Friday 8 November 2019

Too Late To Change Capitalism’s Flightpath?

Collision Course? In conditions of ideological white-out, the international bankers’ “Woop-Woop! Pull Up!” warning may have come too late to save global capitalism.

WHAT DOES IT MEAN when international bankers are more willing to embrace radical solutions than our politicians and their electors? At both the International Monetary Fund and the World Bank, Keynesianism is back in fashion. The economic doctrine which underpinned the thirty golden years of rising prosperity and declining inequality between 1950 and 1980 has risen from the grave – much to the horror of its erstwhile undertaker, Monetarism.

The monetarists and their guru, Milton Friedman, insisted that the problem of inflation was always and everywhere a monetary problem. Deficits, they insisted, were evil. Expanding the money supply to kick-start the economy would only produce a further inflationary surge. Moreover, increased government spending, by crowding out the private sector, was inimical to capitalist profit. The inevitable upshot of John Maynard Keynes’ pernicious doctrines, Friedman’s followers predicted, would be an economy forever engaged in chasing its own tail.

Unfortunately for the monetarists, the experience of the past ten years has left their theory in tatters. Since the Global Financial Crisis of 2008-09, the global money supply has undergone an unprecedented expansion. In theory, innovations such as Quantitative Easing and negative interest rates should have generated runaway inflation. In reality, prices have stubbornly refused to spike. Monetarism has been weighed in the balance and found wanting. For the monetarists, the writing should be on the wall.

But it isn’t. At least, not on the walls that matter at Treasury and in the caucus-rooms of our parliamentary parties. In those places monetarism continues to be treated as Holy Writ. Regardless of whether the call for a major, state-led, fiscal stimulus comes from the IMF or New Zealand’s own Reserve Bank Governor, our political class remains unmoved. Deficits are for getting down. Surpluses are for building up. The Government must take great care not to crowd out the private sector by intervening too actively in the economy.

Never mind that it was massive state spending (necessitated by a succession of destructive earthquakes) that pulled New Zealand through the Great Recession with so little in the way of serious economic and social damage; the political class remains unconvinced. In their minds, the superiority of the free market as an allocator of scarce resources is indisputable. Large-scale state intervention is absolutely the wrong way to go.

Nor is it the political class, alone, which responds to social and economic need in this way. Four years ago, a senior lecturer at AUT, Peter Skilling, published an article in which he revealed the extraordinary tenacity of the idea that the “market” is best left to decide who gets what in our society.

In the focus groups he’d convened to study people’s attitudes towards inequality he found that:

“In keeping with survey results, most focus group participants – when asked individually – expressed a preference for a more equal distribution of incomes (better wages for the low-paid; restraint in executive compensation). In the subsequent group discussion, however, these preferences were marginalised by the view that, while a more equal distribution might sound nice, it was likely not feasible given the ‘realities of the market’.”

Even more interestingly, Skilling discovered that: “while this ‘market reality’ trope was typically advanced by only one person in each group, it seemed able to over-ride a majority preference for greater equality.”

Seldom has the Italian communist, Antonio Gramsci’s concept of “hegemony” – formulated in the 1920s – been vindicated so convincingly. Except in extremis, Gramsci argued, ruling classes maintain their position not by physical force, but by the force of ideas which the overwhelming majority of citizens have been persuaded to accept as “common sense”.

This is the extraordinary irony of the present situation. Forty years ago, the ruling classes of Western capitalist societies convinced their citizens that the Keynesianism which had so improved their lives was a flawed and deficient economic doctrine which needed to be abandoned in favour of a new doctrine that elevated and privileged the role of “market forces”. Forty years later, with a substantial portion of those same ruling elites now convinced that monetarism has failed, and that Keynesianism is, indeed, the doctrine which offers the best hope of economic, social and political stability, the political class – and we, the people – remain firmly wedded to our “common sense”.

In conditions of ideological white-out, the bankers’ “Woop-Woop! Pull Up!” warning may have come too late.

This essay was originally published in The Otago Daily Times and The Greymouth Star of Friday, 8 November 2019.


Guerilla Surgeon said...

Trevor Noah did a nice little piece about this entitled something like Wall Street is really scared of Elizabeth Warren. Well worth a look.
But of course all these people that imposed neoliberal policies and austerity on various countries thereby helping to ruin a number of economies, particularly in underdeveloped countries will suffer no consequences. They will simply exit stage left with a large retirement fund and a "Who me?" look on their faces. I think it was probably ever thus.

David Stone said...

It was clear to me at least 30 years ago that those people in positions of power who were persuaded by this "new " doctrine , and acted accordingly so wholeheartedly, would never be able to admit that they were wrong. One or two might, but the vast majority of the powerful during the neoliberal era will have to die out before serious change can come about, and be replaced by people who either weren't old enough to be thinking about that stuff, or who were never taken in. Looking back to the time of change, in social circles , the numbers of individuals in my experience who were prepared to argue against the neoliberal changes were very thin on the ground. They are much more commonly occurring now.

Patricia said...

I urge people to listen to Prof Mitchell on YouTube. He explains through MMT how the monetary system actually works in every sovereign country that has a floating exchange rate. We have a neo liberal labour government here in New Zealand- an oxymoron if ever there was one - which rabbits on about surpluses and deficits with no understanding what so ever about how they work. A bit like Orwell’s two legs good four legs bad... We all just repeat their mantra and so the power of the rich just continues.

Jens Meder said...

But is it not clear, on the physical level verifiable and a long time well known fact, that unlimited non-repayable Keynesian, "Quantitative Easing", or plain Social Credit style "debt free" credit creation is inflationary, and has been widely practiced most of the time very cautiously after giving up on gold value based monetarism ?

In other words, there are limits to whatever "debt free" credit creation - beyond which it becomes more destructive or wealth consumptive than wealth creative -

and leading to widening poverty even as the credit is meant to alleviate poverty and delivers some relative poverty relief for the moment.

Wider discussion and debate on that would be desirable for the sake of more clarity on how to face the future.

Shane McDowall said...

Milton Friedman linked capitalism to democracy.

Ironic then, that his first customer was Augusto Pinochet of Chile.

His second customer was the Argentine junta.

And the Monetarists fail to see the irony.

greywarbler said...

GS and David Stone I completely agree with what you have written and the truth of the post by Chris. Whoop whoop.

My mind is running off on an analogy with the Whooping Cranes of Canada and USA. Determined, caring people worked with the Cranes, nurtured them from their low point in 1942 when 22 were left. The group of conservationists taught the raised youngsters to follow a microlight. The flock is increasing and had got to 500 some years ago.
This is from 2015.

We can learn new ways. The Whooping Crane has been brought from extinction level by a few careful, intelligent and dedicated people. 'Birds do it, bees do it, even educated fleas do it!'

A conservationist Bill Lishman who died in 2018, developed the light aircraft imprinting in birds' minds. He thought around a problem, NZ is still thinking in straight lines.

His daughter said:"One of the things that I thought about a lot on the day that he passed was his comment that there are no straight lines in nature. And if you think about it, it's true," she said.

"And so curved spaces and curved thinking and imagination that runs in curved lines was really what moved him and made him feel most comfortable."

A film made about his initiative with the birds. Lishman — an award-winning artist, writer and filmmaker — was the first person to lead a flight of geese with an aircraft, a feat that inspired the 1996 Oscar-nominated film Fly Away Home. We can do with inspiration like this.

Guerilla Surgeon said...

" would never be able to admit that they were wrong. "
Couldn't be more right. Roger Douglas is still crapping on about it. And as with most libertarians it's something like – "Everything would be fine if only they'd remove the last few rules and regulations."

Jens Meder said...

Regardless of what has been done in Chile and Argentina, is not Friedman right in that the highest degree of economic democracy would be achieved through at least a minimally meaningful level of the economic power of capital be owned and managed by all citizen personally ?
Would that not be much more democratic than totalitarianistic state monopoly capitalism, or even the mixed capitalism of a Social Democratic Welfare State where a proportion of people as "Have Nots" do not participate in the power of capital ownership and management ?

David Stone said...

@ Jens Meder; QE and Social credit are very different . QE is Social credit for the society of bankers and the very wealthy; Social credit is QE for the masses.
Either way , in excess and without a plan to draw off some of the credit at some point in it's circulation, perhaps through taxation, it will always be inflationary if it is not balanced by an equivalent increase in productivity and consumption.
Social credit as the Social Credit political league advocated has never been tried . So whether or not it would be inflationary is not proven or disproven in operation, but one would expect it to be if there were no mechanism to withdraw most of the cash put into circulation in the hands of the public if there were no point at which it was to be withdrawn.
QE has not been inflationary in the traditional sense , as it has not led to hugely increasing prices in food and consumer goods. This is because it has been made available only to the banks and to the already grotesquely wealthy. They have no incentive to invest it in industries or activities that are of use to the majority of human beings, so little of it finds it's way into the every day economy. But it does find it's way into share prices, a futures explosion, and to a degree into house prices as the most secure looking place for surplus funds for the intermediately wealthy.
I think the value of the gold standard was that it took the creation of money out of the hands of individual people and tied it to an arbitrary quantity. Responsible management is potentially better, but human kind being what it is , it eventually corrupts the wisdom of responsible money management. Keynes , if he got something wrong, it was that governments would relinquish the power to manage the money supply in the interests of their people.
I would happily contribute to a debate as you have outlined.


Nick J said...

Can't help but agree with Grey about straight lines. Nothing is linear yet the economists models are all set for continual upward
lines aka growth.

With Keynesianism what we are talking about is the creation of credit which can also be described as a debt against future earnings. This debt is then used to stimulate economic growth and allow redistribution of profits. Which is all very good if you can grow. If not the debt will consume the economy.

Growth requires resources and energy. The linear model says these are infinite, we however live on a finite planet. Therein lies the problem with both Friedman and Keynes. As Galbraith stated Keynes was for a time but not all times.

Final curved thought; the wealthy abetted by the property owning middle classes did very well post Keynesianism. Now the mop has flopped, and as the money gets tighter the middle class shrinks. Save us they cry whilst the one percent are the only ones with access to real credit ("quantative easing") that they use to asset strip us.

Fact; the cavalry (energy and resources) are too depleted to come to the rescue, the middle classes are about to be enlisted in the army of the dispossessed masses.

David Stone said...

Again to Jens @ 19 . 43
Few would disagree " that the highest degree of economic democracy would be achieved through at least a minimally meaningful level of the economic power of capital be owned and managed by all citizen personally . " Certainly not me.
The problem is in keeping it that way. Some, many, even perhaps most people are content to have what they need for themselves and their family and contribute in their chosen arena willingly, while they have confidence that it will not be taken from them.
Unfortunately there are always some who are not content with enough, and dedicate their minds and their lives towards accumulating more than enough, and that means by one means or another, getting some of what others should have. And though society assumes this is reward for greater ability and greater endeavour , it isn't. It's reward for greater focus on getting more. And once one is ahead of the game and personal security is established, such people can afford to take risks that those who are content with enough cannot afford to take, so the snowball roles .
When many years ago I attended elementary economics classes , it was an immediately recognised problem of operating a democratic capitalist system that monopolies and monopsolies needed to be legislated against. Neoliberalism has abandoned that principle, reversed the legislation that protected against monopolies ,and replaced it with legislation that protects them, and has managed to apply that world wide across national borders so that a countries government no longer has the power to govern over any matters that effect commerce. They are left to pick up the pieces of a disenfranchised populace , recycling from those who have little to those who have nothing. Those who have much are left out of government jurisdiction.

greywarbler said...

Green Dollars and LETS (Local Exchange Trading System) was set up in Social Credit's shadow.

There were some problems about its smooth running. And this underlined the general public's inability to comprehend what money is. It is a set, controlled system of promises, with tokens or thin oblongs printed with a numeral that indicates the value allocated to that promise.
Banknotes used to have something about the Reserve Bank Governor underwrites or promises this note to this value. As mentioned above, it can be misused, and inflation can arise. The system must be controlled carefully to prevent this, and the point made that taxation can help with that; the very reverse of what is happening at present. I wonder if we could relearn what to do if we looked at the economic model our compatriot Bill Phillips built. It may be a more important event for our wellbeing than Lord Rutherford's findings.
In 1990, the MONIAC was brought to New Zealand by the New Zealand Institute of Economic Research and refurbished as a sesquicentennial project, including re-calibration to the New Zealand economy. The old pound sterling signs can still be seen on the machine

We had a Local Exchange Trading System in Nelson and there is a small one in Golden Bay. The Nelson one collapsed because of mistaken ideas of what it was trying to do, and lack of commitment to keeping it in good working order. An example is, the Committee made an agreement with the Nelson City Council to do a trade of Green $ people carrying out work for the Council when asked, as a return for getting free entry to the swimming pool. A number of people really enjoyed the use of the pool, but may not have been fit enough to do work for the Council and when the Council asked for the Green Dollar group to fulfil their part of the bargain. no-one came forward. There were perceived problems; the Council wanted to incorporate the transactions in their annual accounts. They wanted the group to tender for a job, weeding gardens perhaps. The Committee didn't seem to have any idea of how to approach it, and didn't have a ready-team to call on of members who had signed up for this, (and perhaps received a Green Dollars credit,) Anyway the scheme with the Council fell through and they were not pleased.

Any alternative money scheme must be well run on realities, not on airy-fairy ideas and ideologies. One problem with Green Dollars was that well-meaning people are on the Committee, doing their best, but each one had a different idea of what Green Dollars is about. Minutes were kept of meetings but the decisions and their background would probably not be studied by any new Committee who would be eager to do things their own way.

greywarbler said...

This is long but an interesting subject and some of this could be useful.

One of the problems was that Green Dollars are able to be converted to real NZ dollars; people can be sued if they decline to meet obligations. Yet they are meant to be credits of community members doing things for each other, sometimes part in Kiwi dollars to cover the cost of parts. But not all localities would take accept suing, so there was confusion about it. In the end a Committee that was particularly at odds, went to a theoretical philosophy and decided the transactions should balance to zero each month, and then took a portion of earnings from members accounts to adjust the monthly balance, finally they just closed it down. This left one member who had got permission to build a big credit by doing hours of work, so that he could buy another member's car, with nothing as the system had gone. (No-one should smile at the Committee's actions; our trading banks have got permission to raid our accounts to prevent a collapse if necessary. What do you think of that?)

There is no reason that a series of local currencies could not be set up and assist poor areas to some extent, gradually building to where they would be relied on by the wider community which would build up its skills and raise the standards of living in the area. But they must have realistic rules and have a controller to enforce those rules. When a currency was sufficiently well organised and stable, then it could sign an agreement with an adjoining area, or make a treaty for special purposes (barter) with more distant areas, perhaps so they could bring school children to use sports facilities at set times, in return for opportunities for farm stays at other set times. Mutually useful, supportive and expanding opportunity.

In Nelson we have a fall off in commercial activity in winter; there could be a couple of months when a local currency would be accepted on a discount basis, or for making a free introduction to some enterprise, so acting as a stimulus for people to interact with their community and businesses.

Nick J said...

Jan's, Friedman like Thatcher placed the individual above society / community. What neither acknowledged was that a society that supports individual freedoms comes at a cost. These include duties and obligations to the law, to the polity, to the shared commonwealth. In a civilised society we seek to balance these against freedom. Neither can be ascendant as Freidman would wish.

Rex C Harrison said...

Monetarism, neoliberalism and the like are human inventions - not holy writ. Like all human inventions they can be discarded when found wanting.
"If long-cherished ideals and time-honored institutions, if certain social assumptions and religious formulae have ceased to promote the welfare of the generality of mankind, if they no longer minister to the needs of a continually evolving humanity, let them be swept away and relegated to the limbo of obsolescent and forgotten doctrines. Why should these, in a world subject to the immutable law of change and decay, be exempt from the deterioration that must needs overtake every human institution? For legal standards, political and economic theories are solely designed to safeguard the interests of humanity as a whole, and not humanity to be crucified for the preservation of the integrity of any particular law or doctrine."

Shoghi Effendi, “The World Order of Bahá’u’lláh”

Jens Meder said...

Nick J - a society does nor exist without individuals.
Since there is no society without individuals, the individual comes first - and there is no life at all without the cost of keeping the individual alive, and society can exist only by self-supporting individuals willing and able (or enforced) to contribute to the extra cost of designing and policing the set of rules agreed (or enforced) to maintain law, order and peace.

Thus, is not in principle even the most democratic government slightly totalitarian or fascist, in that up to a point we want it to have the power to "order and enforce" ?

Human society is not(yet?) like an ant heap or a bee hive, with the individual being only a component with a narrowly prescribed function like that of a cog-wheel in a machine.

Yeah, and even an ant heap would not exist without individuals.

Jens Meder said...

Yes David Stone and Rex C Harrison -
since monetarism, neo-liberalism, economic socialism etc. can all be classified as "human inventions" for hopefully finding the most effective and fairest way of applying the basic universal necessity (for civilization) of capital(ism) -

then - and especially in view of David's comment on it -

is not the time now ripe for a thorough discussion on the pros and cons of "peoples capitalism" and the possible ways of achieving and running ?

That could be wonderfully done in public under Chris's critical and strict guidance on his blog, but in case that is not acceptable, what about finding a blog where it is?

I am not capable of running a blog, but my email is

sumsuch said...

Geez, the Otago Times and Greyport Post, or whatever. Look forward to the Oban Post. For sense.

Hate the complacency that's sent your remarks down south. How can you define it but complacent comfortable elites of '84. They being my age group, grown up in the Welfare State, I feel free, knowing them -- we were all the same --, to despise them rightfully.

A strong talker like Bernie?

A NZ without the heart for the least doesn't have my loyalty, nor, I would presume, anyone else. Which I see as Somalian disintegration in the long run. Though in the meanwhile, a steadfast 40% for the National gibberers.

sumsuch said...

Jens, capitalism is an amazingly great means of distribution but it doesn't allow for finitude of resources. In short , it's all 'pay later'. We are now there.

The prob is the folk from the immediate reward/ pay later are still in charge. And we are all soft , soft, soft.

Jens Meder said...

Yes sumsuch - it is true that libertarian capitalism through seductively successful salesmanship of consumption on credit (and perhaps excessive welfare altruism?) lead to widening socio-economic polarization into haves and have-nots, and possibly widening "class war" demagoguery when for whatever reason an adequate rate of "pay later" is not being kept up.

However, useful and profitable investment on credit - e.g. such as when buying a house etc., is an immense help for widening and faster wealth ownership ownership creation - which just does not exist without capitalism.

Would it be more promising and painless to face the "finitude of resources" through reduced capitalism (i.e. widening poverty), or population stabilization and reduction ?

sumsuch said...

Despite the regular stupidity of governments, I just think it's better they should be in charge in democracies v. the self-interested business folk deciding since '40 years on'. I have zero regard for the elite of 84. And so much for the very few who have fought against their personal interest and for … us. Only one in America. Yet we don't doubt he is right and everyone else is wrong.

Jens Meder said...

sumsuch - but does not "he is right and everyone else is wrong" smell of the most repressive totalitarian regimes in recent world history ?

Is not multi-party democracy the best safeguard against that on the political level, and mixed private and state capitalism as we have it now, on the economic level ?

The weakness of liberalism - even though enforcing universal investment in education etc. - is in neglecting to organize lifelong participation also in tangible wealth ownership creation and maintenance to achieve more egalitarian participation than what is possible in a community split into haves and have-nots.

Or please describe briefly or only in principle what you thought of as "the only right way", sumsuch ?