Monday, August 25, 2008
The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there's no such thing as a free lunch.
Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That's all about the free lunch. The role of modern economic theory --- I should call it post-modern economic theory and statistics is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy.
BF: Your book is really an antidote to the dominant Chicago school of free marketeers. What is the meaning of “free market” these days, as understood on Wall Street?
Micahel Hudson : It's exactly the opposite of what Adam Smith, and Ricardo and the classical economists defined as a free market. Classical economics defined a free market as one that is free of overhead charges, free of unnecessary charges of production, free of watered stock.
Today a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt, and basically lead (us) to a world of debt peonage... So the whole concept of freedom has been turned upside down by the Chicago school and by the Bush administration.
BF: Why is today's understanding so different?
Michael Hudson : Because hundreds of millions of dollars have been spent to mislead people and to endow business schools and universities to stop teaching the history of economic thought, to stop teaching the classical economist, and essentially to brainwash students, so that those with a sense of realism simply drop out of the field of economics and go into some other field.
Source: Guns and Butter Interview with Michael Hudson
Subsequently, as Williamson himself has pointed out, the term has come to be used in a different and broader sense, as a synonym for market fundamentalism; in this broader sense, Williamson states, it has been criticized by George Soros and Nobel Laureate Joseph E. Stiglitz. The Washington Consensus is also criticized by others such as some Latin American politicians and heterodox economists.
The "Washington Consensus" - stabilise, privatise and liberalise - is dead. Long live the new pragmatism. That is the message of "the growth report" released in May 2008 by the commission on growth and development chaired by the Nobel laureate, Michael Spence.
No single recipe will secure sustained and rapid economic growth in poor countries, it argues. Governments have to choose from a variety of ingredients. Yet only governments can do so. They "are sometimes clumsy and sometimes errant", but "active, pragmatic governments" are indispensable.
This pragmatism is one of the two principal contributions of this report. The other is its focus on growth itself. This is not to suggest that growth alone matters. But without it sustained improvements in human welfare are impossible: one cannot redistribute nothing. The report forces us to refocus attention on this overriding goal.
The great majority of the commission's members are policymakers from developing countries. Naturally, they are interested in learning from the few countries (13, in fact) that have managed growth of 7 per cent a year, or more, for at least 25 years. They have come to two broad conclusions: first, fast and sustained growth "requires a long-term commitment by a country's political leaders"; second, it depends on sustained engagement with the global economy, as a source of both knowledge and demand.
Beyond this, the report identifies a number of ingredients in the growth pie. No country, it notes, has sustained rapid growth without high rates of public investment in infrastructure, education and health. Furthermore, growth means profound structural change. Policy must allow this to happen, while doing what it can to protect people.
The commission also emphasises that "growth strategies cannot succeed without a commitment to equality of opportunity" and action against extreme inequality of outcomes. Meanwhile, the inclination to leave the environment aside at the early stages is a huge mistake.
(Source: Gang of 8)
Political Economy Research says it is time for the people of the world to demand socialise, especially for utilities like water, equalise as growth just for the rich does not help the poor, and democratise has self interested comprador elites have usurped the political process.
So let Socialise, Equalise, Democratise bury Stabilise,Privatise and Liberalise the theology of the last third of the 20th Century.
Sunday, August 24, 2008
Now we extract an introduction from Aspects of the Indian Economy to summarise a foundational critique of Neo Liberalism by Indian comrades.
On the links pages if you are interested you can follow up in more detail on these contributions and pursue these matters in more depth.
I. Economics as Mechanics
“Faster growth is the answer to poverty”
The current economic policies are based on the current orthodoxy reigning among economists worldwide. This view, called ‘neoclassical economics’, argues that growth will automatically spread from the current boom sectors to the backward sectors, and that all that needs to be done is to accelerate growth. The Finance Minister concluded his 2007-08 Budget speech thus: “our human and gender development indices are low not because of high growth but because growth is not high enough.... As Dr. Muhammad Yunus, the Nobel laureate, said, ‘Faster growth rate is essential for faster reduction in poverty. There is no other trick to it.’”
How is growth to be accelerated? The neoclassical economists claim that Government intervention is harmful. According to them, all that needs to be done is to ensure that nothing interferes with the incentives for individual gain. The focus should shift, then, from macro-economics to the micro-economic environment, the level at which individuals make decisions.
Thus, in the name of accelerating growth, the supporters of this approach demand that various subsidies, supports, regulations and restrictions concerning the backward sectors be removed. For example, they demand that, in agriculture, official procurement of crops be ended, restrictions on private corporate procurement and contract agriculture be removed, ceilings on land holdings be removed, new seed technology be allowed entry and patent protection be strengthened for it, restrictions on agricultural import and export be removed, restrictions on domestic trade in agricultural commodities be removed, restrictions on commodities futures markets be scrapped, and so on.
For industry, they demand that labour laws providing security to workers be relaxed, and that the remaining sectors under the public sector be privatised or ‘opened up’ to private capital. Restraints on the entry of foreign capital into various sectors should be removed. Tariffs on imports should be reduced to very low levels. Such subsidies as remain, hidden or open, should be scrapped. All such measures, they say, stifle the incentives for individuals – the incentives for investors to invest, for workers to work harder or learn new skills, for farmers to switch to growing crops for which there is demand, and for the under-employed to shift to sectors in which employment is growing.
Once all restraints are removed, they say, capital will flow to low-wage regions and under-invested sectors, and raise the productivity of labour in them, thus improving incomes of the people in those regions/sectors.
In fact, they celebrate the growth that has been taking place in the last few years as proof of their theories. The Economic Survey 2007-08 proclaims: “Faster economic growth is... translating into more inclusive growth, both in terms of employment generation and poverty reduction.” Whenever there is a sign that GDP growth is flagging, they demand that yet more neo-liberal ‘reforms’ be carried out along the above lines.
Behind such arguments lies a certain conception of the economy and society. In the seventeenth century Isaac Newton discovered the laws of the action of forces upon material bodies, known as classical mechanics.1 Just as Newton’s mechanics spell out the laws of motion of objects, the reigning school of economics, known as neoclassical economics, imitates Newtonian mechanics to analyze human society.2 It sees each participant in the economy – each worker, peasant, big landowner, capitalist, and so on – as an independent actor. Each one acts on his/her own, striving to get the greatest possible satisfaction (termed his/her ‘utility’). Neoclassical theory claims human beings’ actions throughout history have been (and will continue to be) driven by individual, selfish gain. Yet the sum of their strivings, pushing and pulling in different directions, brings about an ‘equilibrium’, a state of balance, which yields the greatest sum of ‘utility’ possible in the given conditions. (What exactly ‘utility’ is, and how, if at all, it is to be compared, measured or added up, was never meaningfully defined.)
In this conception, every participant in the economy is, in a sense, a trader, and the forces driving the actions of all these individuals are fundamentally similar. It portrays each individual – worker, land-owner, industrialist – as possessing some resource: land, capital, or labour, which it calls ‘factors of production’. The worker hires out his labour; the landowner rents out his land; the capitalist gives the use of his capital. Each does so for a price (the price of hiring labour is wages; the price of hiring land is rent; and the price of hiring capital is the rate of interest).
That price, according to the reigning theory, is determined by supply and demand in each market. According to the proportions in which these three factors – land, labour, and capital – are available in a particular society, their prices automaticallyand simultaneouslysettle at some equilibrium which makes full use of all of them. Where capital is scarce and labour plentiful, interest rates would be high and wages low. In that case, it would be attractive to capitalists to employ less capital-intensive methods of production, that is, hire workers rather than buy machines. If any of the three resources lay idle, its price would fall till it was fully absorbed. Full employment is a central assumption of this theory.
However, say the neoclassicals, if prices are kept artificially low or high by outside intervention, all factors might not be employed fully: the gears become sticky, as it were, preventing the machine of the economy from running smoothly. For example, if wages were prevented from falling to ‘equilibrium’ level by minimum wage laws, or by trade union action, capitalists would tend to buy machines that replace labour; and so some labour looking for work would remain unemployed. Thus unemployment, according to this theory, is the result of wages not being allowed to sink low enough.3
Price plays the key role in this theory. Price not only signals how much to use of each ‘factor of production’, but also how much to produce of each commodity. Every consumer, whether worker, peasant, capitalist, or landlord, whatever his/her income, is driven by the same considerations. Each consumer chooses what to spend on in a way that gives him/her the greatest possible satisfaction (‘utility’). This sends the required signal to the producer on what and how much to produce. When demand for a commodity grows, some consumers would be willing to pay more for it, and its price would rise. The higher price makes it profitable for producers to produce more of the good, and its production rises (with the increased supply, the price then falls, and further adjustments take place up and down till it settles at some equilibrium level). Again, any ‘interference’ with market forces is counter-productive: If the price of a good is kept artificially low (eg by price controls), it would deter capitalists from investing in producing that good, and hence it would remain in short supply.
This theory assumes that producers can shift their production seamlessly from one commodity to another. Each producer can adjust the quantity he/she produces. Each consumer too can shift his/her purchases from a given product to a substitute. No producer or consumer (or group of producers/consumers) can directly influence prices, since there is a large number of producers and consumers (if you price your goods higher than others, you will lose customers; if you price them lower, so will others, and you will not gain customers, but lose profits). Only when individuals increase or decrease their production or purchases do they affect prices, indirectly, by changing supply or demand. That is to say, perfect competition is assumed by the theory.
Nor could there ever be a shortage of demand in relation to production. The orthodox theory assumes that all that is left after consumption goes directly or indirectly toward investment. So the whole of income creates demand for what is produced.
The beauty of this theory is that, given the different quantities of land, capital and labour individuals possess, and their demand for different commodities, the laws of supply and demand work to deliver full employment and the maximum ‘utility’ possible for consumers in the circumstances automatically. If a change takes place in the conditions – for example, if more land, or labour, or capital, becomes available – the system automatically adjusts its mix of the three to absorb fully all of them. Like a pendulum which, when pushed, rocks back and forth but ultimately comes to rest on its own, the equilibrium, when disturbed, gets restored automatically.
Some aspects of classical theory appeal to us because they correspond to ‘commonsense’. We all know that if something becomes scarce its price goes up. And we also easily accept the notion that people are fundamentally motivated by the desire for individual gain, and that this cannot be changed; after all, is that not what we see around us every day?
The obvious fact is that this theory serves to justify capitalism. It provides a justification for profit and rent – these are presented as just the prices of hiring capital and land. (The problem of where the capitalist’s capital come from is not answered; it is assumed that he was thrifty, and saved it up.) And at any rate, whatever the distribution of wealth, unfettered capitalism is shown to maximise the use of resources of society; it maximises utility (whatever that means) in society; every participant in the economy makes individual, voluntary decisions – about how much to work, how to spend, and so on. Innate, immutable human nature (which, in its view, is greedy and selfish) is not suppressed, but harnessed; no section is oppressed, but a harmony of interests is automatically achieved. Any attempt to run counter to this system harms the interest of the whole of society.
Questioning this economic orthodoxy
With the onset of the Great Depression in 1929, certain economists (the best known among whom was Keynes) began questioning parts of the above theory. They showed how the system does not automatically create demand for the whole of production, or bring about an equilibrium in which there is full employment; rather, it spontaneously tends to break down. When for some reason capitalists do not anticipate enough demand in relation to production, they stop investing, and cut production. That in turn lowers demand further, making investment even more unattractive to them. And so the economy sinks to a level at which there is large unemployment and unused capacity.
The insight of these economists undermined the entire structure of neoclassical economics. For now it was clear prices don’t play the magic balancing role accorded to them in neoclassical theory. Contemporary capitalists don’t keep cutting prices of their products till they are able to sell all they can produce, irrespective of whether or not they make a profit. Instead, they prefer to cut production. Capitalists who are already saddled with excess capacity don’t borrow money, even if the price of capital (i.e. the rate of interest) falls to very low levels. Moreover, a fall in the ‘price of labour’ (the general level of wages), far from making investment more attractive to capitalists, reduces aggregate demand, which makes investment less attractive, dragging the economy down further. All this would suggest that in the present era the underlying tendency of capitalist economies is towards stagnation and failure to realize productive potential.
However, the situation of underdeveloped economies, like India’s, has a further dimension. The manner in which production is organised – the social and economic order under which production takes place – itself does not permit even an approach to full employment.4
The Indian economy has been deregulated over the last 15 years, labour laws have been given a de facto burial, and various sectors have been opened up to, or handed over to, private capital. If the prevailing economic theory were correct, one ought to have witnessed a more even spread of income growth and a steady rise in employment.
Instead, the gap between the growth rates of different regions has grown; the gap between the growth rates of different sectors of the economy too has grown; the rate of employment growth has slowed, resulting in massive growth of unemployment; and employment in the organised sector, where wages and conditions meet some minimum norms, is actually falling. Inequality in incomes and wealth has grown. And the bulk of the workforce remains in agriculture, the sector that is stagnant or retrogressing.
Thus the currently prevailing economic theory does not help us to understand the current state of affairs – boom on one side, and destitution and retrogression on the other. So this orthodox theory cannot help us change it, either. In fact, such change is the main concern of the vast majority of people.
The view of classical political economy
Picture of David Ricardo
Before the rise of neoclassical economics in the late 19th century, the dominant stream was what is now called ‘classical political economy’. Its founders, stalwarts of the capitalist system, are now cited in textbooks for those aspects of their thinking which were later adopted by neoclassical economics. Adam Smith is cited for his belief that each person had a propensity to trade; that in the pursuit of selfish gain each person would advance the common good, “as if led by an invisible hand”; and that State intervention could only harm the natural harmony of social interests that arose from free competition. David Ricardo is cited for his theory showing how trade between two countries benefited both. However, important questions explored by them were cast aside by neoclassical economics.
In the work of Smith and Ricardo, the participants in the economy do not appear as independent, atomistic actors, but as classes – workers, landowners, capitalists – characterised by their roles in relation to production. They tried to work out the principles by which income created in the course of production is distributed among these three classes in the form of wages, rent, and profit.
The discipline of political economy developed in a period of rapid change – the era of the rise of capitalism in Europe. Thus Smith and Ricardo were interested to find the driving force of development. They located it in the production of a surplus over the consumption of the labourer, and the accumulation of the surplus in the form of the growth of productive capacity.
In the course of their investigations, it emerged that the interests of the three classes (workers, landowners, capitalists) are in conflict: The surplus over the consumption of the labourers is distributed among the other two classes (i.e., landowners and capitalists). Of course, in their view, the capitalist’s share of the surplus, i.e., profit, benefits society: for it goes toward accumulation, expanding the productive capacity – unlike the landlord’s share. Smith termed various sections other than labourers and capitalists as “unproductive” (he included among “unproductive labourers” the king, the armed forces, churchmen and lawyers). Ricardo was concerned with preventing a rise in either wages or rents, which would lead to a decline in profit and thus development. Thus, in their approach, struggle between classes played an important role in shaping economic processes.
Marx developed aspects from Smith and Ricardo’s thought, while rejecting other aspects, in creating a comprehensive and consistent analytic system. His work marks the culmination of classical political economy. At the same time, he introduced aspects which went far beyond its frame.
Neoclassical theory sees the economy as a snapshot – in which supply and demand in all markets simultaneously and instantly arrive at equilibrium. Each successive change is a new snapshot, a new equilibrium. By contrast, Marx viewed the economy and society as a process. This approach allowed him to analyse development in the economy. It follows from this approach that in order to understand the present, we must trace the process back – that is, look at history.
Picture of Karl Marx
In Marx’s historical approach, classes in each society are stamped by their specific history. It is the character and strength of the contending classes that not only shape society itself, but determine that society’s place in the world economy. Only armed with this approach can we understand the vast diversities of the world: how some countries developed first, and colonised or otherwise dominated others; or how some countries today have developed so highly, while the bulk of them, containing the vast majority of the world’s population, remain underdeveloped and in misery.
The source of wealth
Neoclassical theory, as we saw, begins and ends with the market. Classical political economy too gave great importance to the role of market forces and the operation of supply and demand; but its account centred on the sphere of production. Drawing on the analysis of his predecessors, but taking it further, Marx showed that the whole of ‘civilized society’ rests on the surplus created by the working people in the course of production. The manner in which that surplus is generated, the level of the surplus, how it is distributed among different classes, how much of the surplus is accumulated (i.e., re-invested), and in what manner it is accumulated – these give us the key to understanding the economy.
Crucially, classical political economy located the source of society’s wealth in human beings’ interaction with nature in the form of labour.6 The wealth of a nation is measured by how productive its labour is, and what proportion of its labour force is employed in productive labour. Whereas in the currently dominant theory, the wealth of a nation is measured by how much capital a country has accumulated and production per unit of capital. By this measure, a nation grows wealthy by carrying out large investments and using the latest technology, even if this involves keeping a large proportion of its labour force unemployed or under-employed or engaged in work that does not yield it a subsistence. The approach of classical political economy implies that such a deployment of the labour force is a suppression of the nation’s potential wealth.
In neoclassical theory, markets operate on their own; State intervention is represented only as a harmful phenomenon, preventing the markets from ‘clearing’ and arriving at equilibrium.7 And the use of coercion is missing in its account; indeed, it claims there is no need of coercion in a free market; in a free market, by definition, exchange must be of equivalents.
By contrast, Marx and his followers pointed out that under exploitative societies before capitalism, such as slave society and feudalism, extra-economic coercion was a necessary part of surplus extraction: slaves and serfs toiled for the ruling classes of their times because laws, traditions and armed force compelled them to do so. No doubt, in capitalist society it is principally economic coercion that compels the worker to labour (he/she needs to labour in order to eat); but the use of organised force, and its highest form, the State, is essential to the operation of the social and economic order. If the workers set their hands on the capitalist’s private property (which after all has been created by the workers’ labour), they face the armed force of the State. (Indeed, they face it even when trying to reduce the extent of surplus-extraction by fighting for higher wages and better conditions of labour – for example, the use of police against striking workers.) All this can be understood in the Marxist framework. And even the State’s own economic activity – its taxes, its expenditures and subsidies, its production of goods and services – can be understood with the class analysis of Marxism.
Study of the social-economic formation
Finally, neoclassical theory does not take note of the distinct social and economic relations within different societies; it merely talks of ‘advanced’ and ‘backward’ economies. In its view, the difference between the two is merely quantitative: the backward economy has less capital (for example, less industry). As the backward economy develops, it will eventually reach the condition of the advanced economies today. They believe that contact (in the form of free trade and investment) between the advanced and backward economies accelerates the development of the latter, benefiting both in the process. The increasing wealth of one economy (or of a class within an economy) will eventually percolate to the rest; there is no relation between the wealth of some and the poverty of the rest.
Evidently, in such a framework it is impossible to understand why some countries took the trouble to colonise others, and why, centuries later, the gulf between the colonisers and the once-colonised persists in various forms. By contrast, Marx uncovered the character of different stages of social development, and further looked at the specific historical path each society has travelled. Later Marxists extended this to understand the phenomena of colonialism and its development into latter-day imperialism. With the Marxist approach, we can understand how social institutions like caste, race, and gender developed, and in turn their role in shaping particular patterns of economic development. In sum, Marxism does not make a separation between economics and sociology: both are aspects of study of the social-economic formation.
Amid the confusing processes we are now witnessing in the Indian economy, the neoclassical approach cannot explain the strange pattern of growth we are witnessing today. We all the more need the class, surplus-based and historical approach of political economy.
Indeed, in order to understand the historical process by which the Indian economy has developed, we need to look, by contrast, at the process by which capitalism developed in Europe. Though this is a lengthy detour, the reason for our taking it will become evident when we return to look at Indian society.
1. It was later superseded by quantum mechanics. (back)
2. See Krishna Bharadwaj, On Some Questions of Method in the Analysis of Social Change, 1980. (back)
3. As wages sink, not only would capitalists hire more workers, but some workers would no longer find wages attractive compensation for the pain of working, and would voluntarily choose ‘leisure’ over work. (back)
4. What the government terms the ‘unemployment rate’ in India refers only to open unemployment. A much larger number of persons are under-employed – they do not have enough work, and whatever they occupy themselves with does not generate enough for their subsistence. And a large number of persons suffer disguised unemployment: they are not counted as unemployed because they are not looking for jobs, though they would be looking if they had any hope of getting a job. These two categories are larger than the official figure of unemployed. The total of the three categories – unemployed, underemployed, and disguised unemployed – is larger than the figure of those we can properly consider employed. (back)
5. We are not describing here Marx’s entire system, merely a few aspects relevant for this article. (back)
6. Nature is “the primary source of all instruments and subjects of labour”, that which labour works with and upon. (back)
7. For example, by enacting a minimum wage law which prevents wages from sinking low enough to be attractive to capitalists to start hiring. (back)
The figure is one such measure of inequality—the ratio of the wealth of the richest 1% to that of a household with typical wealth in the middle. As the figure indicates, wealth inequality has not only persisted, but also grown much larger over time. The richest 1% of wealth holders had 125 times the wealth of the typical household in 1962; by 2004 they had 190 times as much or $14.8 million in wealth for the upper 1% compared to just $82,000 for the household in the middle fifth of wealth.
Extract below from Super Capitalism, Super Imperialism and Monetary Imperialism
Part 2 of article by Henry C.K. Liu
Who Widened Inequality?
Reich continues in his WSJ Opinion piece: “Yet the philosophical debate [on inequality] is coming up all the time these days, and it helps explain the new economic populism. Consider, for example, the Bush cuts. They’ve mainly benefited the top fifth of taxpayers. Supply-siders argue the cuts have generated enough extra revenues to pay for themselves so they haven’t enlarged the budget deficit. That’s debatable but let’s make the heroic assumption the supply-siders are correct and no one has been made worse off. Yet even so, most Americans have not benefited – nothing has trickled down. Real median wages have barely budged since they were enacted. So the underlying question is whether they’re justified by the fact that rich Americans have gained from them while no one has lost ground. The answer is no. They’ve widened inequality.”
Reich reminds one of the famous fable by Mencius (372-289 BC) in which those who retreated 50 paces from the battle line turning around and laughing at those who retreated 100 paces for being cowards.
The Bush administration has not been the only one adding inequality to the US economy. The philosophical issue of inequality has only come up “these days” because neo-liberals thought it was not a worthwhile issue as long as all income is rising even though some may rise much faster than others.
Moyers the True Liberal
Bill Moyers, key participant in President Johnson’s Great Society that was tragically aborted by the Vietnam War, in a June 3, 2004 speech: The Fight of Our Lives, given at the Inequality Matters Forum at New York University, said:
“Astonishing as it seems, no one in official Washington seems embarrassed by the fact that the gap between rich and poor is greater than it’s been in 50 years – the worst inequality among all western nations. Or that we are experiencing a shift in poverty. For years it was said those people down there at the bottom were single, jobless mothers. For years they were told work, education, and marriage is how they move up the economic ladder. But poverty is showing up where we didn’t expect it – among families that include two parents, a worker, and a head of the household with more than a high school education. These are the newly poor. Our political, financial and business class expects them to climb out of poverty on an escalator moving downward.”
The inequality that Moyers rightly protests about did not start with the second Bush administration. It started with the Carter deregulation policies and the neo-liberal trade policies of the two-term Clinton administration and Clinton’s adoption of the “Third Way” radical centralism approach promoted by British sociologist Anthony Giddens
Saturday, August 23, 2008
Picture of J.A.Hobson author of Imperialism 1902
Super Capitalism, Super Imperialism and Monetary Imperialism
extract of article by Henry C.K. Liu
Part I: A Structural Link
Robert B. Reich, former US Secretary of Labor and resident neo-liberal in the Clinton administration from 1993 to 1997 wrote in the September 14, 2007 edition of The Wall Street Journal an Opinion piece: CEOs Deserve Their Pay, as part of an orchestrated campaign to promote his new book: Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (Afred A. Knopf).
Reich is a former Harvard professor and the former Maurice B. Hexter Professor of Social and Economic Policy at the Heller School for Social Policy and Management at Brandeis University. He is currently a professor at the Goldman School of Public Policy at the University of California (Berkley) and a regular liberal gadfly in the unabashed supply-side Larry Kudlow TV show that celebrates the merits of capitalism.
Reich’s Supercapitalism (2007) brings to mind Michael Hudson’s Super Imperialism: The Economic Strategy of American Empire (1972, 2003). While Reich, a liberal turned neo-liberal, sees “supercapitalism” as the natural evolution of insatiable shareholder appetite for gain, a polite euphemism for greed that cannot or should not be reined in by regulation, Hudson, a Marxist heterodox economist, sees “super imperialism” as the structural outcome of post-WWII superpower geopolitics with state interests overwhelming free market forces, making regulation irrelevant. While Hudson is critical of “super imperialism” and thinks that it should be resisted by the weaker trading partners of the US, Reich gives the impression of being ambivalent about the inevitability if not the benignity of “supercapitalsim”.
The structural link between capitalism and imperialism was first observed by John Atkinson Hobson (1858-1940), English economist, who wrote in 1902 an insightful analysis of the economic basis of imperialism. Hobson provided a humanist critique of neoclassical economics, rejecting exclusively materialistic definitions of value. With Albert Frederick Mummery (1855-1895), the great British Mountaineer who was tragically killed in 1895 by an avalanche whilst reconnoitering the Rakhiot Face of Nanga Parbat, an 8,000-meter Himalayan peak, Hobson wrote The Physiology of Industry (1889), which argued that an industrial economy requires government intervention to maintain stability, and developed the theory of over-saving that was given an overflowing tribute by John Maynard Keynes three decades later.
The need for governmental intervention to stabilize an expanding national industrial economy was the rationale for political imperialism. On the other side of the coin, protectionism was a governmental counter-intervention on the part of weak trading partners for resisting imperialist expansion of the dominant power. Historically, the processes of globalization have always been the result of active state policy and action, as opposed to the mere passive surrender of state sovereignty to market forces. Market forces cannot operate in a vacuum. They are governed by man-made rules. Globalized markets require the acceptance by local authorities of established rules of the dominant economy. Currency monopoly of course is the most fundamental trade restraint by one single dominant government.
Adam Smith published Wealth of Nations in 1776, the year of US independence. By the time the constitution was framed 11 years later, the US founding fathers were deeply influenced by Smith’s ideas, which constituted a reasoned abhorrence of trade monopoly and government policy in restricting trade. What Smith abhorred most was a policy known as mercantilism, which was practiced by all the major powers of the time. It is necessary to bear in mind that Smith’s notion of the limitation of government action was exclusively related to mercantilist issues of trade restraint. Smith never advocated government tolerance of trade restraint, whether by big business monopolies or by other governments in the name of open markets.
A central aim of mercantilism was to ensure that a nation’s exports remained higher in value than its imports, the surplus in that era being paid only in specie money (gold-backed as opposed to fiat money). This trade surplus in gold permitted the surplus country, such as England, to invest in more factories at home to manufacture more for export, thus bringing home more gold. The importing regions, such as the American colonies, not only found the gold reserves backing their currency depleted, causing free-fall devaluation (not unlike that faced today by many emerging-economy currencies), but also wanting in surplus capital for building factories to produce for domestic consumption and export. So despite plentiful iron ore in America, only pig iron was exported to England in return for English finished iron goods. The situation was similar to today’s oil producing countries where despite plentiful crude oil, refined petrochemical products such as gasoline and heating oil had to be imported.
In 1795, when the newly independent Americans began finally to wake up to their disadvantaged trade relationship and began to raise European (mostly French and Dutch) capital to start a manufacturing industry, England decreed the Iron Act, forbidding the manufacture of iron goods in its American colonies, which caused great dissatisfaction among the prospering colonials. Smith favored an opposite government policy toward promoting domestic economic production and free foreign trade for the weaker traders, a policy that came to be known as "laissez faire" (because the English, having nothing to do with such heretical ideas, refuse to give it an English name). Laissez faire, notwithstanding its literal meaning of “leave alone”, meant nothing of the sort. It meant an activist government policy to counteract mercantilism. Neo-liberal free-market economists are just bad historians, among their other defective characteristics, when they propagandize “laissez faire” as no government interference in trade affairs.
Friedrich List, in his National System of Political Economy (1841), asserts that political economy as espoused in England, far from being a valid science universally, was merely British national opinion, suited only to English historical conditions. List’s institutional school of economics asserts that the doctrine of free trade was devised to keep England rich and powerful at the expense of its trading partners and it must be fought with protective tariffs and other protective devises of economic nationalism by the weaker countries. Henry Clay’s “American system” was a national system of political economy. US neo-imperialism in the post WWII period disingenuously promotes neo-liberal free-trade against governmental protectionism to keep the US rich and powerful at the expense of its trading partners. Before the October Revolution of 1917, many national liberation movements in European colonies and semi-colonies around the world were influenced by List’s economic nationalism. The 1911 Nationalist Revolution led by Dr. Sun Yat-sen was heavily influenced by Lincoln's political ideas government of the people, by the people and for the people, and the economic nationalism of List until after the October Revolution when Dr. Sun realized that the Soviet model was the correct path to national revival.
Hobson’s magnum opus, Imperialism (1902), argues that imperialistic expansion is driven not by state hubris, known in US history as Manifest Destiny, but by an innate quest for new markets and investment opportunities overseas for excess capital formed by over-saving at home for the benefit of the home state. Over-saving during the industrial age came from Richardo’s theory of the iron law of wages according to which wages were kept perpetually at subsistence levels as a result of uneven market power between capital and labor. Today, job outsourcing that returns as low-price imports contributes to the iron law of wages in the US
domestic economy. See my AToL article: Organization of Labor Exporting Countries (OLEC).
Hobson’s analysis of the phenology (life cycles study) of capitalism was drawn upon by Lenin to formulate a theory of imperialism as an advanced stage of capitalism: “Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capitalism is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed.” (Vladimir Ilyich Lenin, 1870-1924, Imperialism, the Highest Stage of Capitalism, Chapter 7 - 1916).
Lenin was also influenced by Rosa Luxemberg, who three year earlier had written her major work: The Accumulation of Capital: A Contribution to an Economic Explanation of Imperialism (Die Akkumulation des Kapitals: Ein Beitrag zur ökonomischen Erklärung des Imperialismus, 1913). Luxemberg, together with Karl Liebknecht, founding leaders of the Spartacist League (Spartakusbund), a radical Marxist revolutionary movement that later renamed itself the Communist Party of Germany (Kommunistische Partei Deutschlands, or KPD), was murdered on January 15, 1919 by members of the Freikorps, rightwing militarists who were the forerunners of the Nazi Sturmabteilung (SA) led by Ernst Röhm.
The congenital association between capitalism and imperialism requires practically all truly anti-imperialist movements the world over to be also anti-capitalist. To this day, most nationalist capitalists in emerging economies are unwitting neo-compradors for super imperialism. Neo-liberalism, in its attempts to breakdown all national boundaries to facilitate global trade denominated in fiat dollars, is the ideology of super imperialism.
Hudson, American heterodox economist, historian of ancient economies and post-World War II international balance-of-payments specialist, advanced in his 1972 book the notion of 20th-century super imperialism. Hudson updated Hobson’s idea of 19th-century imperialism of state industrial policy seeking new markets to invest home-grown excess capital.
To Hudson, super imperialism is a state financial strategy to export debt denominated in the state’s fiat currency as capital to the new financial colonies to finance the global expansion of a superpower empire.
No necessity, or even intention, was entertained by the superpower of ever having to pay off these paper debts after the US dollar was taken off gold in 1971
Visit Henry CK Liu site
When it comes to Neo Liberal Economics I have found Michael Hudson along with Henry CK Liu one of its most informed as well as the most scathing critics, in case comrades have missed Michael Hudson's critical works on Neo Liberalism I publish some extracts to get the flavour of his work.
He is obviously influenced by the Marxist tradition (but has his own independent thought) one of his contributions focuses on the conflict over the divisions amongst the bourgeoisie over the distribution of the surplus ie surplus value between industrial and finance capital.Finance Capital is never far from the mind of Michael Hudson has also is the question of Imperialism
He makes a convincing arguement for the victory of the Emperors of Finance over the Captains of Industry in the last decades of the 20th Century and the ascendancy of US Super Imperialism.
His seminal work is Super Imperialism first published in 1972 and republished in 2003 and is available free on the Internet and will leave you more informed even if you don't agree with all of it about the nature of US Imperialism.. Get your free copy here http://www.soilandhealth.org/03sov/0303critic/030317hudson/superimperialism.pdf
Super Imperialism by Michael Hudson
Extract world’s need for financial autonomy from dollarization
The Washington Consensus would not be so problematic if America used its free ride to invest in productive capital that yields future profits by putting capital in place.
Unfortunately, it has pursued for the less productive policy of maintaining an imperial military and bureaucratic superstructure that imposes dependency rather than selfsufficiency on its client countries. This is what makes the international system parasitic, in contrast to the implicitly productive and profitable private-enterprise imperialism depicted prior to World War I by critics and advocates alike. Far from being the engine of development that Marx, Lenin and Rosa Luxemburg imagined the imperialism of Europe’s colonialist powers to be in their day, the United States has drained the financial resources of its industrial Dollar Bloc allies while retarding the development of indebted third world raw-materials exporters and, most recently, the East Asian “tiger economies” and the formerly Soviet sphere. The fruits of this exploitation are not being invested in new capital formation, but dissipated in military and civilian consumption, and in a financial and real estate bubble.
The early system was supposed to grow stronger and stronger until it culminated in armed conflict, but economically developing the periphery in the process. But the tendency of today’s Washington Consensus is to retard world development by loading down the economies of almost every country with dollar-denominated debt, and to require America’s own dollar-debts as the medium to settle payments imbalances in every region.The upshot is to exhaust the system until local economies assert their own sovereignty and let the chips fall where they may.
In today’s world the form of breakdown is likely to be financial, not military. Vietnam showed that neither the United States nor any other democratic nation ever again can afford the foreign-exchange costs of conventional warfare, although the periphery still is kept in line by American military initiatives, most recently in Yugoslavia and Afghanistan.
The lesson is that peace will be maintained by governments refusing the finance the military and other excesses of the increasingly indebted imperial power. Yet Europe, Japan and some third world countries have made only feeble attempts to regain control of their economic destinies since 1972, and since 1991 even Russia has relinquished its fuels and minerals, public utilities and the rest of the public domain to private holders. Its overhead in acquiescing to the Washington Consensus has been to sustain a capital flight of about $25 billion annually for the past decade.
Asian and third world countries have permitted their domestic debts to be denominated in dollars, despite the fact that domestic revenues accrue in local currencies. This creates a permanent balance-of-payments outflow as a result of the privatization selloffs that provided governments with enough hard currency to keep current on their otherwise bad dollarized debts, but demand future interest and dividend remittances, while the state must tax labor,not these enterprises.
This is a system that cannot last.
But what is to take its place?
If foreign economies are to achieve financial independence, they must create their own regulatory mechanisms. Whether they will do so depends on how thoroughly America has succeeded in making irreversible the super imperialism implicit in the Washington Consensus and its ideology.
Financial independence presupposes a political and even cultural autonomy. The economics curriculum needs to be recast away from Chicago School monetarist lines on which IMF austerity programs are based and the Harvard-style economics that rationalized Russia’s privatization disaster.
Money and credit always have been institutional products of national economic planning not objective and dictated by nature. The pretense that monetarist policies are technocratic masks the degree to which the financial austerity programs enforced by the IMF and World Bank serve U.S. trade and investment objectives, and incidentally those of Western Europe and East Asia with regard to the terms of trade between creditor and debtor economies.
A great help to promoting the Washington Consensus has been its control over the academic training of central bankers and diplomats so as to remove the dimension of political reality from the analysis of international trade, investment and finance. Economists assume, for instance, that the gains from trade are shared fully and equally.
But in practice the U.S. Government has announced that its economy must get the best of any bargain, just the opposite of the situation portrayed by academic trade theorists and the idealistic assumptions of international law. Although the preambles to most international agreements contain promises of commercial reciprocity, the U.S.Government has pressed foreign countries to reduce their tariff barriers while increasing its own non-tariff barriers, getting by far the best of an unequal bargain.
The trade theory promoted by the monetarist Washington Consensus neglects the degree to which countries that have let their development programs be steered by the World Bank have fallen into chronic deficit status. Economics students seeking to explain this problem get little help from their textbooks, whose logic ignores the defining characteristics of global affairs over the past thirty years.
This hardly is surprising, as the criterion by which the economics discipline calls theories scientific is simply whether their hypothetical and abstract assumptions are internally consistent, not whether they are realistic.
The tactics by which global credit flows are controlled are a secret that U.S. financial diplomats are not interested in broadcasting. But without such a study being given a central place in the academic curriculum, the minds of central bankers and money managers throughout the world will be inculcated with a narrow-minded view of finance that misses the dimension of national geo-economic strategy, the failures of IMF austerity programs, the dangers of dollarizing foreign economies, and the free-ride character of key-currency standards.
The required study would show that in place of the competing national imperialisms that existed before World War I, only one major imperial power now exists.And instead of disposing of financial surpluses abroad as in Hobson’s and Lenin’s day, the U.S. Treasury draws in foreign resources, even as its American investors buy up controlling shares of the recently privatized commanding heights of French, German,Japanese, Korean, Chilean, Bolivian, Argentinean, Canadian, Thai and other economies, capped by that of Russia.
The above view of American financial imperialism differs not only from the traditional economic determinist view, but also from the anti-economic, idealistic “national security”) rationale. Economic determinists have tended to neglect the full range of economic and political impulses in world diplomacy, and have limited themselves to those drives directly concerned with maximizing the profits of exporters and investors.
This view by itself fails to note the drive for national military and overall economic power as a behavioral system that may conflict with the aim of promoting the wealth specifically of large international corporations. On the other and, “idealistic” writers (Bemis, A. A. Berle and so forth) have satisfied themselves simply with demonstrating the many non-economic motives underlying international diplomacy. They imagine that if they can show that the U.S.
Government often has been impelled by many non-economic motives, no economic imperialism or exploitation occurs.
I elaborate these points in Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy (London: Pluto Press, 1992, 2 vols.) and, more generally, “The Use and Abuse of Mathematical Economics,” Journal of Economic Studies
But this is a non sequiter. It is precisely America’s drive for world power and to maximize its own economic autonomy (whether viewed simply as an expression of “national security” or something more expansionist in character) that led it to innovate its parasitic tapping of the world economy through such instrumentalities as the IMF and World Bank. Its military-induced payments deficit led it to flood the world with dollars and to absorb foreign countries’ material output, increasing its domestic consumption levels and ownership of foreign assets – the commanding heights of foreign economies, headed by privatized public enterprises, oil and minerals, public utilities and leading industrial companies. This again is just the opposite of the traditional view of imperialism, which asserts that imperialist economies seek to dispose of their domestic surpluses abroad.
The key to understanding today’s dollar standard is to see that it has become a debt standard based on U.S. Treasury IOUs, not one of assets in the form of gold bullion.While applying creditor-oriented rules against third world countries and other debtors, the IMF pursues a double standard with regard to the United States. It has established rules to monetize the deficits America runs up as the world’s leading debtor, above all by the U.S. Government to foreign governments and their central banks. The World Bank pursues its own double standard by demanding privatization of foreign public sectors,while financing dependency rather than self-sufficiency, above all in the sphere of food production. While the U.S. Government runs up debts to the central banks of Europe and East Asia, U.S. investors buy up the privatized public enterprises of debtor economies.
Yet while imposing financial austerity on these hapless countries, the Washington Consensus promotes domestic U.S. credit expansion – indeed, a real estate and stock market bubble – untrammeled by America’s own deepening trade deficit. The early 21st century is witnessing the emergence of a new kind of centralized global planning.
It is not by governments generally, as anticipated in the aftermath of World War II, but is mainly by the U.S. Government. Its focus and control mechanisms are financial, not industrial. Unlike the International Trade Organization envisioned in the closing days of World War II, today’s WTO is promoting the interests of financial investors in ways that transfer foreign gains from trade to the United States, not uplift world labor.
Extract from Financial Capitalism v. Industrial Capitalism
by Dr. Michael Hudson
Early economic theory dealt with exponential rates of growth. At the time of Britain’s colonial war in America, Richard Price contrasted the growth rates of savings at compound and simple interest. In 1798, Thomas Malthus applied this comparison to contrast ‘geometric’ rates of population growth to an (allegedly) only ‘arithmetic’ growth in its food supply. The basic model for financial crises was that of debt trends rising exponentially until they reached a limit beyond which debt-service obligations could not be met. At this point credit was destroyed and the economic system was brought down with a crash.By contrast, modern theory assumes that automatic stabilizers will return economies to a state of equilibrium if and when they are disturbed.
Such theories assume negative feedback (diminishing returns or diminishing marginal utility), not positive feedback such as exponential debt growth or increasing returns. Ancient economic thought focused on the debt problem, that is, the tendency of debts to grow exponentially, exceeding the economy’s ability to pay (and to produce). Modern economics assumes that money is only ‘a veil’, not intervening in economic processes as such. Concentrating on the ‘real’ tangible economy (depicted as operating without debt distortions or related debt overhead), modern economics banishes the debt problem to the realm of ‘externalities’. Culture is another economic ‘externality’ that is ignored. A century ago, optimists imagined that by increasing productivity, industrial capitalism would provide more leisure time, and hence would usher in higher cultural horizons. But by opposing a role for government and using the public debt as a lever to privatize hitherto public services – including public TV and radio broadcasting, national film boards, arts and other cultural programs – finance capitalism has tended to commercialize culture by downgrading it to the most common (lowest) but also most profitable common denominator.
Ancient economic thought also viewed wealth and income as addictive. It coped with the threat that wealth tended to lead to abusive hubristic behavior on the part of the rich. A designated role of religious and social values was to counter this human tendency toward addictive selfishness. But modern economic theory is based on a view of human nature that unrealistically assumes diminishing marginal utility for each successive unit of wealth. The problem of wealth addiction – and hence, drives for personal power – is not recognized, nor are problems of consumer addiction. The new business mentality is different from that of traditional societies. Most tribal communities seek to socialize their members not to be hubristic. But today’s wealth is egoistic in ways that injure others, lacking a contextual self-steering mechanism. The personal characteristics required for success under finance capitalism are associated with a stripping away of anything not directly associated with a ‘bottom line’ mentality. Expensive or ‘high’ culture (such as opera, symphony orchestras) is likely to suffer financial strangulation. To the extent that the new decadence emphasizes surface effects, the character of motion pictures is likely to shift away from plot-intensive movies about character (and how it deals with the hubristic temptations of wealth and success) to sensational effects. In a sense, one could say that culture becomes ‘proletarianized’.
In the 1830s the British economist William Nassau Senior began his class in political economy at Cambridge by announcing, ‘I am not here to talk about how to make you happy, but about how to make you rich’. The way to get rich is very simple. All you need is greed, and that is something that can’t be taught. It requires a deprivation of culture and what many societies believe is the social sensitivity that makes us human.New well-paid graduates are obliged to work between 80 and 120 hours a week. This is how corporations weed out new prospective employees. It was much the same for bankers, accountants and lawyers in the 1960s. The objective was to weed out any new recruits that had a personal life, family, hobbies, intellectual or cultural interests, or anything that might take precedence over the corporate life. Their entire personal horizon was supposed to consist of working in a dedicated way for their employer. Not everyone wanted to go through this weeding-out process. Bankers used to joke that the best foreign currency traders, for instance, had to come either from the Brooklyn or Hong Kong slums – someone from a poor household, without gentlemanly culture, often from an immigrant family, whose sole personal horizon was to make as much money as possible.
In this sense today’s rentier culture is dehumanizing. As the leadership of corporations has passed from what Thorstein Veblen called the ‘engineers’ to the financial managers, the objective is not to produce more or expand market share, but to increase the price of stocks, other securities and real estate. If executives find their self interest in ‘working for the stockholders’, it is largely be-cause they take more of their remuneration in the form of stock options than in salaries. They use corporate revenue not to fund new direct investment but to buy up their own stock to support its price. They also cut back on low-profit activities so as to increase earnings, and hence to increase the per-share price.The resulting ‘culture of greed’ has become anti-technological in seeking short-term payoffs. Corporate managers are rotated from one department to another, running them as autonomous profit-centers, regardless of the company’s overall long-term position. One sees in these new managers – Russia’s ‘7 bank barons’ as well as US corporate managers – an adolescent immaturity, a childish, self-centered, narcissistic lifestyle. They tend to view life as a game, which one ‘wins’ by accumulating more toys/money than one’s rivals.
Extract from The Creditary/Monetarist Debate in Historical Perspective
by Dr. Michael Hudson
The promise of French and German industrial banking prompted Marx to believe that finance capital would become subordinate to industrial capital. In Part III of his Theories of Surplus Value (Moscow 1971:468) he analyzed the tendency of finance capital to grow at compound rates of interest without limit, but then dropped his analysis of this phenomenon on the ground that finance capital, like land rent, was becoming thoroughly subordinated to the dynamics of industrial capital.
“In the course of its evolution, industrial capital must therefore subjugate these forms and transform them into derived or special functions of itself,” he wrote optimistically. Although not originally established “as forms of [industrial capitalism’s] own life-process,” monetary and banking fortunes would be mobilized to fund economic expansion, just as the land itself was being industrialized into what today is called agribusiness. “Where capitalist production has developed all its manifold forms and has become the dominant mode of production,” Marx concluded, “interest-bearing capital is dominated by industrial capital, and commercial capital becomes merely a form of industrial capital, derived from the circulation process.” There is no anticipation here of debt dragging down the industrial system.
Nearly all historically minded economists shared this optimistic view of finance capital’s subordinate role. The German Historical School and others pointed to the fact that interest rates tended to fall steadily with the progress of civilization; at least, rates had been falling since medieval times. Credit laws were becoming more humanitarian, and the debtors prisons described so graphically by Charles Dickens were being phased out throughout Europe, while more lenient bankruptcy laws were freeing individuals to start afresh with clean slates. Public debts in Europe and North America were on their way to being paid off during the remarkable war-free century 1815-1914. Savers and investors were seeking out heavy transport, industry, mining and real estate to fund, mainly through the bond market. The consensus among economists was that the debt burden would be self-amortizing. Debt problems were curing themselves, by being co-opted into a socially productive credit system.
As matters have turned out, emperors of finance subdued captains of industry. What is striking is how unlikely the prospect of a corrosive and unproductive debt overhead appeared a century ago. When war broke out in 1914, Germany’s rapid victories over France and Belgium seemed to reflect the superior efficiency of its financial system. To some observers the Great War appeared as a struggle between rival forms of financial organization to decide not only who would rule Europe, but also whether the continent would have laissez faire or a more state socialist economic system. In 1915, shortly after fighting broke out, the German Christian Socialist priest-politician Friedrich Naumann summarized the continental banking philosophy in Mitteleuropa. In England, Prof. H. S. Foxwell drew on Naumann’s arguments in two essays published in the Economic Journal in September and December 1917 (Vol. 27, pp. 323‑27 and 502‑15): “The Nature of the Industrial Struggle,” and “The Financing of Industry and Trade.”
Foxwell quoted with approval Naumann’s contention that “the old individualistic capitalism, of what he calls the English type, is giving way to the new, more impersonal, group form; to the discipline, scientific capitalism he claims as German.” This conclusion followed from Naumann’s claim that “Into everything today there enters less of the lucky spirit of discovery than of patient, educated industry. To put it otherwise, we believe in combined work.” Germany recognized more than any other nation that industrial technology needed long‑term financing and government support. In the emerging tripartite integration of industry, banking and government, Foxwell concluded (p. 514), financing was “undoubtedly the main cause of the success of modern German enterprise.” The nation’s bank staffs already included industrial experts who were forging industrial policy into a science. Bankers and government planners were becoming engineers under the new industrial philosophy of how governments should shape credit markets. (In America, Thorstein Veblen voiced much the same theory in The Engineers and the Price System.)
The political connections of Germany’s bankers gave them a voice in formulating international diplomacy, making “mixed banking . . . the principal instrument in the extension of her foreign trade and political power.” But rather than recognizing the natural confluence of high finance, heavy industry and interventionist government policy, English common law opposed monopolies and other forms of combination as constituting restraints on trade, while Britain’s medieval guilds had evolved into labor unions that had embarked on a class war against industrial employers. Germany’s historical form of organization was the professional guild developed at the hands of masters, leading to industrial cartels.
Foxwell’s articles implied a strategy of capital working with governments to undertake military and diplomatic initiatives promoting commercial expansion. The economic struggle for existence favored growing industrial and financial scale, increasingly associated with government support. The proper task of national banking systems was to finance this symbiosis, for the laws of economic history were leading toward political centralization, national planning and the large‑scale financing of heavy industry.
The short-term outlook of English merchant bankers ill suited them for this task. They based their loan decisions on what they could liquidate in the event of loan default, not on the new production and income their lending might create over the longer run. Instead of taking risks, they extended credit mainly against collateral available for seizure: inventories of unsold goods, money due on bills for goods sold to customers but not yet paid for, and real estate.
British bankers paid out most of their earnings as dividends rather than investing in the shares of the companies that their loans supposedly were building up. This short time horizon forced borrowers to remain liquid rather than giving them the leeway to pursue long‑term strategies. Foxwell warned that British manufacturers of steel, automotives, capital equipment and other heavy industry were becoming obsolescent largely because the nation’s bankers failed to perceive the need to extend long‑term credit and promote equity investment to expand industrial production. By contrast, German banks paid out dividends (and expected such dividends from their clients) at only half the rate of British banks, choosing to retain earnings as capital reserves and invest them largely in the stocks of their industrial clients. Viewing these companies as allies rather than merely as customers from whom to make as large a profit as quickly as possible, German bank officials sat on their boards and extended loans to foreign governments on condition that these clients be named the chief suppliers in major public investments.
Although Britain was the home of the Industrial Revolution, little of its manufacturing had been financed by bank credit in its early stages. Most industrial innovators were obliged to raise money privately. England had taken an early lead in stock market promotion by forming Crown corporations such as the East India Company, the Bank of England and the South Sea Company. Despite the collapse of the South Sea Bubble in 1720, the run-up of share prices in these monopolies from 1715 to 1720 established London’s stock market as a popular investment vehicle for the Dutch and other foreigners as well as for British investors. But industrial firms were not major stock issuers. The stock market was dominated by railroads, canals and large public utilities. In fact, Britain’s stockbrokers were no more up to the task of financing industrial innovation than were its banks, having an equally short‑term frame of reference.
After earning their commissions on one issue, they moved on to the next without much concern for what happened to the investors who had bought the earlier securities. “As soon as he has contrived to get his issue quoted at a premium and his underwriters have unloaded at a profit,” complained Foxwell, “his enterprise ceases. ‘To him,’ as the Times says, ‘a successful flotation is of more importance than a sound venture.’”
Much the same was true in the United States. Rejecting the methodical German approach, the Anglo-American spirit found its epitome in Thomas Edison, whose method of invention was hit-and-miss, coupled with a high degree of litigousness to obtain patent and monopoly rights. America’s merchant heroes were individualistic traders and political insiders who often operated on the edge of society’s laws to gain their fortunes by stock-market manipulation, railroad politicking for land giveaways, and insurance companies, mining and natural resource extraction.
Neither British nor American banks were technological planners for the future. Their job was to maximize their own short-run advantage, not to create a better and more productive society. Most banks favored large real estate borrowers, along with railroads and public utilities whose income streams easily could be forecast. Manufacturing only obtained significant bank and stock market credit once companies had grown fairly large.
The monetarist attack on public planning
Industrial banking principles imply a distinction between “real wealth” and “paper wealth” in the form of loans and securities that represent claims on tangible assets. To prevent financial systems from loading economies down with debt without helping create the means to pay, it is necessary to distinguish credit to finance direct investment in new means of production from speculative banking and stock market promotion that merely inflates asset prices. This distinction might well form the basis for a more industrially oriented financial regulation. But like other investors, most banks and stock market investors want to be left alone to make money as quickly as possible. Their opposition to regulation is responsible for some of the most serious blind spots in monetarist economic philosophy.
Prior to the early 1960s most observers viewed the trend of history as leading society to take control of its evolution. Economic thought aimed at refining the ways in which governments might plan their fate. Most countries adopted Keynesian macroeconomic planning to “fine-tune” their economies. France pursued planification, while England nationalized many industries. But what was being “fine tuned” was GNP. This broad measure drew no distinction between wealth and overhead. During the Vietnam War decade the inflation that ensued as America pursued an economic policy of both “guns and butter” led to a reaction that sought to limit the authority of government planning generally. So well funded was this anti-state ideology – and so silent the response by social democrats – that it soon achieved censorial power in the world’s universities, finance ministries and central banks.
Monetarism achieved its first international victory in Chile in its 1973 military coup. Free-market economists did not endorse the idea of a free market in ideas, to be sure. All economic and social science departments were closed down except for those at the Catholic University, which had established close ties to the University of Chicago. Having blocked dissent, the monetarists let supporters of the military form financial conglomerates that ran deep into debt to buy the nation’s public companies, stripping them bare and leaving the economy to be swept by a wave of bankruptcies in 1981-82.
A more politically respectable neo-liberal regime gained office in England behind Margaret Thatcher in 1979, and in 1981 Ronald Reagan brought in his backers to dismantle public oversight in the United States. Deregulation of America’s S&L industry led to a real estate bubble and collapse of the Federal Savings and Loan Insurance Corp. (FSLIC), increasing the federal debt by half a trillion dollars on its way to quadrupling. Reagan’s advisors rewrote the nation’s racketeering laws to permit takeovers by corporate raiders who repaid their backers by emptying out the bank accounts and pension fund reserves of targeted companies, selling off their divisions, cutting back on R&D and other long-term investment, and downsizing the labor force. The fact that the leading practitioners were sent to prison did not prevent a growing portion of revenue hitherto declared as profits and wages from being earmarked to pay interest on the economy’s debt load. The stock market soared as a result of raiders borrowing the money to “take companies private” and then carving them up to repay their backers.
While environmental deregulation opened the floodgates to abuses that lay the groundwork for future cleanup costs, a parallel phenomenon was occurring in the form of debt pollution as business, personal and mortgage debt levels soared. The issue of high-interest “junk” bonds to fund corporate takeovers did not fund much new tangible investment. The allocation of savings was deregulated, and savers then were bailed out of the problems suffered by the economy by their having been badly channeled. Government intervention and heavy new public borrowing were coming not through regulation, but via the need to clean up the financial bubble spurred by deregulation.
But monetarists only criticized public debt levels. Government spending was to be cut back for programs other than to reimburse savers for the bad loans their banks and S&Ls had made. This “value-free” financial philosophy meant that social values of the sort supported by Keynesian macroeconomics were to be replaced by government support for financial and real estate speculation. In Britain, monetarist concerns led to constraints being placed on the Public Sector Borrowing Requirement (PSBR) in order to limit the degree to which the public sector could issue bonds or other securities. The intention was to restrict the government’s ability to promote full employment by running into debt and thus increasing the tax burden caused by interest payments to bondholders and other creditors.
A political conflict erupted over what most people thought had long been settled: whether economies should be planned by elected representatives in the public interest, or by financial institutions seeking their own gains. One of the factors that re-opened this issue in Britain was the degree to which public enterprise had become dysfunctional. Strong union control of the British Labour Party after World War II helped make that nation one of the world’s most socialist (and highly taxed) economies. The Labour Party platform called for managing the economy in the interests of long-term development guided not by pecuniary gain-seeking but by industrial engineering principles as steered by public officials. But instead of financing new direct investment, Britain maintained employment by bureaucratic regulation and by the government itself serving as the employer of last resort.
The financial conditions for industrial modernization were neglected as Labour party planners left financial concerns to the bankers. The Treasury agreed to self-imposed guidelines that limited the public sector’s ability to run deficits. Borrowing by government enterprises was counted as part of the deficit rather than as a separate category of “productive debt” to finance tangible investment (as distinct from consumption or welfare spending). Public enterprise was left without a means to raise new investment funds, especially after the Labour government submitted to IMF austerity planning in 1976. The upshot was that the Treasury denied the nationalized steel industry and other leading public enterprises access to the credit they needed to enable them to modernize and remain competitive in the world economy.
This straitjacket left only one option to enable companies to raise the required funds. They were sold to private buyers, who were free of the Treasury’s public borrowing constraints. In this way British privatization reflected not only monetarist narrow-mindedness, but also a loss on the part of socialist planners of the classical distinction between productive and unproductive credit. No politician advocated making an exception to the Public Sector Borrowing Constraint in the case of funding direct investment for public enterprises. And in New Zealand and Australia, local Labour Party policies were even more restrictively monetarist and neo-liberal, leading to stock market and real estate bubbles that seriously disrupted their economies.
What is remarkable is that despite the fact that economic ideology at both ends of the political spectrum had come to ignore the financial logic of industrial development, Britain had developed an alternative. In 1930 the Macmillan Committee, which included Keynes as well as the trade union leader Ernest Bevin, recognized the need for long-term industrial financing. Although Bevin himself did nothing to put the report’s recommendations into effect when he became a leading member of the postwar Labour government, an institutional structure was put in place by the Borrowing (Control and Guarantees) Act of 1946. Echoing the Defense Legislation of 1939, the Act’s loan guarantees might have promoted industrial credit by enabling banks to lend to small companies for capital purposes. But this “small print” of the financial law seems never was used, and Mrs. Thatcher’s Conservatives repealed the Act in 1985.
By this time the Chicago School’s anti-government economics had won a public relations coup by capturing the hearts and minds of the Royal Swedish Academy of Sciences. To popularize monetarist views under the seemingly objective banner of science, the Academy awards its annual Economics Prize to academics seeking to strip economics of its historical and institutional dimension. A caricature of economic science is promoted that opposes public taxation and regulation of wealth on technocratic grounds of economic efficiency, whose scope is narrowly construed in a rather asocial manner.
The 1999 Nobel Prize was given to Robert Mundell, largely as an endorsement for his politically narrow version of the euro. His proposal for a limited currency union reflects the monetarist view of money as being created by private traders for their own convenience, without any need of intercession (to say nothing of management) by public institutions. A single currency simply would save “menu costs,” that is, the inconvenience of prices having to reflect currency shifts and the transaction fees entailed in making payments from one country to another within the European Community.
As his colleague Arthur Laffer points out, “Mundell’s impact on the practical world of real politics can be seen in Reagan’s America, in Thatcher’s Britain, in the renaissance of Chile and Argentina, and in Jacob Frankel’s monetary policy in Israel.” Exactly! Awarding him the Economics Prize endorses monetarist austerity of the sort that has loaded economies down with debt as an alternative to taxing finance and real estate, while shifting the fiscal burden onto labor. Mr. Laffer adds: “Many in the profession called him a kook. Today they call him a Nobel laureate.”
One may ask what the difference is, in view of the fact that the Nobel awards have helped redefine “economic science” in such a way as to strip away the social and institutional dimensions needed to guide governments in regulating economies.
Monetarist policy works through central banks and finance ministries to restrict regulation of the euro to so narrow a range as to shift economic planning to the financial sector. By making the Economics Prize a vehicle to counter social democratic regulation, the Swedish Academy evidently hopes to see Europe integrated on the basis of finance capital dominating governments, not the other way around. The preferred model seems to be the looser European Free Trade Association (EFTA) created by the Nordic countries and England in the late 1950s as an alternative to the European Community. Little recognition is given to the virtues possessed by the industrial banking and strong government activism of continental Europe and postwar Japan. Today’s fin-de-siecle cynicism has given up belief in society’s ability to steer itself better than can be done by its wealthiest members at the top of the pyramid increasing the degree of economic polarization via their control of finance, insurance and real estate.
Dressed up as positivist economics, monetarism is an anti-government ideology, yet it implies its own form of national planning. Russian government bureaucrats recently (1999) complained that IMF conditionalities were as intrusive as was the pre-1990 Communist planning. The difference is that the IMF program is not an industrial strategy, but favors financial interests at the expense of labor, industry and the government’s fiscal position.
The past half-century has seen an ideological war fought over whether planning should be done by governments or by financial engineers in the banking, insurance and stock-brokerage industries, and their representatives in the central banks and finance ministries. If government agencies do not take the lead, these financial institutions will fill the decision-making vacuum. It is no exaggeration to say that today’s monetarist evangelism represents the most radical proposal to restructure society since antiquity. Never before has there been a call to dismantle government as such. Every social philosophy and religion in history, as well as most political and economic theory has been developed to help guide public regulation to raise living standards and increase human happiness.
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Monday, August 18, 2008
It is possible to conceive of a Socialist State administering a capitalist economy and some hybrid of power relations called the State Socialist Market Economy similar to the NEP period in the Soviet Union.
We go into this in detail in an article on NEP in the section on the History of Market Socialism part 5 as well as the contribution of Wu Bing attached to the NEP section to compare unfavourably NEP with Chinese Reform process.
Concerning the role of the State in China - it is true to say that it still plays a key role in the Economy but so do most capitalist states in the world. We think a comment by Bertell Ollman on the state is worth repeating in this regard.
"The centrality of accumulation in capitalism also forces the state to undertake a function that does not exist in other class societies, and that is helping the capitalists realize the value of their products. Given how capitalism works, capitalists simply require more direct political help in their efforts to enrich themselves than did feudal aristocrats or the slave owners of antiquity.
They require what amounts to state planning on their behalf-and they get it. While rendered mostly invisible by their ideology, such planning covers everything from investing, to financing, to doing research, to training workers, to buying, to selling the finished products. Most of our tax, trade, labor, and monetary policies (including both laws and their administration) some under the rubric of capitalist planning. The political institutions and practices that serve capitalist interests in these ways are essential parts of the capitalist state"Why Do We Need a Theory of the State by Bertell Ollman.
To view the Dengist period has involving no shift of State Power in China is to ignore the realities of the time.The ascendancy of the Dengists who were a minority force in the State apparatus under Mao who asserted complete control of the State apparatus after 1978 to drive through the Market Reform Process marginalised any socialist opposition.
However the Dengists while the dominant force in the Chinese State they never were in Society at large (The reason for the indicate left but turn right policies.) The socialist forces which had been in a majority became a minority in the State similar to the capitalist roaders under Mao.
There is some plausibility (but wrong) in calling China State Market Socialist in the early years of the Deng Reforms when you just had a few isolated Special Economic Zones but by 1992, if you use the intellectual apparatus of Marxism ,what you see is the extention of Market Reforms to the rest of the Chinese Provinces and wholesale dismantling of the State sector with an attack on collective property and the wholesale implementation of the Guangdong free market model for the whole of China.
We see entirely new production relations emerging in China in the 1990's. The end of the danwei or work unit which combined production and consumption,education and health the separation of the means of production from working people with privatisation of State assets.The laying off of the old working class in the factories and in the mines the use of hired gangs from the countryside with no knowledge of mining causing one of the highest mining accident rates in the world.
Gong Xiantian in his open letter informed us that the ouput from the State sector is below 17% of total output in China and that basically the market has put itself in command and not the party and the people as in the past.
The Communist Party of China is now riding a market Tiger which will consume it unless radical actions are taken to re-institute mechanisms of economic control from the centre and the democratisation of society at large.
The creation of a new working class based on super exploitation in the new factories of peasants pouring in from the countryside without rights of residence in the factory towns and cities basically second class citizens depriving them of access to education and health services which are just provided for locals..
Discussion has started in China to privatise land has they have already done with industry hopefully this will re-energise the peasants and workers to combine and re-establish the fight for socialism.
Production relations in China have changed in most dramatic way in the last 30 years, The means of production have been wrested from the working class and privatised.The most equal country in the world in 1978 is now heading for the inequality of South Africa and Brazil..
Take the State Industry sector the Govenor of the Central Bank of China Zhou Xiachuan boasts how one third have been fully privatised one third put on hold for potential buyers and one third closed. Even nominal State shares in privatised companies are scheduled to be sold by State to pay pensions.
The Township and Village Enterprises built up in Mao's time and which formed the basis of China's economic growth have become private property in most cases taken over by a local bureaucrat has his own possession.
The robbery of public assets and public property by powerful individuals in China is one of the biggest expropriations of the working class in history and the new bureaucrat "cadre" capitalists are not satisfied with that now they are eyeing the land for privatisation.
There are clearly voices in China in the Society the State and the Communist Party not just unhappy with this turn of events but seeking to re-orientate China away from the market direction which has now run its course - and put Socialism back on the agenda.
Some current Chinese Government policies reflect a small progressive shift especially in the countryside.
These are tiny steps and the movement for Socialist Renewal in China is young like the new century but it will grow and win back the lost positions of the last 30 years in the economy in the the party and society in China has it gains clarity abouts its defeats and its future.
Foreward to a renewal of Chinese Socialism.Has Henry CK Liu writes on his essay on Mao :
"The full impact of Mao's revolutionary spirit is yet to be released on Chinese society. A century from now, Mao's high-minded principles of mass politics will outshine all his neo-liberal critics".