I don’t know if you are anything like me, but when the financial crisis burst upon us in 2008, you probably went searching for sources of information to explain what was going on as Mr. Paulson presented the American people with Wall Street’s bill for 700 billion dollars to save them and us from economic ruin. This bailout became an obvious embarrassment to the neoliberal, free marketers and right wing conservatives who had been such hearty cheerleaders for the wonders of “free” enterprise. Right wing radio punditry and Republican leadership, in general, quickly developed a narrative that blamed the whole crisis on the excesses of Fannie Mae and Freddie Mac and liberal do-gooders, like Barney Frank, who pushed too many poor and unreliable borrowers (read minorities) into the housing market. There could be no acknowledgment from these quarters, or the mainstream media, for that matter, of anything wrong with the system itself.
As we descend into collective amnesia over the causes of the 2008 financial meltdown, there is general rejoicing in the rebound of stock prices and little enthusiasm for any fundamental reform. People tend to believe as the stock market goes, so goes the real economy and that jobs will soon follow. They forget that the 2002 “recovery” was a jobless one.
There have been many books and articles written and movies produced since 2008 that provide good analysis of what went wrong and why. A couple of books that caught my attention are reviewed below in the hopes you might also find them useful.
Ha-Joon Chang, 23 Things They Don’t Tell You About Capitalism, Bloomsbury Press, New York, NY 2010
Ha-Joon Chang, born and raised in South Korea, is on the Faculty of Economics at the University of Cambridge. In 2003, he won the Myrdal prize and in 2005, the Leontief prize for Advancing the Frontiers of Economic Thought.
23 Things is a jaunty and humorous put down of “free market” neo-liberal ideology; an effort to expose the mythology of the free marketers whose economic dogma has held our political elites and much of our populace enthralled for generations. As he demonstrates throughout his book, the “truths” “peddled by free market ideologues are based on lazy assumptions and blinkered visions, if not necessarily self-serving notions.”
Ha-Joon Chang is no Marxist. He believes that capitalism is the greatest economic system ever devised by the mind of man, he just pokes holes in one version of it, free market capitalism.
He claims that, “Economics, as it has been practiced in the last three decades, has been positively harmful for most people.”
“Forget for a moment the financial meltdown, which will scar the world for decades to come. Prior to that, and unbeknown to most people, free market policies had resulted in slower growth, rising inequality and heightened instability in most countries.” In countries such as the United States, “these problems were masked by huge credit expansion; thus the fact that US wages had remained stagnant and working hours increased since the 1970s was conveniently fogged over by the heady brew of a credit-fuelled consumer boom.”
He reassures us that “95 percent of economics is common sense made complicated,” that we don’t all require advanced degrees in economics to understand what is going on in the world, even though many economists and politicians practice deliberate mystification.
“Once you know that there is really no such thing as a free market, you won’t be deceived by people who denounce a regulation on the grounds that it makes the market ‘unfree.” And, “once you realize that trickle-down economics does not work, you will see the excessive tax cuts for the rich for what they are – a simple upward redistribution of income, rather than a way to make all of us richer, as we were told.”
So what are some of the thing we are not told?
“There is no such thing as a free market;” “Free market policies rarely make poor countries rich;” “Making rich people richer doesn’t make the rest of us richer;” “US managers are over-priced;” “The US does not have the highest living standard in the world,” “The washing machine has changed the world more than the internet,” “Financial markets need to become less, not more, efficient,” “Good economic policy does not require good economists.”
These and 15 other, sometimes counter-intuitive “things” make up the core of this work.
One of Ha-Joon Chang’s compelling reminders is that economics is not a science like physics or chemistry, but is about values and political judgments. He notes that when President Bush introduced the TARP program to use 700 billion in taxpayer money to buy up banks’ toxic assets, he denied it was socialism. It was, he said, “simply a continuation of the American system of free enterprise, which ‘rests on the conviction that the federal government should interfere in the market place only when necessary.’”
The hypocrisy of Bush’s statement tried to dress up, “one of the biggest state interventions in human history,” as just “another workaday market process.” But Bush’s words exposed,
“the flimsy foundation on which the myth of the free market stands. As the statement so clearly reveals, what is state intervention consistent with free market capitalism is really a matter of opinion. There is no scientifically defined boundary for the free market. Indeed the history of capitalism has been a constant struggle over the boundaries of the market.”
Perhaps, it would be more accurate to say that the history of our democracy has been a struggle to define the limits of the market.
It is recalled that the British government fought the Opium War against China to have a free market in opium. Trade in slaves was also once part of the free market as was child labor and discrimination in housing accommodations and restaurant service. Some of the more doctrinaire members of the Tea Party/libertarian wing of the Republican Party apparently would, if given the choice, include some of these odious practices once again in the boundaries of the free market, if remarks by Senators Rand Paul and Mike Lee are taken seriously.
Another dimension of free market mythology that Ha-Joon Chang undermines with relish is Ronald Reagan’s maxim that "Government is not a solution to our problem, government is the problem," a statement which illustrates Reagan’s slender grasp of the entire arc of American economic history. It is a mantra which Republican’s repeat with mind-numbing regularity and which we will surely hear more of as they reassert their control over the US Congress. However, ever since Alexander Hamilton submitted his 1789 Report on the Subject of Manufactures, the Federal government has been absolutely indispensible, the lynchpin, to the success of private enterprise in this country. Hamilton argued that, ‘industries in their infancy, like the American ones, need to be protected and nurtured by the government before they can stand on their own feet.’ Through tariffs, subsidies, public investment in infrastructure and tax breaks, it is government, throughout our history, that has created the climate and means for private enterprise to prosper. One area where the government has been particularly active, as alluded to by President Obama in his State of the Union address, is research and development.
“Between the 1950’s and the 1980’s, the share of government funding in total R&D in the supposedly free-market US accounted for, depending on the year, between 47 per cent and 65 per cent, as against around 20 per cent in Japan and Korea and less than 40 per cent in several European countries.” “It is notable that most of the industries where the US has an international technological lead are the industries that have been receiving major government R&D funding …”
Ha-Joon Chang in his conclusions, proposes, among other things that we should (1) build a new economic system on recognition that human rationality is severely limited. The problem is not a lack of information, but our ability to cope with it; (2) build a system that brings out the best, rather than the worst, in people; (3) stop believing that people are always paid what they ‘deserve’; (4) be more serious about ‘making things’; (5) strike a better balance between finance and ‘real’ activities; (6) encourage government to become bigger and more active, and (7) ‘unfairly’ favor developing countries.
Finally, the market system
“by glorifying the pursuit of self-interest by individuals and corporations,” has “created a world where material enrichment absolves individuals and corporations of other responsibilities to society. In the process, we have allowed our bankers and fund managers, directly and indirectly, to destroy jobs, shut down factories, damage our environment and ruin the financial system itself in the pursuit of individual enrichment.”
David Harvey, The Enigma of Capital and the Crisis of Capitalism, Oxford University Press, 2010.
The Enigma of Capital, by David Harvey focuses both on the causes of the 2008 financial crisis, and the internal contradictions of capital accumulation, which leads to periodic breakdowns of the economic system. David Harvey is a Distinguished Professor of Anthropology at the Graduate Center of the City University of New York (CUNY) and is the author of several books on neo-liberalism, imperialism and the limits of capitalism.
Professor Harvey comes at these issues from a Marxist perspective, a fact that might scare some American readers, or cause them to reject the book out of hand, since we have been so trained to scorn anything labeled Marxist. But there is no need to be frightened; Professor Harvey is a mild-mannered, academic whose analytical insights illuminate many of the economic problems we have encountered over the last several decades. RSA Animate has provided an animated illustration of one of Dr. Harvey’s lectures on the financial crisis that encapsulates some of his key ideas. Please see the following link: http://comment.rsablogs.org.uk/...
Dr. Harvey says that his book is about understanding capital flow and, “the strange logic of its behavior.” Many government leaders and economists were apparently blind-sided by the 2008 economic crisis. He relates that Her Majesty, the Queen of England wrote to the London School of Economics to ask why they didn’t see this coming.
“Assembled together under the aegis of the British Academy, they could only confess in a collective letter to her Majesty, after six month of study, rumination and deep consultation with key policy makers, that they had somehow lost sight of what they called ‘systemic risks,’ that they, like everyone else, had been lost in a ‘politics of denial.’ But what was it that they were denying?” His answer: “any conception of the systemic nature of capital flow.”
Capital, he clarifies, is not a thing, “but a process in which money is perpetually sent in search of more money.” “The process cannot be interrupted without incurring losses.” The insatiable nature of capital accumulation is capitalism’s greatest strength and weakness.
The underlying issue since the crisis of 1973-1982, has been how to absorb greater and greater amounts of surplus capital. Organizations, like the IMF, have often warned that the world ‘is awash with surplus liquidity.' Even now, with the US economy limping along, companies themselves are reported to be holding huge sums of cash, which are not being invested in new productive activities that could create jobs.
To deal with this surplus,
“a new global financial architecture was created to facilitate the easy international flow of liquid money capital to wherever it could be used most profitably. The deregulation of finance that began in the late 1970’s accelerated after 1987 and became unstoppable in the 1990s.” This new financial architecture meant that capital gained access to “the whole world’s low-cost labor supply.”
The impact for the US and the UK in particular, since the Reagan/Thatcher years, is that the wages of working people (middle class) have stagnated. This set up another dilemma since disempowered labour cannot be the basis for a good market, which is essential for more capital accumulation.
“It is now well understood that ‘consumer sentiment’ and ‘consumer confidence’ in the more affluent societies are not only keys to endless capital accumulation but are more and more the fulcrum upon which the survival of capitalism depends. 70% of US economic activity depends on consumerism.”
The gap between what people were earning and what they needed to spend to sustain the market was covered “by the rise of the credit card industry and increasing indebtedness.”
“Household debt sky-rocketed, but this required that financial institutions to both support and promote the debts of working people whose earnings were not increasing.” This started first with the steadily employed people, but by the late 1990s had to go further because “that market was exhausted.” Hence, “financial institutions, awash with credit, began to debt finance people who had no steady income.”
The result in the US market was that, “the financial institutions collectively controlled both the supply of, and demand for, housing.”
In short, the underlying problem is,
“excessive capitalist empowerment vis a vis labour and consequent wage repression, leading to problems of effective demand papered over by a credit fuelled consumerism of excess in one part of the world and too rapid expansion of production in new product lines in another.”
Unlike Ha-Joon Chang, Harvey does not see capitalism as the best system ever invented, although he does admit that the “performance of capitalism over the last 200 years has been nothing short of astonishingly creative.” However,
“At times of crisis, the irrationality of capitalism becomes plain for all to see. Surplus capital and surplus labour exist side by side with seemingly no way to put them back together in the midst of immense human suffering and unmet needs. In midsummer of 2009, one third of the capital equipment in the United State stood idle, while some 17 percent of the workforce were either unemployed, enforced part-timers or ‘discouraged, workers. What could be more irrational than that?” Therefore, “questioning the future of capitalism itself as an adequate social system ought … to be in the forefront of current debate.”
Such a debate doesn’t seem very likely, either from a political or economic point of view.
Dr. Harvey, like Ha-Joon Chang, puts a lot of blame for this on the economics profession and “the deeply entrenched mental conceptions associated with neoliberal theories.” As Paul Krugman said in the NY Times, "The economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."
But what is the alternative? Ha-Joon Chang seems to propose a kinder, gentler style of capitalism that is more humanistic, but probably not very conducive to the driving engine of capital accumulation. Dr. Harvey suggests socialism, by which I think he means the kind of social democracy embraced by Europe and despised by Republicans which,
“aims to democratically manage and regulate capitalism in ways that calm its excesses and redistribute its benefits for the common good. It is about spreading the wealth around through progressive taxation arrangements while basic needs – such as education, health care and even housing – are provided by the state out of reach of market forces.”
There are others, such as Nicholas Georgescu-Roegen and Herman Daly who have emphasized the biophysical limits to capital accumulation, because as Dr. Harvey claims, “the current path of capitalist development” is “leading to a dead end if not a catastrophe for humanity.” They have advocated a “steady state” global economy and population, although it is not clear how such a system would work in practice. Would a no growth or slow growth economy simply mean Japanese style stagnation?
Dr. Harvey says it would mean
“radical reconfigurations in daily life, in urbanization as well as in dominant social relations, production systems and in institutional arrangements. The trajectory of technological development would likewise have to change, away from the gargantuan and the militaristic into more ‘small is beautiful’ and ‘less is more’ consumerism.” All of which would be “deeply antagonistic,” to the whole idea of capital accumulation.
Since neither socialism nor a steady state economy seem likely in the foreseeable lifetimes of any of us currently living, barring a truly cataclysmic meltdown of the global economic system such as we narrowly escaped in 2008, we can only hope that the modest reforms recently enacted and any lessons learned will mitigate the next round of “creative destruction.”