I know. It's all wrong. By rights we shouldn't even be here. But we are. It's like in the great stories, Mr. Frodo. The ones that really mattered. Full of darkness and danger, they were. And sometimes you didn't want to know the end. Because how could the end be happy? How could the world go back to the way it was when so much bad had happened? But in the end, it's only a passing thing, this shadow. Even darkness must pass. A new day will come. And when the sun shines it will shine out the clearer. Those were the stories that stayed with you. That meant something, even if you were too small to understand why. But I think, Mr. Frodo, I do understand. I know now. Folk in those stories had lots of chances of turning back, only they didn't. They kept going. Because they were holding on to something.
Sam, The Lord of the Rings
The journey traveled by capitalist economies over the past three centuries has had many bumps, uncertainties and falls. After the Great Depression, we came to expect stability in our economy with smoother bumps, fewer uncertainties and no falls. However this is not the historic norm. Indeed, as Paul Krugman notes, our ability to address economic upheavals were historically severely limited.
Cycles of boom and bust are inherent to capitalism. Before the Great Depression, there was the Long Depression. Before the Long Depression, there was the speculation real estate Panic of 1837 and so on. Indeed, cycles of boom and bust are the norm much more so than stability.
For many people the economic disruption and devastation associated with the crash that began in 2007 have left us with a strong sense of being lost. This ongoing sense of economic uncertainty and instability seems new.
Indeed, although the Great Recession has been declared over by technical measures of GDP, it is not over in terms of the continuing impact on the lives and fortunes of millions of people. In those terms, there is little sense that we have seen the middle, much less the beginning of the end. Some speak of this period as our version of Japan's Lost Decade. However, this is more accurately a return to the the truth of capitalism: It is an unstable system.
This is an introduction to a new series focusing on chronic economic problems. It is being jointly authored by Richard Lyon and Bruh1. We have conceived it in terms of the new group platform that will beavailable on DK4. Until that conversion takes place installments will be published as diaries under Bruh1's account.
The U.S. and World economies will grow more unstable as time goes on due to the structural problem of capitalism being based on risk taking that leads to greater and greater levels of speculation. Risk taking by individuals as a structural element of capitalism is often described as a strength by the dominant economic leadership in the West. Indeed, such positive terms are ascribed to it like "innovation." The argument goes that risk taking leads to growth. Growth is supposedly infinite.
The hidden truth, despite discussions of winners and loser, is that many true believers believe that growth, and by extension, growth in demand will continue forever. The core assumption is one that denies the existence of a finite world. It is this myth of continuous growth that the true believers use to justify the risk taking in our system and reliance on market mechanism as our ultimate cure all. They do not create models based on a finite world despite claims of being focused on limited resources. The argument is always that these economic policies will raise the ship for all in the long run.
This understanding of the pie as infinite rather than finite leads to profound policy differences. How one thinks of the economy is powerful, and, yet, we mostly take these assumptions, even here, for granted. Indeed, we may not even realize just how much these economic ideas are assumptions rather than facts. Even some progressives tend to believe that the cycle will not end.
Before continuing, we want to make it clear that growth is not always a negative thing destructive to the environment. We could be investing in things as alternative energy, a smart grid, new transportation systems, etc. GDP would expand. New jobs would be created. The risks of climate change would be reduced. It is the drive for growth at any price that is not sustainable.
As a result, there is often very little consideration given to what this risk-taking will means in a macro sense as far as the long term stability of capitalism is concerned. We often don't consider risk until a crisis arises. The response to each crisis since the Great Depression has been to use incremental steps to put out the fires that result from the speculation. This is because on some level policy makers have come to believe that growth is just around the corner. That this growth has no limits. In fact, right now, we are all waiting for the next miracle that will grow us out of our present situation. Even progressive policy makers assume some light at the end of the tunnel based on the current system remaining mostly the same. However, what if that long term assumption is wrong? What then?
Each cycle, in turn, reduces our ability to address the next crisis, and, each subsequent downturn and rebound increases the chances for prolonged disruptions that can take the form of either serious depression or serious inflation. These prolonged disruptions are the car heading over a cliff as far as economic, political and social stability are concerned. Rebounds create the illusion of stability or recovery but the long term systemic instability remains. In addition, the other aspect of how rebounds contribute to the problem are that the tools often used to promote rebound can also increase instability of the system.
One should not imagine, however, that if one eliminates the tools used in rebounds that one would eliminate instability.
There are many canaries in the coal mine. Canaries such as employment, housing and education provide us with insight into the ever increasing social chaos and economic instability. Each cycle, in turn, reduces our ability to address the next crisis, and, each subsequent downturn increases the chances for prolonged depressions as were previously the norm.
The world, as we have come to understand it since the New Deal, of minor bumps, a few uncertainties and no falls is coming progressively to an end. This is the darkness and danger of our story. Like Sam, we struggle to understand its nature and our place in it. We seek to determine how we can get pass the darkness and danger in order to arrive into the light. We question whether it is likely.
To understand where we are, it is important to understand briefly the economic conditions as they existed prior to and after FDR's attempt ensure greater economic stability through the New Deal. We shall primarily focus on the U.S. in this introduction, but there are similar dynamics at play abroad in the economies of other countries.
The 19th century saw the rapid emergence of industrial capitalism in Western Europe and the United States. This development drastically transformed the social and economic structure of the nations at its forefront. Large segments of the population shifted from rural communities to urban industrial centers and others migrated across the Atlantic to the western hemisphere. A regularly recurring feature of this industrial world was business cycles that periodically went through times of boom to bust. The busts were usually termed panics, but they were what we now call recessions or occasionally depressions. Extended periods of stability and tranquility were seldom in evidence.
During the 19th century many European nations established central banks as a means of dealing with financial instability. There was great political resistance to such a step in the US. The issue of giving greater powers to the bankers on the east coast was embroiled in the populist movements in the South and Midwest. The panic of 1907 was a severe disruption. It generated enough political leverage to bring about the establishment of the Federal Reserve System in 1913.
However, the crisis that would lead to the rise of what is considered to be the norm of American society today began with the Great Depression.
The Great Depression of the 1930s was the most extreme and extensive of the crashes. It came at the end of a decade of conservative Republican government and economic policy. The Roosevelt administration came into office with a strong political mandate that allowed them the freedom to experiment with some fundamental changes in policy. The first new deal which was a collection of emergency measures adopted during the first 100 days. Much of this was discarded either as a result of Supreme Court decisions or later repeal. However, a policy regime that is referred to as the second new deal has been an enduring feature of American political and economic institutional structure. It's major components were in place in time for the 1936 election. The most important provisions were:
The Wagner Act provided legal protections to labor unions in their activities.
The Social Security Act established the Social Security program and public assistance programs such as Aid to Families with Dependent Children.
TheSecurities and Exchange Commission Act established regulation of the stock market.
The Glass-Steagal Act of 1933 established the FDIC and depositinsurance and separated commercial banks from investment banks.
The Agricultural Adjustment Act established and extensive system of agricultural price supports.
The programs and policies of the New Deal managed to put the lid back on American society and achieve some level of economic stability. However, it was the all out industrial effort of arms production during WWII that conclusively ended the Great Depression and its economic disruption.
The two decades of 1946-1966 were a period of generally tranquil prosperity for the US economy. Prices and employment remained relatively stable. Many Americans now look back to that period as a golden age that needs to be somehow recaptured. There were four mild and short recessions during this period. Americans enjoyed a standard of living well above that of any other nation. They came to believe that they had created a bullet proof economy.
At the height of the Vietnam war the US economy began to exhibit an increasing level of instability. The stagflation crisis of the 1970s brought periods of high accompanied by double digit inflation. This was a different pattern than historical recessions that tended in the direction of deflation but it was no less problematical. The presidency of Ronald Reagan saw the beginnings of a conservative movement which aimed to make basic changes in the institutional regime which had been dominant since the New Deal. Deregulation, lower tax rates and privatization were among their favorite rallying cries. This brief history forms the background of our diaries.
The recession which began in 1990 had a major political impact. One reason for this was because it created high unemployment among middle class Americans who were accustomed to viewing recessions as something that really didn't impact them. It was followed by the dot com bubble which burst creating another recession followed by the even bigger housing bubble which was then followed by the most severe and extensive recession since the great depression. So far, we have somehow managed to avoid another crash and general deflation of the same magnitude of the Great Depression, but it is pretty apparent that the US does not have a bullet proof, stable and tranquil economy.
Since WWII we have been conditioned to the notion that recessions are a natural, but mild feature of the economic landscape and that they always pass. The bubbles that have been generated in their wake give the impression that the good times are always just around the corner. The conventional wisdom of the prevailing establishment of economists is that free market economies are characterized by self correcting equilibrium and will naturally return to a state of full employment and stable prices if left to their own devices.
As the orthodoxy would have us believe, recessions and such disruptions are the result of external government interference in an economy that should be left to the management of the captains of corporate capitalism and their expert economic advisers.
It is the basic thesis of this series that things really haven't worked out that way. America has economic problems that have been getting progressively worse for the past 30 years. And guess what folks, they are not going to get better by just leaving them alone.
Many people are under the impression that the new deal was inspired by the economic theories of John Maynard Keynes. That is not historically accurate. The New Deal programs were put together by a group of eclectic political thinkers from a variety of backgrounds. Most of the legislation was more influenced by humanitarian philosophy and political concerns than by any economic theory. The second New Deal legislation was almost fully in place before Keynes published his most important work General Theory of Employment, Interest and Money.
During the 1940s, some of his ideas about the use of fiscal policy to intervene
during periods of economic stress became incorporated in the practices of economic management. Initially his theories posed a major challenge to the prevailing neoclassical economic establishment. Some of his work was grafted onto the macroeconomic perspective of neoclassical theory and something, which is now referred to as the neoclassical synthesis, emerged. However in the process much of Keynes most important work was shoved aside and the economists who have worked at full development of it are officially classified as among the heterodox.
Hyman P. Minsky was a post-Keynesian economist who addressed the problems of chronic instability in the American economy. His major work Stabilizing An Unstable Economy lays out his research and theoretical development. Minsky is the intellectual godfather for this series. His book is directed toward other economists and not the general reader. It is not for the faint of heart. However, this video made by Randall Wray who is one of the major contemporary scholars of Minsky's work is an easily digestible introduction to the subject:
Minsky's book was published in 1986. The changes promoted by the Reagan administration, or Neoliberalism, were just being developed. Minsky's main focus was on the stagflation crisis that was beginning to subside and the historical developments from the Great Depression. Much of his work is linked directly to the theories of Keynes. There are several main points of his position that have informed the views that will be developed in this series.
The most important is that advanced capitalist economies are inherently unstable. The primary sources of that instability arise from within the economy and its financial activities. The New Deal did not provide an institutional structure that was highly effective in controlling this instability and certainly not one that could function indefinitely without modifications to adjust to changes in the real world. The tranquil period from 1946-1966 was an historical anomaly. It had more to do with the economic impact of WWII production than with New Deal policy.
The free market mechanism of neoclassical theory is an effective mechanism for the management of specific decentralized markets, but it discards realities that cannot be ignored in understanding and stabilizing the macroeconomic environment and setting policy.
The activity of financing production is the core source of instability. The financial innovations of bankers and other financial service promoters create new sources of economic instability. The strong tendency of government institutions to bailout the catastrophes that result from the increasing level of risk associated with those innovations validates and reinforces the behavior and leads to new destabilizing innovations as soon as the crisis is past.
This series will apply Minsky's ideas to the present US economy we face in 2010 by looking at how the notion of chronic instability explains developments in several major economic areas.
Diaries coming soon include:
Banking and finance
Separately, Bruh1 has developed a series on race and Neoliberalism called "Oprah, Race and Neoliberalism" that he will debut tomorrow at 2PM.