Wednesday, October 22, 2014

Laissez-faire economics

The claim that economics was a "science" as represented by its elevation to "Nobel" status (and other similar events) was soon followed by an enormous move towards reactionary ideas.  It was if the profession decided that if you threw enough math at economics, soon you would be sounding like J. P. Morgan.  It seems strange that adding powerful computers and high-end math to the investigation of economic behavior would lead to a generation of pre-industrial knuckle-draggers and some of the most primitive thinking since the decline of feudalism, but that is what in fact happened.

Because I was there when the economics department of my university got an IBM 360, I was very much caught up in the excitement of combining powerful computers with economic research.  Unfortunately, I lost interest in econometrics almost as soon as I understood how it was done.  My thinking went through four stages:
  1. Holy shit! Do you see what you can do with a computer's help.
  2. Learning computer modeling puts you in a small class where only other members of the caste can truly understand you.  This opens up huge avenues for fraud:
  3. The main reason to learn stats is to prevent someone else from committing fraud against you.
  4. More and more people will gain access to the power of statistical analysis.  When that happens, the stratification of importance within the profession should be a matter of who asks the best questions.
Disillusionment began to set in.  I began to suspect that all the really interesting economic questions were FAR beyond the ability to reduce them to mathematical formulas.  Watching computers being applied to other pursuits than academic economic investigations over time only confirmed those suspicions.
  1. Precision manufacture is an obvious application for computing.  And for many applications, this worked magnificently.  Any design that combined straight lines and circles could be easily described for computerized manufacture.  Unfortunately, the really interesting design problems can NOT be reduced to formulas.  A car's fender, for example, can not be described using formulas—it can only be described by specifying an assemblage of multiple points.  If math formulas cannot describe something as common and uncomplicated as a car fender, how can it hope to describe human behavior?
  2. When people started using computers for animation, it soon became apparent that human motion was almost impossible to model correctly.  After a great deal of effort, the animators eventually put tracing balls on real humans and recorded that motion before transferring it to the animated character.  Formulas failed to describe simple human behavior—like a toddler trying to walk.
Lately, I have discovered a Swedish economist who did NOT give up  econometrics merely because it sounded so impossible.  In fact, he still teaches the stuff.  But for the rest of us, he systematically destroys the pretensions of those who think they can describe human behavior with some basic formulas.

And here we see what happens when economics substitutes the appearance of scientific rigor for the real thing.  Unfortunately, real lives are destroyed in the process.

How Laissez-Faire Economics Led to Inequality and Recession

Jeff Madrick  Huffpo  10/14/2014

Remember in 2009 when everyone was dodging blame for the financial crisis? Depending on who you asked, it was the bankers, the federal regulators, Fannie Mae, fraudster mortgage companies, the ratings agencies and the sub-prime borrowers themselves. The favorite claim of excuse makers was that no single group was to blame -- it was a cluster-f*** as one journalist friend put it.

If everyone did it, no one could be held accountable. But it wasn't true. Bankers and regulators were the major creators of the crisis, for their neglect and single-minded self-aggrandizement that often involved bending the rules.

But let me single out one group that avoided blame and deserved plenty of it: mainstream economists. The deeply held ideas of the nation's most elite economists from the Right and the Left were direct causes of the crisis, justifying perverse behavior on Wall Street and in Washington, and careless and ignorant behavior at the Federal Open Market Committee of the nation's central bank, the Federal Reserve.

These ideas did a lot of harm along the way -- in particular, they were responsible for slower than necessary economic growth that resulted in higher unemployment and inequality.

But first, consider this one enormous area of theoretical neglect, and you get an idea of the inadequacies of the prevailing body of economic ideas. The Federal Reserve just named a new committee headed by vice chairman Stanly Fischer to research how unstable financial markets may affect the real economy of jobs, production, business investment and profits. If you read the 2008 minutes of the Federal Open Market Committee (released earlier this year), which meets roughly every six weeks to set interest rate and other policies, you'll see that the policymakers and their staffs had little idea how to account for financial risk. Finance simply wasn't in their economic models.

In short, the policymakers had no firm concept that the roiled financial markets, which had been in turmoil since 2007, could undo the nation's Gross Domestic Product. The Fed economists, as able a bunch as there are, did once try to put a guestimate to the effect of the troubled mortgage markets, and they were way off the market. The FOMC didn't anticipate a serious recession until the December meetings, after the economy fully crashed and credit dried up two months earlier -- and even then they underestimated by a long shot how far the nation's total income would fall. At that point, they thought the unemployment rate would go to, at worst, about eight percent, but it rose to 10 percent.

I think the casual reader may find this hard to believe -- not that economists missed the forecast (they generally have an abysmal record at predicting recessions) but that they didn't even really take financial excesses into account in their models.

This was not just the oversight or prejudice of stuffy FOMC members. It directly reflected the ideas of mainstream macroeconomists at elite universities -- the economists typically quoted in the media -- from the so-called fresh-water conservatives at schools like the University of Chicago to the salt-water semi-liberals of Yale, Princeton and MIT. (I leave out Harvard, which on balance now has a politically conservative economics department, including Gregory Mankiw, Alberto Alesina, Robert Barro and Martin Feldstein, for example.) As the highly regarded Olivier Blanchard, a left-of-center MIT economist who is now chief economist at the International Monetary Fund, admitted after the collapse, there had simply been no place for financial regulation in macroeconomics up to that point.

This is dismaying but it is important to understand that a fundamental mainstream idea was behind it. Generally, the reaction of the economic mainstream to the inflationary turmoil of the 1970s was to retreat to an ideological interpretation of their fundamental ideas -- a doctrinaire reinforcement of laissez-faire economics. As Americans turned away from government, so did the economics profession. In regard to the financial markets, it boiled down to this. Free markets without government interference work too well to become dangerously unstable; therefore, no need to account for how a credit crisis might affect the real economy. It would correct itself too quickly to do damage.

Since the 1980s, this had been a central economic idea, one of several major ones that did great damage. Financial markets were "rational." If a stock price or mortgage security was overvalued, a smart professional would sell it. Milton Friedman said as much in the early 1950s about letting currencies trade in free financial markets. Speculation would usually lead to stability, not instability.

As with many fundamental ideas, they were often useful initially. Eugene Fama and several other economists at the normally conservative University of Chicago and the usually liberal MIT made persuasive cases that individuals could not "beat the market," which was composed of countless smart investors incorporating information accurately when assessing how much a stock was worth. That is, even if they invested in a professionally run mutual fund, odds were high simply buying an index fund that mimicked the Standard & Poor's 500 would do better. Fama won a Nobel Prize for his early work.

But the economics profession became more extreme in their support of the power of free markets, and what had been known as the efficient markets theory went off the rails. Economists like Fama began to claim there were no speculative bubbles. Regulations to limit them, like credit restraints, would only interfere with the efficient workings of the markets. Others like Michael Jensen, a Harvard Business School disciple of Fama's, argued as did Fama that stock prices rationally reflected the future value of a company. To get CEOs to manage companies better, just give them stock options. They will get rich as the company's stock price rose due to their abilities.

It turned out, however, that stock prices weren't all that rational at all. They were subject to fashions, as Robert Shiller, the Nobelist from Yale showed. It also turned out that, as Lucian Bebchuck at Harvard Law School has shown, there is little relationship between CEO compensation and a company's performance.

Some purely bad ideas were resurrected, such as Say's Law. It argued in part that any savings in a nation would be productively invested. But what we know is that just isn't true if there is no buying power for goods and services. Austerity economics was one damaging result, not merely at the University of Chicago but among researchers at, for example, Harvard, led by Alberto Alesina, and to a large extent Kenneth Rogoff, and some economists at the Brookings Institution. But deficits became the bogeyman.

The wide-ranging turn to laissez-faire doctrine reached across the economy, but here is how it contributed directly to poor and unequal incomes. After the inflationary 1970s, the nearly sole objective of government policy should be to keep inflation low. Again, there was a fundamental idea here. Inflation upset the rational workings of free markets by introducing uncertainty. With low inflation, economies would be efficient and prosperous.

But inflation targeting, led by the Federal Reserve, resulted in higher unemployment rates than necessary and slower growth in wages for most workers. There was a deliberate effort to keep wages from rising rapidly to avoid a squeeze on profit margins that would force business to raise wages. The unemployment rate was higher than what government economists thought a natural rate should be most of the time since the 1970s.

The founding idea of modern economics is Adam Smith's invisible hand, and this great idea, badly over-simplified, was the foundation of many bad ideas of the last generation. The invisible hand tells us how an economy free of government regulations may work, not how it does work. Competitors will push prices down to maximize consumer buying, pure and simple. Government need not regulate these competitors. Increasingly, the profession took a dogmatic view. Financial deregulation, a low minimum wage, reduce government invest -- these were all results of a purist interpretation of the invisible hand.

The great nineteenth century economist, John Stuart Mill, writing well after Adam Smith, was skeptical that competition alone was the great regulator as Smith insisted it was in his invisible hand. He said that economics was by nature "hypothetical." Its laws were not engraved in stone. If you looked around, wrote Mill, "custom," which he used to describe many non-economic aspects of culture and behavior, was equally important. "It would be a great misconception of the actual course of human affairs to suppose that competition exercises in fact this unlimited sway."

The ideas that governed the mainstream economics profession since the 1980s were turned into rules when they were at best only hypotheses. Rules are easier to deal with; ambiguity and uncertainty are shunted aside. But the world is not so simple, and good policy is scarce when a profession once dedicated to brilliant thinking and extemporaneous judgment to fit changing times turns to formula and ultimately cliché. more

Tuesday, October 21, 2014

Free trade versus autarky

Autarky is one of those words that has fallen so far out of favor that it would probably stump a panel of "Jeopardy" champions—even though it means self-sufficient (a virtue that is still widely prized.)  Actually, this contradiction makes a lot of sense.  True self-sufficiency is astonishingly hard to achieve and on a individual level, probably impossible.  There are small groups that make a fine try at being self-sufficient.  The fascination with the Amish is mostly due to their ability to make their way economically outside of the technostructure.  But as the hippies discovered with their back-to-the-land efforts, the freedoms promised by self-sufficiency come at the price of a lot of very hard work.

Autarky as an economic strategy was given a bad name because the Nazis tried so hard to create a self-contained economy.  In this case, autarky was merely another preparation for warfare.  And while the Nazis came quite close to their goals of economic self-sufficiency, there were still plenty of gaps in their desire to limit trade to only allies.  Even (especially?) on a national level, autarky is so hard to achieve that even a totalitarian state cannot pull it off.

Which brings us to today's featured article.  It is from Radio Free Europe so is probably as establishment / CIA / State as these things get.  Normally, I would not bother to read such obvious propaganda, but I am glad I read this one.  Because buried near the bottom is that that archaic and disused term—autarky.  Yes indeed, we now have a believable explanation for the irrational hostility to Russia and Putin.  Not only does Putin's Russia want to reorder the existing, dollar-based, global trading system, it has the possibility through the strategies of autarky to escape the shit-storm such a move has triggered.  And according to this piece, Putin is appointing a new generation of bureaucrats who share his vision.

The neoliberal "free-traders" did an amazing amount of damage to Russia.  That is not so surprising as unfettered trade turns the activity into this glorious opportunity to rip off the Producer Classes.  And that is precisely what happened during the Yeltsin days.  Nobodies with zero relevant skills made off with whole industries and got stinking, filthy, rich by exploiting the weaknesses in the philosophy of "free" trade.  And not so surprisingly, the people who got rich overnight at the expense of the Russian middle classes now worship neoliberalism and try to ensure that likeminded souls have all the important economic jobs.  And this is what Putin is trying to stop in the name of patriotism and national pride.  And he is recruiting his foot soldiers from the provinces where self-sufficiency is still valued.

Just to make sure we understand just how serious this conflict is, there has been a recent exchange between Mikhail Khodorkovsky, one of the neoliberal pirates who almost made off with much of Russia's oil wealth before being sent to Siberia for corruption and fraud, and Igor Strelkov, a man who has a clear sense of the damage Khodorkovsky caused and why Russia must resort to a state of near war to defend itself.  Khodorkovsky's speech was given to the 2014 Freedom House Awards Dinner on October 1.  It is full of the arguments used by all the neoliberal hacks that populate both parties in USA.  Strelkov, on the other hand addresses his Russian readers with pitches to their patriotism, historical Christian roots, and the raw memory of the catastrophe of the Yeltsin days.  Our politicians will certainly not understand—it's probably why none of them have Putin's approval ratings.

Monday, October 20, 2014

The USA military does NOT get it on climate change

Last January, I attended a climate change conference that featured a TV personality who had come to agree with the climate scientists after a lifetime of denial.  Not surprisingly (I guess) he peppered his speech with appeals to deniers like he once was—quoting the Bible, Ronald Reagan, etc.  At one point, he cited some examples of how the Navy was planning for the changes that climate change would bring to their operations.  "The Navy gets climate change," he shouted excitedly.

I thought I was going to be sick.  After a lifetime of passionate interest in the history of USA aerospace, there was one thing I KNEW about the military—almost every bit of their equipment requires massive amounts of premium fuels.  Navy jets, because they must operate off carrier decks, are some of the biggest gas hogs in the air.  Suggesting that these exemplars of conspicuous waste understood the issues of climate change was a bit like suggesting that Hugh Hefner was an expert on growing old gracefully with your lifetime partner.

In fairness I would imagine that the Navy, as part of the USA industrial state, is probably much closer to "getting it" on climate change than the folks who think a solution will come from marching behind large puppets and clever signs through the streets of New York.  Even so, I will not give the military much credit for understanding climate change until they stop using massive displays of waste as a form of chest-pounding.  I mean, considering that 99% of their potential targets are essentially defenseless, why exactly do they need supersonic aircraft?  How much fuel is required to demonstrate readiness or ferociousness?

Sunday, October 19, 2014

Wind power in Scandinavia

A friend who spent a significant part of his childhood with his father—a very successful Mexico City architect / property developer—is someone who can always be counted on to provide the views of the Latin American oligarchical classes.  One day we were discussing the boast made by Hugo Chavez that Venezuela had the investment capital to provide her with the "industrial density of Sweden."  Friend laughed uproariously and then said, "Well, that may be true because she has an almost continuous trade surplus from her oil exports and can buy whatever machines she could possibly want, but what she is missing are the Swedes to run them."  (This is the sort of remark that almost always elicits a nod of approval in Minneapolis so friend was probably being more charming than analytical, but it certainly has a large element of fact built in.)

I thought about that remark today while reading how the Nordic countries plan to manage the VERY tricky transition from coal and gas to wind power as the way to power their societies.  A lot of fossil-fueled electrical generating capacity must soon be mothballed yet this does not seem to cause much distress.  For the Nordics, reducing the national carbon footprint is just another problem to be solved—and these are people who solve complex problems for pure enjoyment.

As my friend would point out, almost everyone has the same set of energy problems.  What they are missing are the Swedes (Norwegians, Danes, Finns).

Saturday, October 18, 2014

Oliver Stone goes to Russia

As someone who thoroughly appreciates Oliver Stone's latest attempts at retelling history, I am quite delighted to see he has gone to Russia to cover the latest episodes in east-west relations.  Apparently, he gave an interview to a big Russian newspaper that is really too good to miss.  So here it is.  At one point in the introduction, the question is asked,
how is it possible, that this man, not a professional journalist or historian, understands what is going on in Ukraine and Russia and the mess the US has gotten itself into, better than the combined western media and Washington policy makers?
As someone who is nearly the same age as Stone, I'd like to give that question a shot.  A couple of years ago, I was talking with a highly educated German who has a major job at the University of California, Berkeley.  As one point he expressed some dismay at the narrow worldviews of many of his colleagues.  I said, "What do you expect?  Even the best-educated Americans know almost nothing about recent history and what they think they know, is usually wrong.  For example, almost no one in USA born after 1945 has any idea that USSR fought the Germans in WW II."  He looked at me incredulously, "What do such people believe?  That World War II was fought only between Germany and UK / USA?"  "That is precisely what I am saying", I replied. "Not only do we not know that almost every important battle of WW II was fought between the Germans and the Red Army, we are taught by omission that they never happened—they don't even come up."

Somewhere along the line, Stone managed to learn the history of the Great Patriotic War.  And that makes all the difference because it is quite literally impossible to know these historical facts and believe the Cold War BS that comes from the State Department.  At this point, it becomes obvious that for the paid liars at State, the near-universal historical illiteracy of the American public is a feature, not a bug.

Friday, October 17, 2014

The consumer runs out of money

In the past 40 years, anyone who has tried to run a business in USA will tell you one fundamental truth—their biggest problem was not finding something to sell, getting a quality product produced, finding skilled employees, raising capital, and after the desktop revolution and the coming of the Internet, being able to mount a slick marketing campaign, the BIG problem was finding enough customers with money to spend.  Not surprisingly, lack of customers has been the #1 reason for business failures.

Of course, there are always companies that find a niche and produce a big "hit" product or service (although in a hits-just-keep-on-coming world, those successes tend to be very short-lived).  There are enough of them so the glossy business mags have something to put on their covers each month.  But since the USA worker hasn't gotten a raise since 1973 and the cost of the necessities of life keep rising, what's left over keeps shrinking.  At some point, it doesn't matter how wonderful your product or service, or how clever your marketing, there are simply not enough folks with money to keep your doors open.  Too many producers—not enough consumers.

The little guy on Main Street knew this long ago.  Now the problem has moved up the food chain so that as reported below:
seven out of every eight major American retail companies “cite weak consumer spending as a risk factor to their stock price,”
Because there is obviously no "free-market" solution to this problem, the only solutions will involve collectivized actions like raising the minimum wage.  But the BIG change will be to finally end the adherence to that most discredited crackpot economic idea—trickle-down "economics."  It turns out that rising yachts cannot life the tides no matter how much the economists would wish to make it so.

Thursday, October 16, 2014

German economy loses altitude

The markets and the real economy are very tenuously linked.  In fact, a major blow to the real economy can send the markets soaring.  But this time, the massively overbought markets are looking for an excuse to sell and by gum, if you look at the real economy, you will very likely find all sorts of reasons to take your money and run.  The only economy in the EU that is not staggering from one disaster to the next is Germany's and folks, they are running out of customers very quickly.  So on the news that German exports have dropped sharply, the DAX plunged to a near one-year low.

I tend to discount this sort of news.  There are thousands of economic horror stories out there that are routinely ignored whenever the markets are advancing.  Considering how much naked corruption, front-running, and computers trading with each other that goes on in those massively over-reported markets, I wonder why anyone takes this news any more seriously than for any other form of betting.  But they do, and governments are known to create extreme hardships for their own citizens in order to keep those magic markets soaring ahead.  So I keep track of the casino only because far too many take it seriously.

Wednesday, October 15, 2014

Finland and Apple

On Monday, Finland lost its AAA credit rating.  This is the only country that paid its WW I war era debts to USA and the country that managed to maintain it independence from USSR after WW II by paying its onerous reparations through heroic efforts that included housewives turning in their wedding rings for the gold.  These are people who pay their debts.  So for them to lose their AAA rating, there must be something seriously wrong with their economy.

There are two major things wrong with the economy of Finland these days—the collapse of Nokia and the continued decline of the global paper industry.  The problems at Nokia are especially sad.  As recently as 2007, it was arguably the world leader in cellphones and the hardware that made them work.  Then came the iPhone—a device that wasn't much of a phone but was a spectacular hand-held computer—and suddenly, those gems made by Nokia looked like something from the dark ages.  Things that once mattered so much—range, signal clarity, durability, etc.—were suddenly irrelevant in the new world where the new abilities such as numbers and availability of applications now dominated.  Nokia could have responded with a line of smart-phones of its own but the company structure was so dominated by cell-phone experts, it had no institutional way to fight back.  Eventually, it would be sold to Microsoft for the fire-sale price of $7.2 billion and the layoffs—over 12,000—began.  For a country with barely over 5 million people, this is a catastrophe.

The paper industry also became a Finnish specialty.  Here in Minnesota, every paper mill in the state is owned by Finns.  They had achieved global dominance through hard-work and innovation—Finnish paper-making machinery was extremely reliable and efficient and Finnish management techniques were first rate. What could possibly go wrong?  People could stop buying and using so much paper—that's what.  Computers had long promised a paperless society but had in fact delivered a paper boom when desktop publishing exploded in the 1980s.  Then came the iPad and its imitators and suddenly, the promise of the paperless society began to come true.

So it wasn't much of an intellectual stretch for the Finnish PM to blame its economic problems on Apple's two big marketing breakthroughs—the iPad and the iPhone.  Finland makes others things of course, but paper and cellphones were the two major accomplishments.  And for all the brave talk, replacing them as engines of the national economy will be damn difficult.

Tuesday, October 14, 2014

When neoliberalism crashes and burns, how will the true believers respond?

These days, even the IMF is warning that the current economic situation cannot last much longer—it can get a whole lot worse.  They can list their reasons for why we can see a major crash on the horizon but here are mine.
The economics profession lost the plot with the arrival of econometrics.  Because numbers-crunching needs numbers to crunch, only those economic questions that had been reduced to numbers would be studied.  As a result, many extremely important economic questions such as, What is the role of aesthetics to economic outcomes?  Or precision?  Or wise use of resources?  Or the production or reduction of waste products, or the role of design in energy consumption?  Etc.?  In short, everything important to the real economy would now be shunted aside as non-important / existent while massive arguments would break out over trivialities such as the role of hedge funds.  In such an atmosphere, the symbolic economy would flourish (stock markets reaching record levels) while the real economy fell apart (everyone the world over now faces catastrophic infrastructure deficits.)

Unfortunately, as the real economy collapses, the number of people who have enough money to participate in the symbolic economy collapses with it.  So while the economics profession ignores the health of the real economy, they inevitably fail to see the problems facing the symbolic economy.  Not surprisingly, they are utterly unprepared to foresee the various threats to their unicorn and rainbow constructions of reality.  (How many economists foresaw the problems of 2007-8?)  Of course, if you cannot see a problem developing, it will surely be impossible to plan for the eventualities they present.
And so we see Larry Elliot, the economics editor for The Guardian size up the state of planning in case the overheated markets collapse.  To call these people clowns is an insult to clowns.  Unfortunately, the financial "heavy-hitters" will try once again to fix the symbolic economy while ignoring the problems of the real economy.  Of course they will—they have no choice because they refuse to acknowledge that the real economy exists.  Unfortunately, the "tools" they had to pump up the symbolic economy without fixing the real thing were mostly used up to rescue the economy from the crash of 2008.  Hard to lower interest rates when the prime is nearly zero already.

Sunday, October 12, 2014

Is history more important to public policy than economics?

Above all else, knowing history is the essential navigation tool.  If you don't know where you came from, you cannot know where you are.  And if you don't know where you are, it is impossible to chart where you may want to go.
—absolutely favorite defense for why anyone interested in leading a meaningful life should know history
I did not always find history so fascinating.  When I was in high school and college, I found history to be tedious and stupid.  But then I discovered a book that covered the history of the development of musical instruments.  What a mind-blower!  Even relatively simple instruments like a violin or guitar are significant and difficult feats of building—while something like a pipe organ or piano were civilization-defining accomplishments when they were perfected.  From this book I learned two incredibly important concepts:
  1. there are as many kinds of history as there are human achievements, 
  2. the people who built our civilizations were infinitely more interesting than the religious figures, moneychangers, politicians, and warriors that so regularly populate standard history texts
In my mind, the biggest reason no one wants to study history is because it is mostly about the Leisure Classes—people who take pride in their uselessness.

Armed with these two insights, I began to devour as much historical information as I could about the nation-builders and what they accomplished.  For example, one of my favorite books was the autobiography of Alfred Sloan.  Needless to say, building GM's market share from 12% to over 50% was a large project.  But that didn't make him immune from appreciating the fact that "big" accomplishments rested on the success of thousands of significant "little" accomplishments.  At one point, he tells of the mind-boggling difficulty of making successful fuel injectors.  You "must make a hole the size of a mosquito's stinger in the hardest steel ever made."  Apparently he got so creative in describing that problem because solving it took GM over a year.  And while this problem was being solved, GM's diesel engine program was effectively put on hold.

My other passion became the topic of what happened when the builders tried to change the debate on economics.

Occasionally, I will read a history book by an established historian but I seldom do this anymore because I find such books less relevant the older I get.  I suppose the last book I read like that was Faust's Metropolis: A History of Berlin, the 1998 door stop by Alexandra Richie of Oxford.  It was frighteningly awful.  For example, the role of Berlin as a manufacturing center with Siemens as the big engine of European electrification was barely mentioned while Richie could go on for pages listing obscure nobodies who were slighted in their desire to be famous for their modern art.  And while she does mention that the Siemen's workforce became so radicalized that Berlin got the nickname "Red" Berlin, she offers nothing in the way of explanation for why making electrical machinery would cause that.

Today, we feature an essay for why the study of history is more helpful in the making of public policy than economics.  Being written by academic historians, it often veers off into irrelevance but the basic point is sound—historical illiterates are pretty damn useless when it comes to collective action.  Of course, I would say that if the subject is economic policy, it should at LEAST be informed by a working understanding of economic history.

Saturday, October 11, 2014

What the crumbling Kiel Canal says about the German economy

My childhood home was not in Germany, but I grew up around so many German-speakers, there were times when it could just as well have been.  My neighbors were often highly virtuous, and one of the virtues I found most admirable was that they believed in maintenance and other manifestations of the Instinct of Workmanship.  So when I saw DDR for the first time, I could only marvel at what madness could have caused Germans (GERMANS?) to build something as truly awful as the Trabant.  I blamed Marxism because it was a body of beliefs that was notoriously technologically backwards.

So now we find the Germans have taken to neglecting routine maintenance.  Since Marxism can no longer be blamed, I blame neoliberalism.  Neoliberalism has trashed the European economy so thoroughly that even though Germany is only now starting to hurt, the wreckage all around them has scared them so badly they will not spend money for capital improvements even when they could borrow at 0.15%.

Evans-Pritchard has no trouble identifying other flaws in German economic thinking.  Being a Brit, he is good at pointing out flaws in the Germans.  And he's probably right about most of them.  But at the bottom, I still believe her problems mainly come from the neoliberal madness.

Friday, October 10, 2014

Evil or stupid? the Troika in action

Whenever there is a financial calamity caused by standard classical prescriptions, my first instinct is to see these things as conceptual errors.  Turning an economic problem into a calamity isn't all that hard to do so it is well within your typical economic expert's power to pull off.  Then there is the problem of religious fanaticism—neoliberalism is based on ideas that have ALWAYS produced disasters so the only reason anyone can believe this horseshit is that it appeals to the irrational that seems to exist in us all.  Worse, these folks are selected for their willingness to conform so they are badly practiced in innovation.

Before we can believe that the people who staff the working level positions of places like IMF are just hopelessly evil, however, we must get past that they are relentlessly mediocre people who create economic structural adjustments for national economies that are little more than checking off boxes.  I mean, this isn't much of a defense but it should keep them from the guillotines when they have finally collected enough really angry victims.

But Auerback makes a strong case for the truly evil nature of the financial actors.  He argues that they knew exactly what they were doing when they pawned off all that real estate speculation on the Irish citizens.  In fact, they threatened the country with bankruptcy if they burned the bondholders—which is exactly what should have happened both from the point of justice and sound economic policy.

Of course, this naked extortion could also be explained away with a sort of "Predators will be Predators" description of human behavior.  Banksters prey on the Producers because it is the only survival strategy they know.  I am not sure this explanation will stave off the mobs, but you can bet it will be proffered.

Thursday, October 9, 2014

Losing the "freedom" to lie

Jon Hellevig is on a roll.  I discovered him in time to include his views in a post last Saturday called Petro rubles.  His insights into the Russian economy are first rate.

Well, he's back.  This time to complain about low-grade reporting and high-grade lying going on in the big organs of the Russian press.  Seems like they mostly exist to stir up trouble by misleading their readers.  Those of us here in USA know what he is talking about because our press has been arguing for policies that have largely destroyed the productive middle class, lied us into utterly insane wars that benefit no one except the arms merchants, and militarized our police forces against the day when a fed-up populace comes out shooting—among a 1000 other crimes against the public good.  Of course, the big difference between Big Media in USA and Big Media in Russia is that their lying troublemakers are almost all foreign.  So Russia passed a law saying non-Russians could not own more than 20% of a Russian newspaper.  (the horror)

Hellevig finds the outcry of the affected organs of propaganda pretty absurd.  According to him, the put-upon press is mostly losing their "freedom to lie"—a "freedom" they have thoroughly abused of late.  Hellevig has that good hard-nosed Nordic pragmatic view of truth-telling—it is a virtue that leads to prosperity and civic order.  Russia can only benefit by restricting the damages caused by people who believe lying is a necessary part of the social order.

Could not agree with him more!

Wednesday, October 8, 2014

IMF predicts slow growth

The charming folks over at IMF, the very same people who spent the last 40 years perfecting demand destruction with their "structural adjustments", have now discovered that bringing back an economy deliberately crippled by their crackpot economic policies is harder than it looks.  Of course, people who wreck things can NEVER consider what it took to build them in the first place.  If they had that much empathy, they wouldn't wreck things in the first place.

It's actually pretty easy to understand, IMF.  The real economy is constrained by resource limitations.  These resource limitations are a certainty because we have created a system that mines valuable resources, processes them into something humans need or want, and finally tries to find a place to hide the trash when our creations wear out or grow tiresome.  Real growth rates in such a system of linear industrialization will inevitably crash because resources are finite—and so are places to hide the garbage.

Now the IMF COULD fund real growth IF they allocated their money towards building systems that avoided linear industrialization like the plague.  And of course, they would have to end their practice of charging compound interest.  So long as the moneychangers demand compound interest for the use of money, the producers will try to make the real economy expand at compound rates.  Since that cannot be done, the IMF is in fact designing failure.  I could do without the IMF's phony surprise whenever the real economy is not performing at they think it should.  It is a bit much to destroy damn near every economy on the planet and then act surprised when they don't spring back when you act a bit enlightened for a few months.