Choosing between an astrologer and an economist

It pretty much goes without saying that in the overall scheme of things, Machetera’s worries are trivial. Not quite as trivial as those of the Blocked Cuban Blogger, but trivial nonetheless. She’s not penned into a waterless, foodless open-air prison in Gaza or Cite Soleil, or the black hole of an immigration jail in the United States. She’s not in Dick Cheney’s personally dictated hell at Guantanamo, or trapped on Ronald Larsen’s ranch in Bolivia. She could go on, but you get the picture.

Still there are things that nag at her.

What’s going on with the economy in a place where every strip mall contains at least one check-cashing/title advance/loan shark business, and sometimes two or even three? Machetera was standing in line the other day at one, waiting to send some money via Western Union, when a client ahead of her reached the window to inquire about getting a loan against his car. The young woman on the other side was obliged to advise him that if he accepted the money, the annual interest rate would be almost 400%. Just so he knew.

How is it that a society can exist where there is no method whatsoever of reaching one’s place of employment except in a solitary car, the operating cost of which, comes nearer every day to negating the money one brings home from said employment, and yet nothing ever changes, except the size of the freeways? Who is thinking about how society looks when fuel is finally and irreversibly unaffordable and why do there seem to be so many people who are completely unconcerned about the fact that we are certainly headed in that direction? How else could one explain the unbelievable waste of energy evident everywhere in the United States? And what, by the way, is the real U.S. inflation rate, not the fake one that leaves out food and fuel?

That’s just for starters. But then, just when things seem hopeless, along comes a user’s manual!

* * *

Economics. A User’s Manual

Isidro López, Carolina del Olmo and César Rendueles – La Dinamo

Translation: Machetera

For most of us, economics are that obscure science that at best, tries to explain why something that was predicted to happen, didn’t, and more frequently, is limited to informing us – although never very clearly – that to reach the end of the month, some will need to own several yachts and billions in Cayman Island bank accounts. However, there are a few economists who don’t play that ideological game, and view economics as a medium for achieving collective well-being through a social and ecological focus: Anwar Shaikh (New School for Social Research, New York), Gérard Duménil (University of Paris X), Robin Blackburn (University of Essex, and member of the New Left Review editorial board) and Óscar Carpintero (University of Valladolid) are excellent representatives of this kind of economic criticism.

Political Economy and Economic Policies

CARPINTERO: One of the tragedies of capitalist societies is that they are supported by a non-scientific theory that starts with imaginary suppositions and arrives at conclusions that are inapplicable to the conditions in which we live. The allocations of goods and services that are actually produced in our society, systematically contradict the predictions of the economic models. When the economic policies of industrialized countries consider what to produce, how to produce it, and for whom, and the answer depends on the market, the inevitable result is the appearance of social inequalities and ecological deterioration. The majority of policies that have commercialized sectors or goods that previously functioned outside the market, based on the idea that the market is the best way of assigning resources, have generated terrible results. Examples are easy to find, in health as well as education, pensions, social benefits, etc. In all these areas, the use of money as a yardstick has generated a decline in service quality.

On Neoliberalism

DUMÉNIL: Regardless of local differences, we can consider 1979, the year the U.S. Federal Reserve decided to raise interest rates in a move said to be necessary to halt inflation, as the emblematic date of entry into a new phase of capitalism; neoliberalism. This was the definition of a social program whose goal was the restoration and enhancement of the power and income of the capitalist classes, through a new kind of work and the opening of trade and finance. The power of the capitalist classes under neoliberalism is inseparable from the power of financial institutions: banks, investment funds, central banks, pension funds, etc. It’s not clear that it can be called a deliberate strategy, but without a doubt, the “financialization” of the economy forms part of an institutional framework at the service of the capitalist classes.

The Hypertrophy of Finance

BLACKBURN: I believe that the root of the present finance hypertrophy can be found in the enormous deficits existing as much in national accounts as in the balance sheets of the great world economies. The persistence of these deficits has increased the need for very complex financial instruments, transactions, and forms of credit. These changes reflect a crisis in the field of material production. The United States, the world’s largest economy, is beginning to lag behind economically, compared to the economic growth of China, and to a lesser extent, India.

But there’s another important level of analysis: the proliferation of forms of finance for everyday life. The citizens of Western countries are turning themselves into cost/benefit centers, with both feet. Indebtedness is continually encouraged as a way to gain access to education, buy a house, accumulate assets…These practices have greatly expanded the scope of financial institutions.

Another important development is the appearance of financial derivatives in the market based on the price of underlying assets. In principle, financial derivatives are used more to ensure transactions than as a means of speculation. As successive financial booms took place in the ’80’s and ’90’s, the speculative component of the derivatives was increasingly strengthened. The banks have granted a large amount of cheap credit that has been converted into debt packages and sold as financial derivatives, in order to escape the consequences of a possible default on the credit. This process, focused above all on mortgage loans, is at the heart of the present credit crisis. The current phase of the credit crisis is clearly an unintended consequence of the way Wall Street has been doing business in recent years.

State(s) and the Free Market

DUMÉNIL: Credit inflation is a phenomenon typical of the United States, not the world. With neoliberalism, the United States has followed a trajectory of increasing external imbalance and the rest of the world has had to finance its economy through credit. Orthodox economics has only one message: the free play of the market leads to an optimal state. When the crisis manifested itself, the talk was of “market discipline” as the best option. This doesn’t change the fact that states in general, and the U.S. in particular, are constantly intervening in the economy, and are specifically intervening in the current crisis.

Keynes understood that the private sector couldn’t ensure control of the macro-economy, that is, the level of overall production; this should be the work of the state, and for this, central banks and other institutions were created. Keynesian principles of economic policy express a kind of social commitment. On the one hand, the state manages the macro-economy, through its budgetary, monetary and trade policies. On the other hand, the private sector organizes production, making investments that will maximize its earnings. Marxist theory explains capitalism’s historical tendencies, its structural crises, and its financial mechanisms. In this sense, it remains much more effective than the dominant economic theory. However, the main problem in the analysis of current capitalism is not the theory, but the detailed study of specific mechanisms; the examination of the most important variables.

National Accounting and the GDP Fetish

CARPINTERO: The growth of Gross Domestic Product (GDP) has been the objective that has most forcefully dominated economic policies since the Second World War. The problem is that in the present context, there’s been a perversion, and there is an attempt to use GDP growth to resolve the problems created by its growth. Turning the problem into the solution has a double cost: on the one hand, the real problem is obscured, and on the other, precious time is lost for ecological reconstruction of industrial societies reaching their peak.

In reality, GDP is a tailor’s catch-all for many things. To question GDP, you first have to open it and analyze it, because it includes renewable and beneficial activities alongside those that are clearly contaminating. A sustainable society has no reason not to want to increase certain activities. For example, a sustainable society needs to increase activities associated with renewable energy or end the material cycle. But it’s evident that there are also a series of activities that lead to GDP growth which must disappear because they are inevitably harmful.

SHAIKH: There’s an important distinction between production and social consumption that is not generally taken into account. In economics, this distinction between production and social consumption can be seen in, for example, the manufacture of a car, or a concert, as a production of a joint determination about the objective properties for its social use, while the use of the car, or the enjoyment of the concert, is an act of personal consumption. Now then, recruiting people to sell access to, or impede unauthorized access to, the car or the concert, is an act of social consumption, in which resources are used to define a particular distribution mode for the product.

Like production, social consumption uses resources to achieve an end. But unlike production, this end is not the creation of new wealth but rather, the guarding of wealth already in existence or the guaranteeing of its distribution in particular forms. Private sale and vigilance activities, as well as military and state administrative activities belong to the category of social consumption. This important distinction has been abolished in national accounting, due to a kind of fetish over the market. However, it could substantially transform the way we build and interpret national accounting. It’s extremely important, in my opinion, in a period in which all countries are dedicating enormous resources to the international circulation of goods and money, as well as to huge and growing administrative and military sectors. If these activities are considered “production,” then to expand them is to expand national wealth; but if they’re social consumption, then their expansion means the expansion of consumption of national wealth.

Gray Capitalism

BLACKBURN: Orthodox economics has been mistaken for quite some time and we are beginning to suffer the consequences of these mistakes. The current crisis overlaps countless examples of malfunctioning economic structures and dominant ownership. I’ve tried to explain what’s happening through the term “gray capitalism:” we find ourselves in a situation where on the one hand there are huge multinational businesses that are not responsible to their shareholders and on the other, we find ourselves with enormous investment funds, like pension funds, where the beneficiaries have no control whatsoever over the fund managers. We might say that we are in a system that enormously favors the managers (insider-biased), with access to incomparably better information than the rest of the participants in the finance economy, whether they’re investors, workers, or people saving for their retirement. This asymmetrical information allows those managers to capture huge benefits. We’ve seen this phenomenon clearly during the subprime mortgage crisis. However, some chief executives and employees have come out of it well. That’s the case with Charles Prince, the President of Citibank, who left his post with $170 million dollars in compensation for his calamitous management. It’s one example among many of how the regulation of finance is profoundly inadequate. In fact, a key part of gray capitalism is the sovereignty exercised by finance over the real economy and over governments.

Tax Shelters

BLACKBURN: Tax shelters have been a decisive factor in the formation of what I’ve called the sovereignty of finance. Now, tax shelters don’t provide complete freedom of movement for the large enterprises nor to very rich individuals. If they did, neither one would pay any tax at all. When a business establishes itself in a specific country and develops its activities within that economy, it’s because it values that market specifically and, to take advantage of it, must obey certain rules promulgated by national governments. Of course, countries with large economies, such as Spain, have it much easier when it comes to enforcing these rules, than countries with smaller economies.

Tax havens are not immune to the rules promulgated in places such as the European Union that allow taxation of large businesses. What happens is that the EU doesn’t put any effort at all into disciplining these tax havens, even when it has sufficient strength to stop them if it wanted to, because in reality there is no justification whatsoever for their existence. In fact, some 90% of the tax havens in the world are under British jurisdiction: the Cayman Islands, the Virgin Islands, Gibraltar, Malta, the Channel Islands or the Isle of Man are, to a greater or lesser degree, dependent territories of Great Britain. I believe that tax havens are simply an excuse and could be eliminated with the stroke of a pen.

The Limits of Formulas

SHAIKH: I don’t believe that mathematical formulas have achieved good results in economics, except in the realm of pure mathematical modelling without any empirical relevance. The real function of these formulas is to provide a rationalization for capitalism, presenting it as an ideal social system for human development. Capitalist reality itself is not governed by these models and representations, and from time to time is dealt a severe blow, such as happened in the 1930’s and in the 1970’s, and as is happening today. On the other hand, the use of models may be appropriate in certain circumstances.

DUMÉNIL: The results of mathematical models are pretty poor. Some very sophisticated ones are used to make financial investments, but they don’t allow one to understand the reality. Math is an instrument that can help, but one cannot speak of “one” method in general. Everything depends on the problem, on the question being asked. To interpret a stage of capitalism, it’s necessary to combine social, political and economic aspects; in theories of competence or technological change, for example, a model can be useful, although it will never explain everything.

CARPINTERO: Mathematics is a powerful instrument, but as the mathematicians know well, one has to be conscious of its useful limits. In the case of economic theory, it has been built on the basis of assumptions that allow for mathematic treatment, instead of the other way round; in other words, looking for a mathematical instrument that would allow us to construct models with the hypothesis that interests us. Abstraction is a normal scientific procedure, but one must distinguish between an abstraction that selects a phenomenon’s most important features from that which selects features that never occurred, but have the advantage of lending themselves to mathematical treatment. For example, economic theory has generated individuals who are automatons and respond to a single motivation, or a concept of production of goods and services that doesn’t meet the most basic laws of thermodynamics which say that nothing can come from nothing. These are not abstractions; they are concealments, tricks and deceptions, that not only ignore what is said in other disciplines, but the most basic laws of the physical world.

Georgescu Roegen understood very well that economics’ predictive inability is related to the qualitative component of economic processes. Economic processes are not linear and include many elements that do not lend themselves to modelling; a model serves as an approximation, but its degree of error and random component is so strong that it can describe, but not predict. Not even the State, with all its statistical apparatus and capacity for data collection can predict the level of inflation for 12 months. At the end of the 1970’s, Fortune magazine did a survey to evaluate the predictive abilities of various professions; well, Americans trusted the predictions of astrologers more than those of economists.

Another Economy

SHAIKH: Economics should always be related to its context and social roots. For me, the real question is: should the market be evaluated in terms of its real social results? And the answer for me is unequivocal: of course. The market is one of many elements in a social fabric. It’s necessary to understand that it has powerful and intrinsic incentives and owners, and so to intervene in it requires a good understanding of its strengths and weaknesses. But at the end of the day, it should be a means, not an end.

CARPINTERO: One of the most positive effects of feminist and ecological economics is that they have introduced a break with the hegemonic idea in economic discourse, that only through more or less arbitrary economic processes, can we achieve monetization. The easiest thing in economic science has been to reduce all phenomena to the measuring stick of money, and from there, think in terms of cost/benefit, but there are phenomena that do not lend themselves to monetization and that are crucial to the survival of the economic system. For example, all reproductive work that includes the care of elders, children and dependents, is fundamental to the productive sphere. In the case of nature, the same thing happens; it’s difficult for us to think of an economic system without taking into account the non-monetizable resources that enter into the economic process and the residuals they generate as a consequence of goods and services.

BLACKBURN: To get out of the current casino capitalism requires better regulation that would allow companies’ real financial situation to be brought to light, something which the more intelligent capitalists also concede. One of the most obvious problems of financialization is its strong tendency toward inequalities. Ten percent of the world’s population has benefited enormously from this process, at the expense of ninety percent of the rest. This has generated a very unbalanced demand structure that requires generalized indebtedness in order to maintain consumption levels for the majority of the population, while the rich are so rich that it is becoming ever more difficult for them to know what to do with their money. Giving more money to the poor is the evident solution for the imbalance. This could start through the payment of decent salaries to workers and Chinese farmers in order to generate a new demand at the base of the global economy, and it ought to continue with similar measures in the major capitalist countries. A massive reduction in taxes for the poorest, accompanied by state credits could be an option.

But apart from these most obvious tax and regulatory measures, there’s another phenomenon to which we should turn our attention: public social funds. When regulated democratically, their potential for redirecting the redistribution from the rich to the rest of society, is immense. My proposal is to look back toward Rudolf Meidner, the head economist of the Swedish trade unions from the 1950’s to the 1980’s, who proposed a tax on profits. Businesses would have to put a percentage of their profits into free shares, and these shares would make up funds that would be democratically directed toward the financing of regional development or social objectives. It’s an idea worth examining at a time when the most economically successful countries appear to have abandoned the old American and British idea of incurring large public deficits, in favor of the establishment of sovereign funds. Norway, for example, is creating a social fund to deal with future problems, such as those which come from an aging demographic or climate change. The possibility of financing these kinds of funds through a tax on shares represents a dissolution of value on the shares held by the rich and the large businesses at a rate of 10% of annual profits, which would be a strong counterweight within current economic dynamics. Of course, the central condition is that these funds should be democratically controlled and directed with the greatest transparency. There should also be rules about the possible uses of these funds; for example, the initial capital should never be spent; only the profits obtained through dividends. At the same time, I believe that these shares, which would continue to increase, should be used to participate in the decisions taken in the businesses’ general shareholder meetings. I believe that this kind of new social ownership and democratic control of finance is the way to get beyond the problems of today’s capitalist world.

Machetera is a member of Tlaxcala, the network of translators for linguistic diversity. This translation may be reprinted as long as the content remains unaltered, and the source, author, and translator are cited.

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