Monthly Archive for August, 2011

the new normal by Mohamed A El-Erian

Is Capitalism Doomed? by Nouriel Roubini

After his death of capitalism rhetorical flourish Roubini provides us with a damn good overview of the world situation, the predictable “Marx was right” aside, followed by his own dubious plan to save capitalism

On the other hand, Mohamed A. El-Erian, CEO of PIMCO, a global investment management firm and one of the world’s largest bond investors provides this more measured evaluation:

PIMCO frames its discussions of the post-2008 outlook using four potential scenarios. We rate the current environment a “C-minus.”

■ Scenario A: A rapid V-shaped recovery
■ Scenario B: A slower bounce back
■ Scenario C: The New Normal of low growth, persistent high unemployment and recurring balance sheet issues in developed markets, and higher growth in emerging markets
■ Scenario D: Deflation and double-dip recession

As long as the global economy remains in the New Normal scenario C, the systemically important emerging markets will likely be able to manage their success, given their balance sheet cushions. The rest of the world should be able to accommodate that success because it’s happening gradually over a secular time frame.

However, if the global economy slips closer to the D scenario of a high chance of recession, then the outlook varies among emerging markets, depending on the strength of balance sheets and the ability for EM domestic consumption to increase to counter more limited global demand

Keynes questions, readings and analysis

John Maynard Keynes (1883 – 1946)

It seems like a good idea to focus Keynes discussion in one thread since it has already begun in other threads, particularly marx and the domains of ignorance.

What is the Keynes solution to economic crisis?

… a relatively painless route to recovery is offered by loan-financed public investment, increased government spending generating the income that, through increased tax revenue and savings, will provide the resources to finance the increase in expenditure and that will justify the expansion of the money supply required to fund the initial deficit
Keynesianism, Monetarism and the Crisis of the State by Simon Clarke, p. 238 (source)

Of course, this is open to interpretation.

His original main work is: The General Theory of Employment, Interest and Money by John Maynard Keynes (1936)

Lupin3 has suggested we read: Mr. Keynes and the Moderns by Paul Krugman

Please post your questions about Keynes, Keynes references and Keynes analysis here.

the second great contraction by Ken Rogoff

Summary of a couple of articles by Ken Rogoff, a former chief economist at the IMF. Note that the second article was written in 2008. As always, read the originals.

The Second Great Contraction by Ken Rogoff (2nd August 2011)

What is the difference between a Great Contraction and a Great Recession? A recession involves decreased output and decreased employment. A contraction or deep financial crisis also involves massive debt and credit issues which requires deleveraging, which take years to complete.

The real problem or number one problem is that the global economy is badly overleveraged, there is too much debt.

The solution is to transfer wealth from creditors to debtors. How?

  • Through defaults, financial repression or inflation
  • Housing: Write down mortages in exchange for a share of future home price appreciation
  • Countries: Rich countries in Europe fund a larger bailout of Greece in return for higher payments in 10 to 15 years time if Greece achieves growth by then

Inflation is Now the Lesser Evil by Ken Rogoff (2nd December 2008)

Modern finance is so interwoven and complex that it is impossible to restructure one financial institution at a time.

Moderate inflation (6% for 2 years) would ameliorate but not solve current problems

Policy suggestions:

  • aggressive macroeconomic stimulus
  • tax cuts
  • infrastructure spending
  • interest rates reduced to zero

Most of the world’s largest banks are insolvent! Further defaults are bound to occur in real estate, credit cards, private equity and hedge funds. Governments will have to carry out 2nd and 3rd recapitalization.

The hole in the financial system is too big to be filled by taxpayer dollars. More Banks should be allowed to fail but this is costly and painful. Housing prices need to fall another 15% in the USA and more in Spain, UK and others.

Central Banks will keep printing money to buy government debt. The main danger will be an inflation overshoot, 20-30%.

The Return of the Bear by Steve Keen

The Return of the Bear by Steve Keen (August 9, 2011)

Read the original. This is a brief summary only without any original analytical content of my own. Steve Keen is an Australian Post Keynesian economist who runs a popular blog about debt deflation.

We are headed for a Double Dip recession or more correctly a Second Great Contraction (Ken Rogoff’s term)

According to Hyman Minsky there are two price levels in capitalism:

  • consumer prices, which are determined by a markup on the cost of production
  • asset prices, which are determined by expectations and leverage

Ultimately, over the long term, these different price levels have to converge. The debt which finances asset purchases must be serviced by the sale of goods and services. But in the short term rising leverage can insert a wedge between these different price levels. In a modern economy the short term can last a long time!

A graph showing the variation in the ratio between asset prices and consumer prices reveals:
1890-1950: 113
1966: 438
1982: 157
1994: 471
mid 2000s: 1256
now: 709 (after the very recent falls)

According to Minsky the 1966 level marked the beginning of increased turbulence or instability of the capitalist system.

In the current economic environment with debt levels so high deleveraging dominates.

USA figures:
1945 debt:GDP = 43%
2009 debt:GDP = 300%
Now debt:GDP = 260%
GD debt:GDP = 172%
(GD = Great Depression)

Alan Greenspan was the greatest cheerleader for asset price inflation. He helped create the greatest debt bubble in history! In the Greenspan era the government and central banks saw rising asset prices as a good thing.

After 2007 asset prices began their long overdue crash back to earth. This was temporarily interrupted with the stimulus and swings in the rate of debt acceleration.

The above figures, asset:consumer price ratios and debt:GDP ratio shows that there is still a long way to fall before capitalism returns to “normal”

Post-capitalism – day one and longer term

This is a rather clunky attempt to present some thoughts on the immediate and longer term programs for a radical party whose aim is to move to a society based on the social ownership of the means of production. The immediate program would have to be relatively limited in its objectives because change takes time and you do not want to bite off more than you can chew.

Grabbing the commanding heights of the economy would be the main job at first. This means nationalizing the large public companies. It has been suggested that the best way to handle this would be to allocate shares in these companies to government owned hedge funds. Hopefully, the well paid managers of these funds together with the nationalized banks would continue to invest as if nothing had happened. Likewise for senior management of enterprises. No doubt it will not work out quite as smoothly as we would like.

At the same time, arrangements will need to be made to ensure that people who previously owned shares in the nationalized companies – particularly the non-rich – continue receiving regular compensation payments.  Foreign investors may or may not be a tricky issue. It would depend on the political circumstances.

Smaller scale business would be left untouched. (I don’t know where you would draw the line.)

While these minimalist arrangements are being put in place, hopefully a lot of stuff is happening among the middle and lower ranks (the “masses”).  Generally they will be busily sticking their noses in where they previously did not belong. In many of the enterprises that are still private there will be calls for socialization. Policies will need to be developed on how and when this occurs. Continue reading ‘Post-capitalism — day one and longer term’

Unpacking the value suitcase

This will never be finished so I will publish now.

Clarifying the meaning of and distinguishing between the words: value, wealth, quality and money

Suitcase words: Marvin Minsky (The Emotion Machine) has coined this marvellous term to describe words that are not clearly defined and mean different things to different people. For example, Consciousness is a suitcase word. It can mean unifier, self awareness, identity, animator of the mind, provider of meaning, detector of feelings. It refers to many different mental activities that don’t have a single cause or origin. In part Minsky’s book is about the need to create a new vocabulary in order to discuss the workings of the mind.

So, let us discuss the value suitcase. Over the years it has become a very large suitcase with many thousands of words devoted to different interpretations of value theory resulting in a tangled mass of incoherent vocabulary.

I start with the folk perspective because what we pick up as the everyday background noise of the meaning of words does influence our understanding when we get around to analysing those words in more detail. We cannot properly acquire new understandings without first subjecting our old understandings to critical scrutiny. No construction, without destruction.

Here are some popular uses of the word value:
1) Tom is good value, ask him to do the job
2) That car is good value for money
3) Gold increases in value during economic recessions
4) Steve Jobs adds value to Apple shares
5) The role of a teacher is to add value to their students
6) It was a valuable experience to attend that Noel Pearson lecture

So, in folk use, value might be used to describe an attribute of a person, a commodity (two examples, car and gold), a business, a process or an experience. In some cases there is a close connection between value and money (sentences 2 and 4) but in other cases it refers to the ability of certain people to successfully transfer their skill to a job of work or to other people. It can also refer to a learning experience. In all of these cases value is a good thing and the more value there is the better.

In Capital, Marx doesn’t start with value. He starts with the commodity and then splits the commodity into something which possesses both use value and exchange value. It turns out later that exchange-value is the form of appearance of value. Exchange value is “observable” in a transaction. For example, one 32GB USB stick = 20 litres of Pura full cream milk. We can equate these values in real life but more realistically in our imagination and it does not have to involve money. Value is the underlying category, an abstraction, a theoretical underpinning of exchange-value.

In Marx’s terms value has a form, a substance and a magnitude. The form of value is its capacity to be exchanged. The substance of value is embedded abstract labour. The magnitude of value is the amount of embedded labour or socially necessary labour time. This thumbnail needs to be discussed in more detail later.

Marx clearly distinguishes between value and use value. For Marx value is a social product (or in his language, a social form). It only exists in a commodity society, a society where products are produced and sold to others. For Marx value does not exist, or only exists in embryonic form, in primitive society where hunters and gatherers are mainly working for themselves. For Marx value is historically contingent whereas use value is not. Use value refers to the properties of products that make them useful. For example, a car is useful for transportation. This is true irrespective of whether it is bought and sold in the marketplace. Marx makes a radical separation between the usefulness of products (true for all social systems) and their value, which is only true for products which are made to be sold in the marketplace. Such products are defined as commodities.

What is the difference between the folk perspective of value and the Marx perspective of value?

Well, Marx mercilessly dissects or interrogates the commodity and teases out a variety of meanings and distinctions (use value, exchange-value, value). For Marx value becomes a central theoretical concept which is complex in its own right, having social form, substance and magnitude. But for Marx a line is drawn between value and use value.

So, looking again at the starting sentences and adding some annotations about what the folk use of value means in each case:
1) Tom is good value, ask him to do the job (Tom is useful at work of an unspecified character)
2) That car is good value for money (I am prepared to exchange my money to buy that car)
3) Gold increases in value during economic recessions (Gold is special for unstated reasons because it is always valuable, even in economic crises)
4) Steve Jobs adds value to Apple shares (some individuals excel at their value interventions in the capitalist system because of their creative design and marketing skills)
5) The role of a teacher is to add value to their students (in the “knowledge economy” value can refer to added knowledge too; the teacher transfers their knowledge to their students)
6) It was a valuable experience to attend that Noel Pearson lecture (an experience can be valuable or personally enriching in its own right)

The folk usage of the word value does either mean or imply the similar concepts which Marx discovers in the commodity (usefulness, exchangeability), adds on a few more (creativity, knowledge transfer, enrichment) and then fuzzily blurs them all together. In folk usage value is a suitcase word. Folks are using the word value as a suitcase whereas Marx is starting with the commodity and meticulously teasing out various meanings in his analysis.

The folk perspective on value and Marx’s perspective also deviate when it comes to labour saving or productivity increasing technology. With technological progress the value of manufactured products decreases. They become cheaper to buy in the marketplace.

I said above in relation to the six introductory sentences which illustrate a variety of usages of value, that,

In all of these cases value is a good thing and the more value there is the better

But now I am pointing out that as technological productivity increases then the value of the manufactured products decreases. That experience is part of popular consciousness. We all know that we possess more products than our parents generation. We possess them because we can afford them since comparable items are cheaper relative to our wages than they used to be. But does the concept of declining value universally enter the popular consciousness?

7) Commodities are cheaper for my generation than previous generations. We’ve never had it so good!

There may be some awareness of this truth but it is not general folk wisdom. Why not?

Well, often prices don’t go down. Rather you buy a fancier equivalent of the commodity you want for the same price. You are getting more value for money but not getting the feeling that things are cheaper in an absolute sense. Windows 7 replaces Windows 6. It really doesn’t do anything different but has a few extra bells and whistles so you end up paying a similar price. In reality, absolutely free alternative operating systems such as Ubuntu are equivalent and better in some ways (no viruses).

Some prices do go up. For example, land, petrol, electricity, internet access in Australia.

It is cheaper to build a house now than previously, due to technological and organisational development. The house is cheaper but the land is often more expensive due to supply and demand for good location.

Petrol prices are subject to the control of a cartel (OPEC)

The price of electricity goes up due to lack of forward planning by governments who don’t build surplus capacity in good time.

The National Broadband Network (NBN) is potentially a good idea but due to government incompetence it is rolled out in a more expensive fashion than is needed.

Environmental costs contribute to rising prices. Once again, governments are generally incompetent in managing these issues, Julia’s carbon tax being a good current example.

It is hard to accurately compare our generation with previous generations. This arises from the nature of capitalist development. We have more things but in the main they are different things to our parents possessions. When I grew up we did not own a flush toilet, an electric frig, a TV, a microwave or a computer. They were either invented or became affordable consumer items later. Even the items that are common to both generations differ substantially. Houses and cars are far more sophisticated today, they possess added gadgets and functionality which was not present previously. This rough comparison makes it obvious that the current generation has far more material possessions than previous generations. The value of producing equivalent and / or better commodities has declined over time mainly due to productivity improvements.

What is the difference between value and wealth?

In folk usage wealth may refer to:
8 ) There are a wealth of ideas in the mind of that intellectual
9) James Packer is wealthy (aka filthy rich)
10) Capitalism increases the wealth of society but that wealth is distributed unevenly

If you substitute wealth for value in my original sentences it doesn’t work out. You wouldn’t say:
1′) Tom is good value wealth, ask him to do the job
2′) That car is good value wealth for money
5′) The role of a teacher is to add value wealth to their students
but you could say:
4′) Steve Jobs adds value wealth to Apple shares

This is because value means more than the finished product or money. It also means or implies productive labour. Wealth doesn’t fit in those sentences because it usually refers more to the end product or the market value of the end product than the productive labour required to obtain that product.

Marx and his predecessors also distinguished between value and wealth. Wealth is the sum of all use values irrespective of whether they require labour. Hence unadorned natural products, eg. virgin land, are part of wealth but not part of value. In Marx’s terms nature is not a source of value. Marx approved of his predecessor William Petty in distinguishing between labour and nature as sources of wealth:

“Labour is … not the only source of material wealth, ie of the use-values it produces. As William Petty says, labour is the father of material wealth, the earth is its mother.” (Marx, vol 1)

Wealth is the sum of all use values, which are concrete and particular. Wealth originates in both nature and labour. This applies to any society. Value is a creature of capitalism or a society where commodities are exchanged in the market place and display their exchange-value there.

What is the difference between value and quality?

In Marx’s terms value is not metaphysical. By metaphysical I mean broad trans historical concepts which attempt to define meaning in a permanent or grandiose sense. Marx’s analysis is relevant to capitalism, not all of history. Marx is not writing a theory of everything to last for all time but is doing a specific critique of capitalism and classical political economy, the partly correct then existing theories of his predecessors Adam Smith, David Ricardo and others.

It is a different approach to my memory of the sense in which Quality is discussed at length in Pirsig’s Zen and the Art of Motor Cycle Maintenance. I had the sense there that if only the slippery concept of Quality could be grasped then that would be similar to solving the riddle of life itself.

However, folk usage does not always embrace metaphysical texts. In folk usage there is not a clear distinction made between value and quality. If you take the sentences I began with:
1) Tom is good value, ask him to do the job
2) That car is good value for money
3) Gold increases in value during economic recessions
4) Steve Jobs adds value to Apple shares
5) The role of a teacher is to add value to their students
6) It was a valuable experience to attend that Noel Pearson lecture

For most of them you could substitute the word quality for the word value. It is only in sentence (3) that this substitution does not work. This is because the phenomenon of gold increasing in value during economic recession requires a detailed economic theory to explain it. Even though the sentence is part of folk usage the explanation of that sentence is not.

What is the difference between value and money?

From the original sentences value is measured in money terms in sentences 2 and 4 or at least the connection is clear:
2) That car is good value for money
4) Steve Jobs adds value to Apple shares

In folk terms the value suitcase is much broader than money and encompasses usefulness, creativity and experiences as well.

For Marx value originates from labour and evolves into a universal equivalent, gold money, which further evolves into paper money. But for Marx value is in motion. The capitalist uses money or credit to buy labour and means of production, proceeds to a production process, sells the resultant commodities and finally invests more into the production process in a continual cycle. Value moves through this whole process dynamically.

So value is far more than money in both folk and Marx’s usage but in different ways.

The folk connotation of value is that it is a good thing, that valuable things (people, commodities, experiences) are worth having. This is different from the Marxist understanding, that value is a creature of capitalism an underlying theoretical concept which is the staring point to explain the motion of the whole capitalist system. For Marx, value is the starting point for further analysis and understanding of capitalism.