Comments on RWER issue no. 66

  1. Derryl Hermanutz
    February 18, 2014 at 10:39 pm

    Good paper on the defects of MMT. MMT, as it is currently conceived, is a roadblock to monetary reform rather than an ally. I want to make a couple of points to bolster your critique of MMT.

    Warren Mosler claims government spends money into existence by “marking up accounts”. I have repeatedly asked MMTers to explain exactly how the government reaches into people’s bank accounts at private commerial banks to “mark them up”. I point out that only bankers are permitted administrative access to their customers’ bank accounts, and only bankers are allowed to mark bank accounts up to record a credit, or down to record a debit.

    I have never received an attempt at an answer from an MMTer, other than to repeat their claim that government does indeed spend money into existence by marking up accounts.

    Wray believes that government sells bonds after the fact of spending the money into existence. That’s why he finds it so “strange” that government bothers selling bonds at all. A government that creates its own spending money simply by marking up people’s bank accounts clearly has no need to “get” money by selling bonds to banks in exchange for credits of bank deposits.

    Nor does a government that “issues” its own money by spending it into existence need to “get” money by collecting taxes from the public to fund its spending. This latter misconception is why MMT believes taxes are used simply as a “currency drain”, to remove money from the economy in order to prevent inflation.

    A few months ago Mosler revealed the misconception that underlies all of MMT’s misunderstanding of monetary reality. In an article on Global Economic Intersection, an article that was quickly pulled and edited, Mosler admitted that he conceived MMT based on a greenfields currency system. If a nation is going to start up a new currency, and if the government is going to be the sovereign issuer of the currency, then before the government can collect that currency in taxes, it has to “issue” that currency into circulation in the economy. Banks that create fractional reserve credit against their holdings of that currency have to first “get” reserves of that currency, either directly from the government or from deposits of currency by the banks’ customers. Given the assumption of a sovereign government issuing a brand new currency, MMT’s monetary logic that follows from that false assumption becomes clear.

    THAT is the source of ALL of MMT’s monetary confusion. I have repeatedly pointed out to MMTers that the US$ system NEVER began as a greenfields currency system. Banks had been creating credit denominated in dollars, and printing their own dollar banknotes, long before the bankers’ monopoly of money issuance was formalized in 1913. All of those pre-1913 dollar banknotes were simply replaced with new Federal Reserve Bank banknotes. All of the dollar deposits in all of the banks then became convertible into Federal Reserve issued dollar notes, rather than private bank issued dollar notes. There was never a time when the US government, or the Fed, “originally” began issuing all of the dollar banknotes and dollar bank deposits into existence.

    And after 1933, Federal Reserve banknotes were no longer convertible into gold, and commercial banks no longer held reserves in gold, so the Fed became the monopoly issuer of central bank issued fiat money. The Fed supposedly issued reserves and currency only as some multiple of its gold holdings, so the Fed’s fiat money was supposedly fractionally “gold-backed”. After 1971 Treasury debt became the new “gold” that backed central bank money issuance.

    The Fed is prohibited from directly purchasing US government debt. The Primary Dealer banks directly purchase new issues of Treasury debt and pay for them by adding a deposit to Treasury’s bank account at the buyer bank. Those bank issued bank deposits are the money the government deficit spends. In open market operations, the Fed buys Treasury debt from the primary dealers, and pays for those asset purchases by crediting the seller bank’s reserve account at the Fed. As the “issuer”of the Federal Reserve Bank Notes that function as the fiat currency, the Fed can never become “illiquid” by running out of currency. Currency, $100 banknotes, ‘is’ liquidity. The Fed will convert a bank’s reserve account balance into currency, so reserves are the equivalent of cash.

    In order to get cash and reserves from the Fed, banks have to sell assets to the Fed. After 1933, and especially after 1971, the principal asset was Treasury debt. So Treasury debt “backs” the Fed’s issuance of reserves and cash. Which means that in the existing system, even the cash is issued as debt.

    Cash and reserve balances in commercial banks’ bank accounts at the Fed are listed on the “liability” side of the Fed’s balance sheet. The government’s interest bearing debts are listed on the “asset” side of the Fed balance sheet. Several years ago I read a couple of fawning acolytes discussing, on the Council on Foreign Relations website, how the cash and reserves that it issues could be a real “liability” to the central bank. It’s semantic doublespeak.

    The Fed is the sovereign issuer of currency denominated in US$. But the non-bank public can’t get its hands on any of this currency until a commercial bank gets the cash from the central bank, then a commercial bank customer converts some or all of his bank deposit credits into cash at the ATM or teller window. And before any bank deposits can “exist”, some bank has to make a “primary loan” of bank deposits to some primary borrower, who spend the bank deposit money into circulation. The primary borrower transfers ownership of the bank deposit by check, and whoever sold something to the primary borrower “deposits” the check in his own bank account.

    Bank deposits are the “money” that non-banks use to “pay” for stuff. In order for the transaction to be finalized, reserves move from the payer’s bank into the receiver’s bank, which happens in those banls’ reserve accounts at the Fed. The Fed acts as the clearinghouse for the payments system.

    Reserves are “real currency” that is moved between banks. The deposit money that us non-banks use as money is merely a “claim” on real currency. If our bank fails, the claims it issued as bank deposit “credits” become worthless. The Fed is the bankers’ bank where real fiat money changes hands. Commercial banks are the economy’s banks, where mere claims on real fiat money change hands, until a bank goes bust and its claims are exposed for the Ponzi fraud that they are.

    There is no “sovereign money” in this system, unless the Federal Reserve Bank has been declared the sovereign ruler of the United States. “Banks” purchase private and government debts, and “pay” for those “asset purchases” by “issuing money”. The central bank issues currency. Commercial banks issue bank deposits that are convertible into the currency. Our “debts” are the banks’ interest bearing “assets”. And our “money” is the banks’ “liability”.

    The simple structure of ANY bank’s balance sheet, which shows government and private sector debts as the bank’s assets, and government and private sector deposit balances (our money) as the bank’s liabilities, should prove even to an MMTer that the great monetary divide is not between government and private sector, but between banks that issue money to buy debts, and non-banks that issue debts to get money. It “should” be obvious enough. But MMTers are determined not to see it that way, and nothing anyone says can change their mind. So good luck trying to get MMTers onboard the monetary reform bandwagon. I gave it up as a lost cause quite some time ago.

  2. robert r locke
    July 25, 2014 at 7:57 am

    Jamie Morgan & Brendan Sheehan

    In the last century Eric Schneider pointed out that neoclassical economists are not interested in the origins of economic events. “The most exact knowledge of an economic event (say the price of a good) might be of interest to a historical-institutional economist but it would not answer the question that neoclassical economists ask, how price is determined by markets. One forgets that the sea of facts is dumb and can only be forced to reveal interconnections when properly queried. Intelligent (sinnvoll) questions can only be derived from theoretical (formal) analysis.” (Quoted in Locke, 1996, 11). When neoclassical economists took over the field in departments of economics and business school, after WWII, they were so sure of themselves that they removed history and the study of institutions from the discipline. That left them, people who do not study history or institutions, in charge of our understanding of the dumb sea of economic facts.
    In your paper “Information economics as mainstream economics and the limits of reform,” you write about the fiscal crisis and how neoclassical economics in this crisis did not make sense of the dumb sea of facts. As an historian, who has studied the vicissitudes of neoclassical economics theory as prescriptive science, I know this is nothing new. The discipline, since its inception and mathematization in the 19th century, has never succeeded as a prescriptive science, i.e., it has never been able to clarify the dumb sea of facts. Then, why use the neoclassical economics as a point of references for clarifying system failures, when their claim that their axioms/assumption expressed in a logically consistent symbolic exposition of their invention has clearly always been fraudulent?
    The economists’ claim that theirs is the only crap game in town and must be kept for want of a better alternative, I have never accepted because it is a nonstarter. I have preferred to start investigations of economic events not with their economics (which assumes a methodological market-based individualism, and utilizes knowledge channels they create) but with the so-called dumb sea of facts, to see, if they are “dumb,” that is, to ask the people who are/were involved and have/had to cope with economic events, who are, neoclassical economists say, part of the dumb sea facts, to make sense of what is/was happening to them.
    Because neoclassical economics is a-historical, it has trouble dealing with crises or even remembering them. Everybody since 2007 has been talking about the financial crisis, which is the focus of your article, but ten years before this happened manufacturers in advanced Western countries were working their way through the Japanese challenge, which had been brought home in the 1980s in another systemic crisis, when whole sectors of US industry began to shrink and/or go under (rubber, steel, automobiles, consumer electronics, etc.). Americans developed a new language, about entering a post-industrial society; other manufacturing countries were affected as well – Germany, for example, about which I knew a great deal through my studies of relationships between high education and industrial firms during the second industrial revolution (1870-1940). This very important exporting nation faced the Japanese challenge not just through the invasion of Japanese manufactured products on its home markets, but through Japanese product replacing German on export markets (e.g. automobiles sales in North America).
    When I went to Germany in the early 1990s to investigate the German reaction to Japan, I discover a knowledge framework that was very different from that extant in Anglo-Saxonia, and I wrote about it in my book, The Collapse of the American Management Mystique (1996). A reviewer of my 2011 book with Spender, Confronting Managerialism, said that this 1996 book had been “underappreciated,” which means it had been pretty much ignored. I think the information I put into 1996 book is very much a propos of the comparative knowledge frameworks that people need to understand in order to appreciate what is happening in economies. It is also an example of how meaning (interconnections) can be derived outside the framework of neoclassical economics just from investigating the dumb sea of facts. I’ll illustrate the point by looking at the contents of two interviews conducted in 1994, which are reported on in the 1996 book.
    The first was done at the Koblenz Business School, where I interviewed Prof. Arnd Huchzermeir, PhD in Operations Management, Wharton School of Management, who had lectured at the University of Chicago Business School and at the Koblenz School of Corporate Management. His specialty at the time of the interview, 24 July 1994, was production-distribution chains. The second interview was of Prof. Horst Wildmann, done in Munich, the day after I had talked with Huchzermeir in Koblenz (25 July 1994). When, in the early 1990s, I asked around about Germans who were involved in meeting the Japanese challenge to German manufacturing, Professor H Thomas Johnson suggested I ask Robert W Hall, founding member of the Association of Manufacturing Excellence (AME), who was deeply involved in studying Japanese Production processes; he told me that Wildemann was the “repository of nearly all the coming of manufacturing excellence practice to Germany, a part of it almost from the beginning.” (Ltr. 25 June 1994). When I interviewed Wildemann, he was a Professor of business economics, with emphasis on Logistics, in the The Munich Technical University where he taught courses primarily to engineering students on work-process innovation, as head of a substantial group of over one hundred research-consultants, including 35 graduates assistants (30% with business degrees, 50% with degrees in engineering-economics, 20% with engineering degrees). Their work was heavily oriented to mathematical modeling and computer simulations. Wildemann produced at the time from 5 to 10 PhD’s yearly; about 120 of his current students and assistants were active consultants with firms; former students and assistants of his had moved into consulting agencies mostly in Germany (BCG, Arthur D Little, etc.) Like all German professors he also published books with his associates on such subjects as strategic investment planning, creating synchronized production, the just-in-time concept, the introduction of continuous quality improvement, etc. When I met him, Wildemann, with the various teams in other universities where he taught before, and his team in Munich, had introduced Japanese production processes in 200 European –mostly German – firm over a period of 11 years, including Daimler-Benz, Grundig, Philips, and Volkswagen. At Volkswagen he spent three years teaching small-group quality control management techniques in five day courses to over 2,500 managers. (Locke, 1996, 199-201)
    This is what I learned from the plunge into the dumb sea of facts in these two interviews (reported in the 1996 book)
    The Huchzermeir interview (pp. 98-102 of the book). I asked him why German management functioned so well, without American style management education. The summary of his answer follows:
    “He notes that professors at good American business schools (he cites, Stanford, MIT, Chicago, and a few others) work on real business problems, translating them into formal systems that businesses use to add value to their production-distribution chains. American professors activate the transfer of problem-solving techniques because American business schools are places where business comes to learn how to carry on operations, thus making the American management school , and the ‘science’ it creates, a part of actual (p.99) management process. Hence in top American business schools, tenure and promotion decisions (the value that professors have for the school) depend on the professors’ ability (through consulting and counseling) to add value to the activities of business and industrial clients. Business school professors get high salaries for the same reason that corporate management is well paid: they create added value.
    Huchzermeier observes that the German faculties of business economics do not possess the concentrated knowledge and skill of American business schools. (German BWL is particularly weak in mathematics) Consequently, their professors are usually incapable of translating business problems into formal systems, not at least nearly as capable as professors in the premier US business schools. No doubt this incapacity explains the near contempt that is sometimes encountered in American business professors when they speak of German faculties of business economics. But the contempt is misplaced because, Huchzermeier affirms, solving problems in praxis is not their intent. To have contempt for people not doing what they have no intention of doing is contempt misapplied. Here the traditional German distinction between being berufsfähig (having capacity) and being berufsfertig (being ready for work) applies: routinely German academics in BWL develop the science (Wissenschaft) as a schooling of the mind (Denkschulung); they are not concerned with solving actual business problems, which they leave to the firm.
    But Professor Huchzermeier also affirms that within German academia plenty of people have the requisite skills and knowledge needed to translate actual business problems into formal usable systems. These people, however, are not concentrated in faculties of business economics as much as dispersed throughout the university in various departments and institutes. When bought together from their scattered university venues, the scientists form teams that are quite as capable as professors in American business schools of solving business problems. Many of them do just that every day. The difference between the Americans and the Germans in this respect is in knowledge management. The firm, more than academia, is the activating agent that puts together the requisite skills and knowledge in Germany. And Huchzermeier claims that the German way of concentrating and exploiting academic knowledge is very effective, more effective perhaps than the American because the firm can more easily (p. 100) identify a management difficulty, assemble the problem solving team, and effect the solution than the business school. The firm is closer to and more intimately involved with the problem.
    Huchzermeir’s comments, therefore, illustrate the general point made throughout this chapter (in the 1996 book): the locus of German management is in the firm not in the management profession itself and the instrumentality Americans attach to it, the business school. The leadership locus also explains why German management attributes differ from American. Because of the specificity of the firm’s leadership environment, German executives disregard, in Peter Lawrence’s terms, ‘the general processes of communication, decision-making, coordination, and control,’ the sort of managerialism taught in American business schools, for the specialism of their actual work in firms. To acquire the managerial attributes that German’s actually prize, they follow a different educational path. They focus on subject-based pre-experience education (law, business economics, and above all engineering for Denkschulung) and do research projects at university. Graduate students do research degrees; doctorates are not earned through course work like an MBA but by substantive project work in a field of knowledge. Managers undergo post-experience training in short courses that delve into specific topics rather than general management subjects. Germans are underrepresented in famous international management educational institutes, INSEAD, IMEDE, and the Harvard Business School. Germans want to learn useful functional leadership skills for the job rather than general skills of a management professional.” (p. 100)
    The Wildemann interview. (199-202 in the 1996 book).
    Since Huchzermeier made it clear that the locus of German management was in the firm, and Wildemann made it equally clear that his team had worked with 200 firms on the introduction of reformed work processes, and since I also knew that German laws on co-determination required employee-elected works-council-participation in the implementation of training schemes for the introduction of new work process, I anticipated resistance from them (especially in firms like Volkswagen, where IG Metall, the powerfull trade union, dominated VW works councils) to the introduction of the new processes. Wildemann replied to my question about reform under co-determination “that in four years at Volkswagen he worked closely with works councils and shop stewards. The works councilors he worked with, in his words, were ‘very intelligent people,” who fully appreciated the need to improve work processes, but also understood the impact that the changes would have on jobs in the workplace, in reducing work time and pay. He noted that his group taught the new techniques to shop stewards at the same time they taught them to management. Wildemann commented that the union (IG Metall) not only promoted the implementation of JIT and other new work processes but often led management instead of following it in their adoption. The reform, because of its nature, required employee co-determination for success.
    At the same time the Germans worked to transform their manufacturing, Americans faced the same issues. Indeed, Wildemann, and many others had learned a lot about the new processes in Japan through America. In 1988, for example, he had attended a special seminar at MIT, sponsored by Volkswagen, at which Womack, who was finishing his co-authored book The Machine that Changed the World, talked about “lean” production. He also learned about Japanese methods by studying production methods in Japanese transplants in America. (200) But he learned it from production engineers and their associations, i.e., The Association for Manufacturing Excellence, Deming Societies, etc. not from business school professors. Robert S. Kaplan, former dean of Carnegie-Mellon Business School and a Harvard Business School professor after reviewing articles published in leading operations management journals and examining research and teaching in top business schools, found that only one to two percent of the schools had “truly been affected, as of early 1991, by the Total Quality Management revolution that had been creating radical change in many US and worldwide businesses” (Kaplan, 1991, 1). He concluded that “American business school research and teaching contributed almost nothing to the most significant development in the business world over the past half century – the quality revolution.”

    This could only happen where the locus of the management profession was outside the firm, which, as Huchzermeir had noted, was the case in America. In fact, while US manufacturers were emulating the “quality revolution,” in the US business schools and top management in firms followed policies that would stop it from happening. I’ll mention four such policies.

    1. First policy. The financialization of non-financial corporations.
    Alfred D Chandler, Jr. in the Visible Hand (1977) noted that in a big corporation, the purpose and function of management differed according to place in the hierarchy. At GM, for example, in the car-making divisions the purpose was originally to make a product, i.e., a car, a truck. But in the 1920s the CEO (Sloan) in corporate headquarters declared that the business of GM was to make money.

    H. Thomas Johnson complained about the effect this policy had on firm management in an article written in 1992; repeated it in an article he wrote with Anders Bröms in 1995, and returned to the theme in the book he and Bröms wrote in 2000, where he observed:
    Successful [US] managers believed they could make decisions without knowing the company’s products, technologies, or customers. They had only to understand the intricacies of financial
    reporting … [B]y the 1970s managers came primarily from the ranks of accountants and controllers, rather than from the ranks of engineers, designers, and marketers. [This new managerial
    class] moved frequently among companies without regard to the industry or markets they served … A synergistic relationship developed between the management accounting taught in MBA programs and the practices emanating from corporate controllers’ offices, imparting to management accounting a life of its own and shaping the way managers ran businesses. (Johnson and Bröms, 2000, 57)

    Johnson despised these lifeless pyramidal structures imposed on work processes and managed by computer-oriented production and financial control experts:

    At first the abstract information compiled and transmitted by these computer systems merely supplemented the perspectives of managers who were already familiar with concrete details of the operations they managed, no matter how complicated and confused those operations became. Such individuals, prevalent in top management ranks before 1970, had a clear sense of the difference between “the map” created by abstract computer calculations and “the territory” that people inhabited in the workplace. Increasingly after 1970, however, managers lacking in shop floor experience or in engineering training, often trained in graduate business schools, came to dominate American and European manufacturing establishments. In their hands the “map was the territory.” In other words, they considered reality to be the abstract quantitative models, the management accounting reports, and the computer scheduling algorithms.

    Johnson juxtaposed a list of phrases that contrasted the behavioral traits suited to US Big Three management-driven “decoupled” manufacturing top management imposed, which he called “Management by Results,” to those of the Toyota collaborative-continuous-process that he studied in the Toyota operations in Georgetown, Kentucky, which he called “Management by Means.”

    Production behavioral values – Big Three Toyota Production System
    A The “I” stands alone A Relationships are reality
    B Control the result B Nurture relationships
    C Follow finance-driven rules C Master life-oriented practices
    D Manipulate output to control cost D Provide output as needed on time
    E Increase speed of work E Change how work is done
    F Specialize and decouple processes F Enhance continuous flow
    G An individual is the cause: blame G Mutual interaction is the cause: reflect
    Source: H. T. Johnson and A. Bröms, Profits Beyond Measure: Extraordinary Results
    through Attention to Work and People. New York: Free Press, 2000, 186–87

    The financial reporting systems being taught to MBA students in the top business schools are integral to the comptroller and financial officers running corporate headquarters in big corporations but they are incompatible with management by means that Johnson found operating so effectively in the Toyota Production System. Nor were they compatible with the new production processes that Wildemann introduced under co-determination management.

    2. Second Policy. Effect of the institutional investor on corporate management behavior.
    During the late 20th century, institutional fund managers became major players in equity markets. By 2000 the institutions that employ them, primarily public and private pension funds, came to own almost fifty percent of the equity of American corporations. Approximately fifty percent of Americans either owned stock individually or, more typically, had an ownership or retirement interest in these fiduciary institutions. The institutional fund managers did not threaten director primacy or CEO control because they could step in and micromanage firms in which they held stock. They in fact honed few of the skill-sets necessary to replace errant corporate managers. These fund managers live in the investment world, operate by its rules, and have little knowledge about how actually to manage firms in which they place investments. Laurence Mitchell stressed this point in The Speculation Economy when he described how the institutional investment managers slavishly follow the Capital Asset Pricing Model (CAPM) in their investment calculations:
    [T]he product of a regression analysis called beta, CAPM allows investors to build the kinds of potentially lower-risk, higher-return portfolios … described by Nobel Prize Winner Markowitz, based solely upon a narrow range of information about the stock. The business itself matters little, if at all. All an investor needs is beta. No balance sheet, no profit and loss statement, no cash flow information, no management analysis of its performance and plans, no sense of corporate direction, no knowledge of what is on its research and development pipeline, no need even to know what products the corporation makes or what services it provides. Just beta. The stock is virtually independent of the corporation that issued it. CAPM has been adopted and is daily used by countless stock analysts and institutional money managers. Almost every American who invests in the market through mutual funds or other institutional media has invested on the basis of CAPM. (Mitchell, 2007, 275)
    If CAPM does not permit the institutional investor to interfere directly in a firm’s management it does so indirectly because the institutional investor is guided in investment decisions by a firm’s short term profits and its stock price. Mitchell reports that because of such pressure almost eighty percent of more than four hundred chief financial officers of major American corporations, recently surveyed (2007), would have at least moderately mutilated their businesses in order to meet analysts’ quarterly profit estimates, cutting the budgets for research and development, advertising and maintenance and delaying hiring and new projects are some of the long-term harms they would readily inflict on their corporations.
    This intrusion of the preoccupations of institutional investors into the firm’s decision-making meant that the locus of the firm’s management shifted towards outsiders. The American business school, which played no significant role in the quality revolution, armed with neoclassical theory and the toolkit of econometrics, made major contributions to this intrusion through the massive development of derivatives markets. In 1969 Robert Merton introduced stochastic calculus into the study of finance; in 1973 the Black-Scholes Formula for Pricing European Calls and Puts was published; in 1981 Harrison-Plasma used the general theory of continuous-time stochastic processes to put the Black-Scholes option pricing formula on a “solid” theoretical footing, and consequently demonstrated how to price numerous other derivatives. These knowledge events permitted mathematics to be used in all four branches of finance mathematics: modeling, optimal investment calculations, option pricing, and risk management. Thereafter, trading in derivatives could be modeled and market behavior could be reasonably predicted. Merton and Scholes won Nobel Prizes for their achievement (Black was dead). Institutional investors regularly used their tools in investment decision-making. Their “theoretical” achievements made major contribution to provoking the financial crisis of 2007, from which the banks and investment institutions, with which they worked, had to be rescued by TARP.

    3. The third policy. Financializaion of income
    Everybody knows that the incomes of the top one percent of Americans, in which category American CEOs belong, have increased dramatically in recent decades, but the fact that the growing gap between the top one and the bottom ninety-nine percent can be attributed almost exclusively to the financialization of CEO salaries through stock options is perhaps not so well known. Dünhaupt claims that the introduction of stock options into American CEO pay is solely responsible for increasing their share of total incomes from two percent in 2000 to eight percent in 2007 (19). She concludes that given the proximity of CEOs’ position to capital owners rather than to workers, the stock option is closer to capital income than to wage income and should be classified with the former, i.e., with financialization, rather than with earned wages. Financialization, therefore, not only increased the income gap between top management and regular employees but encouraged those at the top, in their own interest, to adopt a short-term Wall Street focus rather than a long-term firm outlook when running their companies. As Mitchell explained:
    Failure to meet quarterly numbers almost always guarantees a punishing hit to the corporation’s stock price. The stock price drop might cut executive compensation based on stock options, attract lawsuits, bring out angry institutional investors … and threaten executive job security, if it happened often enough. Indeed, the 2006 turnover rate of 118 percent on the New York Stock Exchange alone justifies their fears. (Mitchell, 2008, 1)

    4. Fourth policy. Financialization of relationship between owners and employee within the firm.

    Financialization changed top management’s view of the firm from a vehicle for earning “returns on investment . . . based on the value created by productive enterprise” to one of viewing businesses “as assets to be bought and sold for maximizing profits through financial strategies.” (Ball & Appelbaum, 2) It brought with it a change in attitude towards employees, which were no longer treated as a human capital asset in the firm, but as costs to be minimized, in order to maximize payouts to stockholders and directors. This led to management’s assault on legacy costs in firms, expressed primarily in pension and benefit plans. Defined-benefit private pension plans, entered into during the pre-1980 era of “trust,” were the biggest cost problem. There were 112,000 of them in the US in 1983, each guaranteeing fixed levels of income to retirees. Many were not fully funded, that is, management, pressed by stockholder desires for good quarterly income statements and dividends to keep the stock price high, had made funding the employee pension plan a low priority. Tough-minded managers preferred to eliminate pension and benefit plans altogether, or failing that to move employees into undefined contribution schemes that did not guarantee fixed incomes for retirees, or establish individual pension savings accounts that greatly reduced company contributions
    and obligations. Undefined benefit plans and individual savings accounts permitted management variously to lower the benefit amounts, to borrow from their employees’ individual accounts, to pressure
    workers to put company stock into their personal retirement accounts, or to manipulate a plan’s fund in ways that let a company appear to be more profitable than it actually was. In these schemes, the workers usually assumed all of the risks the companies suffered from stock and bond market declines.
    Financial institutions, too, preferred undefined contribution and individual savings account plans, because fees for managing them were high – typically 2 to 4 percent of a worker’s contribution, a significant reduction in his/her pension, although a steady stream of income for financial institutions managing accounts. The ruthless, relentless, and radical transformation of private pension plans that the management caste carried out at the end of the twentieth century broke up the moral order that had been created in postwar America. “From Reagan through [George W.] Bush,” Jack Rasmus reported in 2004,

    corporations have been terminating and undermining group pension plans by shutting down plants and moving companies, underfunding the plans, diverting funds to other corporate use when they can get away with it, and then, when the plan is in jeopardy, with the assistance of government and the courts, funneling whatever remains into 401-K type personal savings plans. From the passage of the Employee Retirement Income Security Act (ERISA) in 1974 until 2003, more than 160,000 Defined Benefits plans have gone under in the US. (Rasmus, 2004, 3)

    The issue raised here is quite simple: how well did the Germans cope in the 1980s and 1990s, with their firm centered management, to the challenge of Japanese manufacturing, compared to the Americans, with a split management, between production engineers whose attention was centered on the firm, and a top management in firms increasingly preoccupied with outside demands brought by financialization that were reflected in the business school educational establishment.
    In 1994 Wildemann estimated that 30 to 50 percent of German industry, had already successfully implemented Total Quality Control, JIT, kaizen, or other new work process techniques. (p. 202). In America at the same time, the spate of studies continued. Perhaps after more than two decades, we can get a better perspective about the of the transformation efforts made.

    A look at the top 20 firms in the US and Germany in 2012 (ranked by revenue), reveals different outcomes.
    1. Exxon 11. AT&T
    2. Wal-Mart 12. Valero Energy
    3. Chevron 13. Bank of America Corp
    4. Conoco-Philips 14. McKesson
    5. General Motors 15. Verizon Communications
    6. General Electric 16. JP Morgan Chase & Co
    7. Berkshire-Hathaway 17. Apple
    8. Fannie Mae 18. CUS Caremark
    9. Ford 19. IBM
    10. Hewlett-Packard 20. Citi Group
    (Source: C Stahl (2013) Corporate Responsibility in US & German Firms, 59)

    Aside from big oil, which has been around for a long time, and is unique to the US economy, among the top twenty US firms there are many drivers of financialization (Berkshire-Hathaway, Fannie Mae, Bank of America, JP Morgan Chase Co, Citi-Group, and GE Financial), or US firms that are the creation of financialization (Hewlett-Packard, IPO 1957, Apple, IPO 1980), and there are many new firms that arose from the Information Revolution (Hewlett-Packard, IBM, Apple, Verizon Communication, A T & T). The old mass production industries that use to dominate the top 20 are gone or on their way out (e.g., General Motors & Ford). American analyst frequently make a virtue out of the turnover of firms listed on the top 20; the more turnover, the more vitality in the economy. Firm sustainability is not the goal.
    Here are the top 20 German firms ranked by revenue in 2012,

    1. Volkswagen 11. Aldi Group
    2. E. ON 12. BP Europa SE
    3. Daimler 13. Robert Bosch
    4. Siemens 14. RWE
    5. BASF 15. Rewe Group
    6. BMW 16. Edeka Group
    7. Metro 17. Audi
    8. Schwarz 18. Thyssen Krupp
    9. Deutsche Telekom 19. Deutsche Bahn
    10. Deutsche Post 20. Bayer
    (Source: Ibid., 61)

    Some firms on the German list are classifiable under the same rubric as American, e.g., retail giants (in the US Walmart and McKesson; in Germany the Aldi and Edeka Groups). Only one oil firm is on the German list. Whereas few of the firms on the US list were famous before WWII, such firms dominate the list of the German top twenty, many of them prominent even before the First World War (Deutsche Post, Robert Bosch, Daimler, BASF, Thyssen Krupp, Bayer, and Deutsch Bahn). From a financialization perspective, the big difference is that among the top twenty US firms there are many drivers of financialization, on the German list, there are none, i.e., not one is a financial institution, not one is a stock market creation, although many well-known German firms went public when the era of financialization began. Despite the vicissitudes of German political history, there is a remarkable sustainability of firms in the top twenty. From the point of view of the Japanese challenge, moreover, in the automobile industry, for instance, German firms weathered their crisis to obtain world leadership, along with the emergent Japanese, in the industry. The once dominant presence of US firms on the list boils down to GM, which has gone through bankruptcy, and Ford, which is still struggling.

    I do not see much of a reason to rely on neoclassical economics to clarify the dumb sea of facts, when interrogating this dumb sea of facts reveals that neoclassical economics, after it took over the discipline, made no contribution to understanding or solving the crisis in manufacturing in the US, produced a body of theory and knowledge about finance that helped provoke, because of its deficiencies, the financial crisis in 2007, and, from my own investigations into the sea of facts in Silicon Valley, played no part theoretically or practically in fomenting the one really true significant American contribution economically in recent times, The Information Revolution. (Locke, 2000, Locke & Schöne, 2004, Chapter 1)


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