must forgive me if I do not completely follow your line of thought. I am sure you have elaborated it very clearly in previous contributions, but I can only really go on what you have said here. I do not understand computers and so metaphors from that field are a bit opaque to me: but let me see if I have understood you a little
You seem to me to be characterising much of the mainstream thinking in terms of “feedback loops”. If that is correct then I agree that this is a good way to think of such things as the “invisible hand”, and maybe even of the keyensian prescription of spending in recession, and saving in boom times, to allow that.
You then go onto say that thinking about it in that way assumes that economies are under centralised control and that there are alternatives to that. This is the kind of assumption I think we need to consider, at one level. I do not think that you can collapse these views into one shared narrative, though I gather that follows from your characterisation.
For me the neoliberal story is the opposite of your description. The “invisible hand” is presented as an automatic correction mechanism, and there is no agency, and no centralised control, in this conception. What they invite us to believe is that the sum total of the actions of rational and self interested people will lead to optimal outcomes, and will ensure self correction of any error over time. Any intervention will thwart that automatic correction and so the market is best left to itself.
This rests on a prior theory of “human nature” and that is fairly explicit. It is mindbogglingly stupid, IMO. But it has been adopted by the neoliberals, and it has been presented as truth. I find it quite sad that it is tacitly accepted even by many who criticise the analysis. While much criticism challenges the idea that man is solely motivated by his economic interest, and has “full information”, and all of those irreducible assumptions which underpin the theory, there is, for me, a failure to really lay out that foundation and draw the inferential links to the policy prescriptions which arise from it. That is done in some of the alternative economics papers I have seen, but it is excluded from the debate I see about what we should do, and why we should do it, as that debate is conducted in mainstream outlets. That is not suprising, because the media have limited space: and it is also in thrall to the same narrative, by now. A further consequence of the neoliberal analysis is that economics has not goal, and should not have. They trade on the ambiguities inherent in their language, and so we hear such terms as the “law” of supply and demand. This is the emperor’s clothes and they are largely used to suggest that economics is a science: in our culture, if that can be sold as true, it confers great authority. We are very largely wedded to the idea that acceptance of scientific “truth” is desirable no matter how distasteful the implications of that truth may be. Who can disagree? The problem is that there is no such “truth” in economics: it is not a science in any meaningful sense: it is politics.
The Keyesian does not accept that theory. Instead his analysis rejects “self correction” as an automatic mechanism, and holds that intervention is essential from time to time. The difference is that the Keynesian conceives an “aim” for economic activity: and that is a fundamental disagreement. He is less inclined to see economics as “lawful” and more likely to admit of the political element. As I see it (and I am no expert and welcome correction) the Keynesian agrees that man is rational and self interested: but he rejects the idea that he is perfectly informed; and also the notion that pursuit of self interest in those circumstances will sum to an optimal outcome (or at least not in any time frame which can be seen as acceptable). I do not find it helpful to see his analysis as a feedback loop, though: it seems to me more like saying the machine’s owner must oil it from time to time else it will seize up. To that extent there is “centralised control” but only to a limited degree: there is no suggestion that we need a different machine: only that we must maintain it in order to get the best out of it.
If I understand your position correctly you challenge the machine itself. I presume that when you talk of “centralised control” you are in some sense saying the machine itself is that: and you would prefer to dismantle it and replace it with much smaller and more localised systems, which operate largely independently. This is a challenge to “globalisation” perhaps: certainly a challenge to the “oligarchy” which Helge believes is consciously in power and pursuing specific goals under cover of a narrative which pretends it is doing no such thing.
We must start from where we are. At present, at least in this country, the people have accepted the neoliberal analysis. At least that is what we are told, and to some extent it seems to be true. Any political grouping will say that the people accept their views (if that is demonstrably untrue they fall back on the “silent majority”) so that doesn’t get us very far. But it has taken decades to push this agenda and while they have been ascendant they have dismantled much of the power of the alternative narrative so those voices are not readily heard. I think that we must accept that these underlying premises are not much questioned in practice: and if the premises are accepted the subsequent policies are logical in their own terms. That is the challenge we face.
But this provision of an alternative story is only one part of what needs to be done: it is always there in the culture, as the neoliberal narrative is also always there. So we can tap it., and at different times in history one or the other (I make this a dichotomy but that is too simple, of course) is to the fore: the other is buried so that it dare not speak its name. Over 30 years it seems to me that the neoliberal strand has moved from shame to triumphalism: and the alternative views have moved in the opposite direction,. That can change and it needs to change: there needs to be a proper examination of the assumptions we are making in the narrow debate currently on offer.
The other thing that needs to be done is to make practical proposals for short term action which people can see are workable, and ethical, and in line with their interests. These two processes need to go hand in hand. So, for example, Helge has suggested a “living wage” for all. I absolutely agree that is desirable. But it is not what most of my compatriots want, apparently. They have accepted that the poor should be poorer than they are, because they have acceped that people are workshy/feckless/parasites/whatever. They have rejected the notion of relative poverty, and while they are not prepared to let folk starve (yet) they do think that life for the poor must be made very uncomfortable indeed: rich people need more money to give them an incentive to work hard: but poor people need less. That is very far from logical but these are the watertight boxes in their heads, which they need to make the underlying ideology appear self consistent. It rests on “othering” and it is not new. The poor are a different kind of people, on this thinking, and are no longer “us”. And so the contradictions are reconciled.
If we wish to move to a universal living wage we must make it plain that this is “doable”: for they do not believe the money is there to achieve it, and so it seems utopian. We must show that it is desirable, and that means demonstrating a benefit for all, and not just a “charitable impulse”. For many it is actually harmful for the poor to ensure they can secure a decent standard of living: that is part of the neocon theory as well, from “tough love” to “dependency culture” povery is justified in the narrative and we need answers to that. It is sad that a “universal living wage” is not obviously right: but it isn’t and so asking for it is not enough.
You are absolutely correct that this hinges on our ideas about money and law: money wears many hats: a way of keeping score; a store of value; a medium of exchange. But for the usurer it is a commodity which generates wealth all by itself. And this, too, is largely accepted. Some discussion of the nature of money is also central, as you say. But the relationship between power and money is not transparent: we know there is a relationship but not that it is toxic, so much. We have not been encouraged to think about the fact that power has been transferred from elected politicians to plutocrats: that is only now becoming clear.
The nature of the debts which will lead to our impoverishment is not recognised: people think they exist and they must be paid. Onerous debt is not a concept I see much discussed, though it is old, and it has also been used in Ecuador to justify rejection of the debt, and proposed in Greece as a legal justification for a different approach, recently. It is not surprising it is not mentioned, because it represents a real alternative to the assumptions about what we must do. It is one part of one proposed solution and it is practical, so far as I can see. The Icelandic decision did lead to some impoverishment: but it is interesting to note that their “austerity” was short lived and if the government of that country is to be believed they are now moving back to prosperity quite rapidly: that is not much discussed either and when it is it is asserted that the “austerity” worked, Not how I see it, Where are the interviews with the Icelandic prime minister within the eurozone: I only saw one on Al-Jazeera: yet you would think that their experience would be very relevant in this debate. Perhaps it is more mainstream in other countries?
Thank you so much for your helpful response, Fiona. Helpful in that by saying what you think about my agenda we can discuss where we differ, And incidentally, I have no illusions about my having elaborated my thoughts clearly. Very early in my career I was judged to have “expressed by far the best thoughts in by far the worst manner”, I think visually, and find it hard to translate complex pictures into simple words.
Which brings us to where you’ve missed my point. I’m seeing the ECONOMY as a control system, not economics. What I see economics teaching is steam engine theory. Compare a supply and demand diagram with the steam pressure diagrams used to calculate indicated horsepower in many of O S Nock’s more tecnucal books.
So if I understand you right now, you are characterising the economy as a control system and you are suggesting that there are different kinds of such systems which will help us to decide 1. what kind it is now; and 2. what alternatives we can identify. Then using those models we can see the implications of each, and decide what is helpful? I hope that is right.
Well I do not know much about control systems. Analogies have their strengths and their weaknesses, certainly, and we all relate things to what we are familiar with. But I am still struggling to see how this helps.
Taking your idea that economics teaches a “steam engine theory” as a starting point. Would I be right in thinking that a steam engine is mechanical in its operation? By that I mean there is given input in terms of energy, and there is a given output depending on what I will call a “gearing system” (don’t hold me to that literally, I don’t know how steam engines work) which turns the energy into a different form which is useable in terms of what you want to achieve. .I believe there is a “condenser” which collects the steam and turns it back into water (your feedback loop, perhaps?) There is also a safety valve type of thing to prevent explosions. And all of this is predictable and measurable.
I am not clear how this is a control system: I can see the safety feature is: but the steam engine itself is not controlling anything. You switch it on and it does its thing. On this analogy, insofar as I get it, the energy would be productive activity, presumably. The gearing system would be the markets and such things as the banks. The safety valve would be the regulatory arrangements in place. The condenser would be the means by which the outcome is fed back to the productive activity, and so would perhaps represent investment. My problem is that I do not see the system is controlling anything when viewed in this way.
If what you mean is that from a neoliberal point of view the machine just runs and produces what it produces, that may be so: and the majority of neoliberals do accept we need a valve, if that can be seen as regulation to prevent monopoly, for example. But I am still failing to see the economy as a control system of any kind.
We are all helped by different ways of thinking about these things and so maybe this is just alien to my mindset. But what I am getting from your posts is that you think there is some helpful analogy within computing or information science or maybe engineering which will let us identify what an economy “is”. To me that is a a choice because I do not think that economies have an internal character: they are what we make them.
Thanks again for addressing my argument, Fiona. Apologies for delay – I’m now out of phase “down under” and a power-down lost me my first reply. Having slept on it, this one is likely to be different!
At #27 I used the “control” interpretation as an example, but remember, the context was different interpretations: as at object, lifeform, animal and human levels. Would I see a human as an analogy of an animal? I suppose I’m vaguely seeing the neoliberal interpretation as at the “object” level and trying to suggest interpretations which make it more and more “human”.
I entirely agree with your conclusion: economies “are what we make them”; BUT we make them what we think they are, so we can’t make them what we don’t yet know about.
Re control, in 1870, sub-atomic particles and the structure of chemical elements hadn’t even been imagined. Nor had Heaviside drastically simplified, for the confined space inside e.g. electric circuits, Maxwell’s complicated equations for radiation into space. But Maxwell had explained heat as the motion of atoms with a confined space, hence steam pressure as their impact on the container walls, and so the indication of steam engine horse-power. Jevons was thus able to interpret the economy as competition between unspecified individuals who differed only in how much useful work they produced. In that period the need was to “grow” maximum output: there were no concerns about how much coal would be consumed, shovelled and cost.
So, 1880′s neo-classical theory is not about control, it is about growth. So was the 1776 classical theory of Adam Smith, which – seeing how wealth accumulated in trading centres – proposed increasing international trade by mass production and hence by investment in capital equipment.
Electric circuits were not discovered until 1800, being first used for railway telegraphy in the 1830′s, with Heaviside’s theory developing c.1880 from problems with trans-Atlantic telephony. Their use for power distribution had to await the development c.1890 of large steam engines, electromagnetic generators, motors and electric lights. The invention of electronic amplifiers permitted the development of multi-channel sound radio and frequency spectrum theory c.1920. Shannon’s work on automating telephone exchanges c.1938 led to his discovery that computer (and indeed brain) logic is performed by switching circuits; in 1948 he invented “micro” error-correction in communicating information, just before Weiner’s “Cybernetics” (i.e. steering) explained how “macro” error-correction is the basis of “communication and control in the animal and machine”. By 1968,[our] Algol68-R had shown how to automate computer operating systems and detect and eliminate logical errors in programming (whence the development of PC’s), and PID “servos” were separating the mechanical elements of control from the processing of control settings and error information (which is now available as an integrated circuit). By c.1990 these had come together as the internet, whose computers still require powerand use refined forms of telegraphic Morse code piggy-backing on multi-channel broadband signals. These signals link together PC’s with operating and security systems more or less adequately eliminating errors and viruses.
As to the relevance of this to economies – now, as they have been, or may be in the future – did I not just point out how information-based PID error processing can be applied to control of any activity? Why not, then, to economic activities? There is still the problem of how to apply it! There are, of course, static forms of control: a balloon controls the spread of air as one blows it up, electric circuits the paths followed by electrons, electron circuits in genetic molecules the way our “internal character” develops, the existence of banks and shops the way we do our shopping.
You make an interesting reference to a steam engine safety valve, which is also a mechanical form of control system (called a homeostat). Overheating the boiler increases steam pressure on a spring until its compression opens a valve, allowing the pressure to come into into equilibrium with the atmosphere at a value higher than atmospheric pressure. (Cf. steering a ship, where any course has a specifiable angular off-set from magnetic north, but the compass doesn’t physically turn the ship). The point about information-based systems is that they provide remote control and thus the possibility of human intervention in the event of – or creating – spurious information (as that money is valuable in itself) or a “virus” wrecking the system itself (as when treating everything as equivalent to money leads to “autistic” suppression of feedback from (P) work now, (I) possessions already accumulated and (D) danger approaching from nature’s degeneration).
You also refer to a condenser. At #8 on another thread here [Occupy Market Failure] I have explained how to draw a diagram of my model, and on this, condensing would figure as recycling rather than control. (The parts of a control system are not usually control systems themselves). Re Alice’s comment there at #10, it is at least arguable that ethics is about which direction to go (towards or away from self-interest) and that morality is about error avoidance and correction. The economic functions there can be concretely imagined as old folk like me Investing in thought for the future of the Dads providing and Mums supplying what we and the Kids – the next generation – will consume. Note how that tends to be in reverse order of intellectual development: from emotion to skill to language teaching to adequately informed intuitive choice of method.
I did read the posts you refer to, and this one several times. I am not sure that I yet understand. It is important to reiterate that I am new to economics and I have been trying to think through some of what I have read so that it makes sense to me. In the other thread there is some concern about how the subject should be taught, I think, and some of those contributing seem to be teachers. It would probably astonish them just how ignorant I am of the basics they take for granted. I am sincerely trying to get a handle on it though: and the reason for that is that it seems to me that it has disappeared up its own bahookey: Forgive my crudity but I have so far reached the conclusion that the subject is very largely neoclassical, at least as it touches my world, and that it has no evidence base nor any useful content. That may be extreme, but it is my honest impression so far. Indeed I rather testily concluded that economists should shut up and go back to academia to see if they can find a subject matter: they are operating at the level of phlogisten at present. This, of course, is an example of the ignorance and frustration of an outsider, and I am very sure if I knew more this would not be my position. But if the profession wants one view of what a complete novice makes of what is readily available I happily refer you to my attempts here:
http://thosebigwords.forumcommunity.net/?f=7741210
They will give economists a laugh at least, if they can be bothered reading reams of innocent effort. Not for the faint hearted, I admit :)
Having said all that my problem with what I understand of your posts is not that I disagree a different model is required, nor yet that yours is helpful. It is that the variables which are relevant are not agreed at any level. A control mechanism such as you describe must first have identified what is a fault, and what is a danger signal, and what is a failure. None of those things are agreed. Indeed as I understand it, there are economists who see as postive indications of efficiency and a well functioning machine, those very things that others would characterise as faults in need of correction.
To give one example: the rapid increase in the price of a house in this country (UK) was, to me, quite obviously a meter in the red zone and rising. But it is was not till recently seen that way in press or in the economic mainstream. In fact a “recovery” in the housing market (by which they mean a rise in price) is portrayed as something devoutly to be wished, even now. So what I see as a failure screaming for correction they see as a sign that all is well. If we are to build a control system, whether for manual intervention or for automatic correction we must first decide if that particular phenomenon should turn on a flashing red light and siren (as I think) or a steady green one, as they think. (If the control system is automatic then the lights will not be light, but I trust you know what I mean.) In short we are nowhere near buildng a control system of any kind because we do not have any idea of what constitutes an impending explosion. And that is why I say the subject seems to have no content at all which is worthy of attention from the rest of us.
You bring in the relevance of ethics and morality and I could not agree more. If any theory ends up with the necessity of impoverishing a whole swathe of people then it is not worthy of consideration so far as I am concerned. It is as simple as that, to me. If austerity is the answer you are asking the wrong question.
Fiona, it may be that the contradictions evinced by the economic mainstream over the dysfunctional housing market is the result of land and resources being ‘expunged from neoclassical economics’, as suggested by Martin Wolf on his Exchange blog.
Fiona, the evidence is there, the problem is why economists and those they have indoctrinated are not seeing it. (I myself have been studying economics for decades, but I trained first as an electronic engineer and became an information scientist developing computing methods, so that I have a much more general and up-to-date mathematical toolbox than it seems economists have). Let me first say most of us here agree with you about the economic “bahookey”, whereof we’ve been saying “scrap the lot and start again”. (Adam Smith and Keynes are probably the exceptions which prove the rule, though we should appreciate others, notably J K Galbraith and K E Boulding, who have thought “outside the box”). I also admire your willingness to admit ignorance, though I find it even more difficult knowing more than my readers and I myself find credible. But let’s get back to your difficulty with generalised control.
As it happens, your difficulty is a fundamental one in logic, which the philosopher David Hume (Adam Smith’s mentor) got wrong and the German philosopher Emmanuel Kant only half-resolved. Bertrand Russell discovered a paradox in Frege’s mathematical logic which opened up the possibility of different kinds of logic, and in 1965 Noam Chomsky, trying to understand how kids with similar brains learned different languages in different countries, realised the commonality was at a “deeper” level, in the grammar of their logic. He developed a way of spelling that out which a group of European mathematicians used to address the similar problem of how to specify a programming language, the grammar of which would allow it to adapt to new developments. I worked with the group that turned the ALGOL-68 specification into a working programming language, and the key is that one has to define computing objects not only in terms of the real world objects they refer to, but by what type of objects those are, so that the computer know what types of program can be used on them. On a PC you can see the idea in the .suffix of a file, whereby .doc opens a word processor program and a .jpg a photo program. The point is that those who write the programs don’t need to know in advance the details of e.g. the letters you wish to write; you can tell the programs that as you write them.
Likewise then with a PID control servo. Once you have “programmed” your own understanding of how these work by considering examples like steering a ship or driving a car, you become able to recognise or construct them in whatever context you happen to be in. Obviously a balloon is not one, nor is the cylinder of a steam engine. If I say the economy is one (or would be if people didn’t listen to neoclassical economists), I mean we have learned (P) to control how much we buy in light of price information, and likewise (D) to choose which competing brand we can afford. The cumulative effect of this (I) is, however, not obvious. Over time we acquire all we need of long life items, so we stop buying them, firms stop making them, and some workers lose their source of income and can no longer afford even everyday necessities. Keynes however worked this I out and proposed the necessary correction – for Government to to employ redundant workers on building infrastructure – very long life items which we can’t afford to buy, so firms don’t make, but we need in common. Unfortunately the perverse neo-cons misconstrued this need for an I-correction as a need for a throw-away society to increase sales (more P), then as competition to increase choice (more D). They are now dragging us up their own monetary bahookey (or as they say where I come from, “cutting off their nose to spite their face”) with public-private partnerships in which governments denied tax have been persuaded to rent money in order to rent infrastructure! Keynesian progressive taxation was one way out of this impossible situation, but see also Peter Earl’s new thread on ‘Monetary Innovations’.